Don’t blame Covid for economic devastation
Pandemics don't cause recessions. Policymakers' responses to them do.
The values of democracy and freedom matter crucially in considering how we should be managing the Covid-19 health crisis. Economics only plays a part in this discussion. Crudely pitting economic outcomes against health does nothing to help advance the much-needed political debate about how to proceed.
Cost-benefit analyses that look at the economic costs resulting from government actions can broaden the discussion a little. But they do not elucidate the vital democratic issues at stake.
However, it is also unhelpful to present the economic costs as pandemic costs. Claims that it is the virus, and not the restrictions, that is causing today’s devastating economic damage to production and jobs are misleading.
Although some commentators may just be abbreviating when they claim, ‘Covid-19 has had such and such economic cost’, it is instructive to be more specific about how the economic damage arises. Is it really the case that ‘pandemics depress the economy, public-health interventions do not’? Is it a ‘false narrative that the economic hit is about the restrictions and not the disease itself’?
Certainly the economic damage has been considerable. Most countries in the world have been in recession at some point this year with substantial losses of production, income and jobs. Some may be heading back into double-dip recessions as a consequence of the latest social and work restrictions. And regardless of the vaccine, many countries are projected not to recover to pre-Covid levels of output or employment until 2022 or later.
Understanding better how the economy is being hit is important for several reasons. A firmer grasp of all the costs arising from lockdowns and other official social restrictions is necessary for sound policymaking. Making decisions based on epidemiological models without a broader assessment of the costs – social, health and economic – and of how they have arisen is a reckless approach from political leaders.
Moreover, these other indirect impacts are helpful in assessing the lessons to be learned in preparing for and managing future pandemics.
Costs of illness or costs of precaution?
In fact, there is little doubt that the proximate health effects of disease rarely have much economic impact these days. We are better able to treat those infected, at least in the most advanced industrial countries, so pandemics do not do much direct harm to economies. Rather, it is what societies do in response to pandemics that matters a lot more.
The costs of extra healthcare and treatments, and the losses of output caused by reduced productivity or by the illness or death of workers, are easily eclipsed by the indirect costs of a society’s response. And when it comes to the economic effects of a modern pandemic, the response costs more than the disease.
The impact on economic life is not an immediate consequence of those infected, then. Rather, the impact is produced by the actions many people take out of fear of infection. Even supporters of Covid lockdowns underline the importance to the economy of public anxieties over the disease. Some studies, sympathetic to the case for lockdowns, have suggested that individual choices tied to fears of infection have been the most important influence on declining economic activity. They highlight how people have stopped going out to buy things in order to avoid potential exposure to the disease.
Yet it is not ‘fear rather than policy’ driving the economics. Fear does not arise in a vacuum. Political leadership, pronouncements and policies play a significant part in how people respond to unexpected events. Government policies, including official guidance, as well as lockdowns, can foment people’s fears.
In recent decades the level of fear many people express has tended to be incommensurate with the specific health risks faced. This is a cultural phenomenon that governments have the capacity to inflame or to assuage. With Covid-19 and other recent health crises, we’ve experienced far too much of the former and far too little of the latter. And this time, it has produced tangible economic damage.
The lockdown effect
Many of the economic assessments of Covid-19 have focused on the impact of official lockdowns. However, this is only part of the government effect on how people and businesses are responding. Social-distancing rules, prescriptions for how work venues are arranged and operate, as well as advice against or restrictions on travel have all disrupted how we live and how we produce and consume.
Focusing too much on trying to identify the precise impact of mandatory lockdowns can itself give a misleading impression of the economic impact of the broader and more sustained range of government measures. It is better to retain this bigger picture. For instance, another US study concluded that local stay-at-home policies were only weakly associated with declines in economic activity. However, it went on to admit that ‘common shocks to the economy have much larger explanatory power in explaining economic outcomes’. In particular it noted that people who were going out less were also responding to ‘policies in other jurisdictions’ and to the ‘common informational environment’.
At the extreme, though, the full lockdowns imposed by governments have caused the greatest damage to working activities and to economic output. When ‘non-essential’ businesses, including most service occupations that require some level of human contact, are shut down, there is a straight-line effect on measured output. Legal restrictions on travelling and instructions that people stay at home except for ‘essential’ reasons directly curtail other economic activities. The impact of school closures is particularly costly through the absenteeism of working parents who have to give up work to stay at home to look after their children.
Several estimates for the impact of the government-mandated lockdown in Britain from mid-March to late-June range between half and two-thirds of the recorded output losses. One peer-reviewed ‘low-end’ estimate of the narrow economic cost of the UK lockdown was nine per cent of GDP. Such precision in economic estimates, though, comes with huge health warnings, given the difficulty of coming up with figures that are, as one study puts it, ‘empirically reliable and widely accepted’.
In the unusual circumstances of the global pandemic, current official statistics are even more affected by abnormalities. Moreover, other national particularities influence how economies respond to shocks. These include its prior economic state as well as its structural make-up, especially its relative dependence on exporting and on services involving social interactions.
In general, more dynamic economies, such as those in East Asia today, are likely to be better able to cope with public-health crises, even if they are geographically closer to the origins of this one. Meanwhile, already struggling economies in the West, not least Britain’s, with a legacy of inadequate business investment and languid productivity growth, are likely to have less scope to adjust well and compensate.
Extraordinary business-compensation measures complicate the real economic picture further, because they can be the equivalent of putting already struggling businesses on to artificial life-support. This means that while some company closures may have been brought forward this year, and others will have taken place, pandemic or no pandemic, others still might be delayed into the future when the government support measures wind down. There will also be some that were ‘just about managing’ before the pandemic arrived, but for which the extra debts taken out this year with government encouragement will prove a terminal burden.
With all these caveats on the accuracy and meaning of national output statistics, lockdown countries like Britain and France do seem to have had bigger drops in economic activity this year compared with those countries in which governments avoided legal lockdowns. Japan and Sweden, for instance, relied mainly on advice and voluntary measures. In the first half of this year, when the initial wave of the pandemic was in full swing, output fell by about 22 per cent in Britain and by 19 per cent in France, but by a smaller though still significant eight per cent in Japan and Sweden.
However, some countries with mandatory lockdowns experienced similar or even smaller falls than Japan and Sweden: for example, nine per cent in Denmark and six per cent in Finland. Thus, the differential economic impact within Western countries between compulsory restrictions and cautionary instructions should not be exaggerated.
The International Monetary Fund shared this assessment in its latest World Economic Outlook report. While confirming that lockdowns were an important factor in the recessions, it concluded that voluntary social distancing also contributed very substantially to the economic contractions. Unsurprisingly, it found that countries that implemented more stringent lockdowns experienced sharper GDP contractions. Nevertheless, it seems likely that a good portion of this year’s economic losses in the mature advanced industrial countries would have occurred with or without legal shutdowns because of the more persistent policy-led social disruption.
The more decisive factor seems to be the role of government in general, especially when contributing to an over-fearful public response. National-output comparisons do appear to be more indicative concerning the broader approach and attitude of governments in influencing how people have responded. In particular, countries where governments were prepared for a new pandemic, and relied primarily on issuing clear and prompt advice while deploying effective testing-and-tracing systems, endured smaller output drops.
For instance, the South Korean and Taiwanese governments, benefitting from their experience of the SARS coronavirus pandemic nearly 20 years ago, adopted less panicky and fearful interventions than many Western countries. Output drops in the first half of this year for these two admittedly much stronger East Asian economies were only 4.5 per cent and 2.4 per cent respectively. And a significant share of those GDP falls probably came through the impact of government restrictions elsewhere in constraining their export markets.
Lessons from SARS
It is clear that it is how governments and societies respond rather than the number of people that are infected or die from a disease that drives the economic repercussions. This was also the lesson widely drawn from the 2003 global outbreak of SARS. For instance, Canada was then, outside of Asia, the country hit hardest, with 438 probable cases and 44 deaths, most of them in the Toronto area. The outbreak there was mostly contained to hospitals, where healthcare workers, the elderly and the already ill were most at risk.
The adverse economic impact was due primarily to people taking what they perceived as preventative action. Surveys at the time showed that about a fifth of Toronto residents avoided Asian shops and restaurants, with slightly fewer avoiding all public places. One 10th of regular travellers stopped taking international flights.
A study from the Harvard School of Public Health looking into the significant economic and psychological impact in Toronto concluded that public fear motivating these behaviours was disproportionate to the actual risk of catching SARS. The study found that ‘people’s level of worry is higher than their assessment of their own risk. As we have seen in Toronto, as the number of cases of SARS increases, the proportion of people who are concerned grows substantially, even though many of those concerned know that their risk of contracting the disease remains low.’
These anxieties have been linked to how the government acted during the crisis. Subsequently, the official investigating committee criticised the government response for creating confusion and unnecessary fear about the disease. It identified unclear leadership, dysfunctional interrelationships between health agencies and the lack of a unified message and communications strategy. That all sounds very familiar.
A wider lesson taken from the same SARS outbreak was that the scale and economic ramifications of individual responses to a health crisis are going to be influenced by the government guidance and instructions issued. A World Bank assessment five years later similarly concluded that the economic impact, centred on East Asia, was out of proportion to the actual severity of the outbreak. It found that it was how societies and governments reacted rather than the disease itself that caused most economic impact.
The researchers stated that the ‘main economic effects arise from the uncoordinated and sometimes panicky efforts of millions of private individuals to avoid becoming infected’. The major source of the economic losses derived from ‘reduced domestic traffic for services sectors such as retail stores, hotels, restaurants and transportation’, as well as steep reductions in domestic and foreign tourism. The report assessed that such effects were ‘sometimes aggravated by the information and risk communications strategies pursued by governments in affected countries, as well as by the often excessive trade and travel restrictions imposed by governments in other countries’. It noted the possibility that government information alone ‘could lead to severe economic losses because of panic’.
The report concluded that during the 2003 pandemic the ‘costs of prevention’ far outweighed the ‘costs of illness’. In fact, econometric analyses of the early phases of Covid-19 are mostly consistent with the conclusions drawn from the experience of the earlier SARS pandemic. For instance, take one peer-reviewed study in the Journal of Public Economics that relied on correlating Google search data for US unemployment insurance claims to particular state health announcements. It calculated a relatively small economic impact from the public-health interventions, estimating that of the main government shutdown policies just two seemed to have much effect. Between them, restaurant and bar limitations, and non-essential-business closures, contributed only 12 per cent to the rise in unemployment.
Admitting that it seemed ‘counterintuitive’ that state restrictions do not explain a large share of economic decline, the researchers went on to suggest that the other factors playing a larger role might include declines in consumer demand, local government policies, and policies implemented by private firms and institutions. They also cautioned against using the results to infer the impacts in general of particular state interventions, since the exact policy effects would be conditional on pre-existing expectations and policies. Their emphasis in accounting for the economic damage caused remained on wider policy and behavioural responses, rather than the disease itself.
The 1957–1958 influenza pandemic
The same conclusion can be drawn from further back in history when governments adopted a less interventionist approach to an earlier pandemic and the economic costs seemed to be lower. Take the impact in the US of the 1957–1958 influenza pandemic.
Despite the prior existence in 1957 of a vaccine, American mortality rates in the worst six months from late 1957 to early 1958 were in the same league as the Covid-19 death levels so far. During this period the US suffered some 116,000 deaths, the equivalent of about 220,000 today, based on the current population. This is comparable to the 253,000 Covid-19 deaths in the US by mid-November, covering a slightly longer period. The contagion rates of the two pandemics also seem similar.
In the earlier pandemic, it is noted, there was little sense of panic and not much social disruption. One survey of the pandemic’s impact concluded, ‘it was a transiently disturbing event for the population, albeit stressful for schools and health clinics and disruptive to school football schedules’.
There were no official lockdowns or quarantines and not even many school closures. Overall, apart from providing healthcare and, later, vaccinations, the US government made little effort to mitigate the spread of the disease. Later it was criticised for inaction. In contrast, interventions by state and local governments have been extensive during today’s pandemic, despite President Trump’s apparent complacency. The vast majority of US states issued ‘stay-at-home’ orders and imposed closures of schools, restaurants, bars and other ‘non-essential’ businesses.
Maybe some more aggressive government mitigation efforts in 1957 would have reduced the death rates then, but what we’re looking at here is the relative relationship then and now between the actual impact of the disease on the population and the economic effects. The economic losses were much lower then. While there was a short sharp recession at the time, few observers attributed it to the pandemic. The consequence of rising Federal Reserve interest rates feature in most economic commentaries.
Even if that explanation expressed complete myopia about the pandemic’s role, the 3.5 per cent fall of GDP recorded between September 1957 and March 1958 was only about one third of the 10.6 per cent fall in US GDP over the first half of this year. Given the reasonably commensurate numbers of deaths, this strongly suggests that factors other than the disease itself were at play. It is reasonable to conclude that the lesser scale of governmental interventions contributed to the economic losses being far below the level of those over a similar duration this year.
Lessons for economic policy
A more accurate assessment of the cause of the economic costs during the pandemic is important not just for learning lessons from this Covid experience. It should also inform the debate about our future economic possibilities. Seeking greater lucidity about why Western countries have had such a hard economic knock this year can illuminate what is needed to make the economy strong again.
I have highlighted before that most advanced economies, not least Britain’s, were in a terrible state before the virus arrived. Many economies were already so anaemic that this year’s disruptions have brought those pre-existing fragilities into the open. Policy, not the virus, created the recessions.
If through our actions we can so effectively crash our economies, we at least have the possibility of also fixing them. This year’s experiences confirm that governments retain considerable power to influence practices and behaviours. The harsh economic ramifications of government policies this year should put paid to the pompous globalist myth that states are impotent in an interconnected world. This is extremely pertinent to the much-needed public conversation about what we can do to bring about an economy that provides the population with better jobs and durable prosperity.
This will need much new thinking, purpose and courage to bring about. But at least recognising the huge if, unfortunately, mostly negative social and economic impact of state actions over the past year can have some upside. It can also alert us to our potential to act positively, for the greater social and economic good. We have brought about this year’s economic contraction. We also have the capability to restructure and rejuvenate the economy, too.
Picture by: Getty.
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