Will Coronavirus public health interventions depress the economy? We know that the pandemic itself will hurt the economy but the question is whether non-pharmaceutical interventions (NPI) such as social distancing, lockdowns and quarantines will help or hurt the economy. trump and Republicans obviously believe that NPIs hurt the economy and therefore they are in a rush to open up businesses and put people back to work.
To answer this question, the authors of this study looked at reams of data from the 1918 flu pandemic to study the effect of the pandemic and the level of non-pharmaceutical interventions (NPI) on the economy across various states and cities across the USA. The results are startling and unexpected (not for everyone, but certainly for clueless republicans). Their findings are summarized succinctly in the title of the paper “Pandemics Depress the Economy, Public Health Interventions Do Not”.
The report was written by these highly respected economists -
- Sergio Correia: Board of Governors of the Federal Reserve System
- Stephan Luck: Federal Reserve Bank of New York
- Emil Verner: MIT Sloan School of Management
Summary
Here is a quick summary of their findings —
- In the 1918 flu pandemic, more exposed areas experienced a sharp and persistent decline in economic activity.
- The pandemic reduced manufacturing output by 18%.
- Cities that intervened earlier and more aggressively did not perform worse (economically) and, if anything, grew faster after the pandemic was over.
- Reacting 10 days earlier to the arrival of the pandemic in a given city increased manufacturing employment by around 5% in the post period. Likewise, implementing NPIs for an additional 50 days increases manufacturing employment by 6.5% after the pandemic.
- The findings indicate that NPIs not only lower mortality; they also mitigate the adverse economic consequences of a pandemic.
Here is a tweet by the authors with the link to the paper -
Here is the one chart the summarizes the findings. Cities that aggressively implemented NPIs (green dots) had lower mortality rates (as expected) and their economies grew faster once the pandemic was over. The correlation is not perfect (there are other factors at work), but it is statistically significant.
Few more charts and analysis
The paper is not an opinion piece; it is a scholarly paper published on SSRN, (formerly known as Social Science Research Network), with lots of data, and economic and mathematical analysis of the data. Check out the 44-page paper if you want to dig into it further. Here are a couple more charts.
The first one shows growth of manufacturing employment as a function of of NPIs. The trend is quite clear.
The 2nd one shows growth of manufacturing value (output) as a function of of NPIs.
There is some additional analysis in the paper on banking activity.
Note that the authors do not speculate on the underlying mechanisms that would explain the findings. The study is purely empirical in nature.
The authors conclude by stating —
Altogether, our evidence implies that pandemics are highly disruptive for economic activity. However, timely measures that can mitigate the severity of the pandemic can reduce the severity of the persistent economic downturn. That is, NPIs can reduce mortality while at the same time being economically beneficial.
The authors offer the following caveats —
- Estimates suggest that 1918 Flu was more deadly than COVID-19, especially for prime-age workers, which also suggests more severe economic impacts of the 1918 Flu.
- The complex nature of modern global supply chains, the larger role of services, and improvements in communication technology are mechanisms we cannot capture in our analysis, but these are important factors for understanding the macroeconomic effects of COVID-19.
- The authors make it clear that the opinions expressed in the paper do not necessarily reflect those of the Federal Reserve Bank of New York
or the Federal Reserve Board.
Here is a summary of the paper written by the authors themselves -
Where do we stand relative to other countries?
The authors also offer this opinion - “Anecdotal evidence suggests that our results have parallels in the COVID-19 outbreak. Countries that implemented early NPIs such as Taiwan and Singapore have not only limited infection growth. They also appear to have mitigated the worst economic disruption caused by the pandemic.”
This is something I and others have written about — after we have tamed this pandemic, countries like China, Taiwan, South Korea and Singapore will come as winners in the world economy. Due to their early and forceful intervention, and mitigation procedures firmly deployed, they are opening up businesses already (Singapore did not close businesses or schools at all), while the U.S. (and Europe) will continue to struggle for months to come, with wave after wave of shutdowns, since we do not have a comprehensive strategy in place to stop the virus.
Along similar lines, in the long run, I would guess that blue states will recover economically better than red state, although that is probably difficult to quantify since we cannot stop inter-state travel and blue states will suffer because of the red states.
The damage we are incurring now and how to minimize it
It is clear that the pandemic will cause a lot of damage to the economy and to workers before we embark on the road to recovery. How are we doing relative to other countries on protecting the foundations of out economy? According to this article in the NYT, by UC-Berkeley economists Emmanuel Saez and Gabriel Zucman, we are doing terribly.
- Throughout the world, governments are protecting employment. Workers keep their jobs, even in industries that are shut down. The government covers most of their wage through direct payments to employers.
- The US approach is to have employers fire everyone and then pay unemployment benefits. We are destroying jobs.
- As they are losing their jobs, many workers are also losing their employer-provided health insurance.
- In other countries, people will be able to return to work, as if they had been on a long, government-paid leave. In the U.S., workers will have to apply for a new job, and if all goes well, sign a new contract and resume working.
- When social distancing ends, millions of employer-employee relationships will have been destroyed, slowing down the recovery.
The authors offer some recommendations for Congress -
- Introduce measures to protect employment for the duration of the shutdown. The bill passed last week provides support for wages in one industry, airlines. Congress could easily extend this program to other sectors.
- Introduce a Covidcare for All program. This federal program would guarantee access to Covid-19 care at no cost to all U.S. residents
- To keep businesses alive through this crisis, the government should act as a payer of last resort. In other words, the government should pay not only wages of idled workers, but also essential business maintenance costs, like rents, utilities, interest on debt, health insurance premiums, and other costs that are vital for the survival of businesses in locked down sectors. The recovery will be lot harder if businesses get destroyed.
- Some companies will do very well during the pandemic and inequality will rise. The government should impose excess profits taxes, as was done in 1918, when all profits made by corporations above and beyond an 8 percent rate of return on their capital were taxed at progressive rates of up to 80 percent.
Epilogue
We are in uncharted waters, this time with a broken rudder, thanks to conservatism and the modern GOP. We need a much more comprehensive approach to saving our economy, our workers and helping them recover once the virus is under control. Republicans will not get it done with their vulture capitalism philosophy. Democrats can, since they have the expertise, the will and the moral authority to get this done,
This is a message that Democrats should hammer home — that trump is destroying the U.S. economy and the effects will be long-lasting as China and the Asian Tigers pull ahead, while we, our businesses and our workers will fall far behind. Like trump’s daily presser propaganda rally on TV, Democrats need a similar platform that lays out their approach and vision.
What do you think?
References
- Pandemics Depress the Economy, Public HealthInterventions Do Not: Evidence from the 1918 Flu — poseidon01.ssrn.com/…
- How we can tame the Coronavirus — www.dailykos.com/...
P.S. This diary was up for an hour yesterday. I have substantially revised it since then.