”We know what to do to bring back our economy back to life. What we do not know how to do is to bring people back to life”
- His Excellency Nana Addo Dankwa Akufo-Addo
President of Ghana, 26 March 2020
Everything is awful. The virus is awful. The immediate choices are awful. The future may be even more awful.
We should have been more prepared. For almost a decade, one of the most popular apps was Plague Inc. (120 million downloads and counting). It showed us how it was done. When the COVID-19 outbreak hit, the app surged back to No.1 in China and was promptly banned in the country.1
In Plague Inc, you play the virus and your goal is to wipe out humanity. To the extent they have a goal, that isn’t the goal of most viruses. Instead, it might be survival of its genetic structure which would end should it wipe out its hosts. But never mind, from humanity’s perspective, we would want to tool up on the tactics for viruses that would lead to extinction.2
COVID-19 is not that species-ending virus. But it does have some of the characteristics one would employ in Plague Inc if you wanted to destroy us all. An inexperienced player normally goes for a highly infectious and deadly disease. But that is not what you want to do. First, being deadly, human scientists start working extra hard to stop the plague. Second, if you kill people too quickly, you actually slow down the rate of infection. Instead, what you want to do is find a way of infecting many people preferably without any symptoms that would get you noticed. Then you want to ramp up the disease after each infected person has spread it around so that you overwhelm health centers before the world shuts down travel. COVID-19 fit that bill. Infectious, many with no or just mild symptoms, but then a deadly movement into pneumonia which takes some weeks of hospitalization to treat. It would do well but not necessarily win Plague Inc.
One thing that COVID-19 did, which was not an option for players of Plague Inc, is that it impacted upon different demographics in different ways. While anyone appeared to be able to carry the virus and infect others, those who became very sick – requiring hospitalization – tended to be the elderly. That meant that in dealing with COVID-19, the costs associated with reduced economic and social activity would disproportionately fall on the young, precisely the group that is less personally impacted. That is a recipe for a virus being able to divide and conquer those who need to mount a response by creating a debate regarding whether that fight was worth it. All this meant that the real game was likely to last some time.
In normal times, economists focus on the fact that we have limited resources and can only do so much. If we direct expenditures towards, say, public health we are giving up something else. Thus, it was not surprising to see some economists reminding people of those trade-offs.
“We put a lot of weight on saving lives,” said Casey Mulligan, a University of Chicago economist who spent a year as chief economist on Mr. Trump’s Council of Economic Advisers. “But it’s not the only consideration. That’s why we don’t shut down the economy every flu season. They’re ignoring the costs of what they’re doing. They also have very little clue how many lives they’re saving.”3
This had the effect of causing some politicians and business leaders to embrace the notion that in dealing with a pandemic we need to be conscious that if we push for public health we are trading that off against a loss in economic health.
The technique of “thinking at the margin” often serves us well. This is because we can narrow the argument and think in terms of tweaking or fine-tuning where are now. In dealing with trade-offs the economist asks if we get a little more of something, how much of something else do we have to give up. In this case, thinking at the margin would ask, if we want to open up the economy a little more during a pandemic, how many lives would that cost? However, even in normal times, there is a strong argument, recently voiced by Paul Romer,4 that, economists at least, should stay away from trying to trade-off economic costs with lives lost. To be sure, trade-offs (especially at the margin) are the economist’s bread and butter. So, this really shouldn’t surprise us to see it being voiced during this time of pandemic.
However, this misses a critical issue: pandemics are not the time where trade-offs at the margin are appropriate. This book is about seeing the pandemic through an economics lens. So, I am going to begin with the question of how to balance the needs of the economy with the needs of public health. The good news is that I can do this, integrating a simple epidemiological model5 with basic economic analysis.
The starting point is to understand that at any given point in time, there is only so much we can produce. Broadly speaking, if we want to have better public health outcomes, we need to take resources from elsewhere and so we can imagine that we get less of other stuff – which we would broadly call ‘the economy.’ What makes these trade-offs easy to grasp is that when we talk about producing some more public health, we can then think about how much less of the economy we get. Moreover, we are also confident that as we push for each extra bit of health, the more of the economy we have to give up each time. So, if our public health is poor, it is relatively ‘cheap’ (in terms of a reduction in the economy) to get more of it. When our public health is already prioritized, pushing the system further to gain even more health is relatively ”expensive” in terms of reductions to the economy. Thus, we do end up balancing and we don’t have the best imaginable public health outcomes because, frankly, we have decided not to pay the price. (In the technical interlude at the end of this chapter, I put all of this discussion in graphical terms that might be familiar to an Econ 101 student – the production possibilities frontier. You can delve into that or skip as you see fit.)
One reason a pandemic is awful is that it constrains even further what we can do with our scarce resources. We can neither sustain the level of the economy we had before without a decline in public health or vice versa. That in of itself would not pose an issue for our ability to fine-tune. Instead, there are two factors that fundamentally mean that we can no longer fine-tune and instead face a choice between prioritizing public health or the economy without the ability to balance those choices. Those two factors are (1) that a pandemic hollows out our ability to maintain the same balance between health and the economy and (2) that our choice of priority changes our options going forward; that is, they can drift.
Let’s begin with hollowing out. Recall that our ability to obtain our current balance of health and the economy is that we recognize that having a little more health or a little more economy is not worth the price in terms of what we give up for each. Absent other innovations – say a vaccine or, as I will discuss later, testing – the way to achieve our previous level of public health in the face of a pandemic is to socially distance. That means that we cannot physically interact with one another and, therefore, to a very large extent, we can no longer produce the economic outcomes we once could.
The problem is that the pandemic now changes the price of obtaining a little improvement in the economy. In order to do that, we must now give up a large degree of health. Being able to have slightly larger groups of people interact or have a few workplaces open poses a potentially high risk to public health because of the way a coronavirus might spread. Put simply, the option of sacrificing a little public health for having a little more economy is no longer open to us.
This also works on the flip side. One option with dealing with a pandemic is simply to ignore it and let life go on as usual. The hope from that plan would be to maintain the economy at its previous level, see the virus spread through much of the population, hope not too many people die and have a one to two-year large decline in public health. This was sometimes referred to as allowing the virus to ‘burn through’ the population. Even here the ability to fine-tune is compromised. You might want to achieve a slightly smaller loss of life from the pandemic but find now that the price of doing that, as even that would require a large amount of social distancing, has become very high.
Hollowing out means that you no longer want to maintain the same balance of the economy and health as you did previously. Instead, the ‘best’ choices are to prioritize one or the other. To be sure, there is a trade-off but no longer can you dial up a little bit more of this and a little bit less of that, you either prioritize the economy or you prioritize public health. You don’t want to try and do both.
One thing that can tip the balance is that you may not be able to maintain the economy at its previous level if you just let the pandemic burn through the population. This is because, like a war or natural disaster, we lose resources if we have much lower public health; aka our workforce becomes smaller. Thus, if we let a pandemic run its course without mitigation that lowers economic activity, what happens is what I call ‘a dark recession.’ This is a recession where we see a reduction in the availability, ability and health of the workforce as the virus spreads unabated. This causes a large reduction in economic activity.
We have some evidence that suggests that a failure to abate the spread of the virus through social distancing can make economic recovery thereafter more difficult. Economists have examined the differences in non-pharmaceutical pandemic interventions across different US cities during the Flu Pandemic of 1918.6. The pandemic reduced US manufacturing by an estimated 18 percent making it a large recession indeed. Those cities that pushed earlier and more intensively on pandemic containment ended up bouncing back and having higher economic growth thereafter, and more exposed areas had a decline in economic activity that persisted. This finding suggests that the choice between the economy and public health is not a hard one — pursuing public health can be consistent with superior long-run economic performance.
Thus far, an analysis of what we can produce in a pandemic has shown that we face a stark choice between prioritizing public health or the economy without the ability to fine-tune those trade-offs. However, epidemiological models have another implication that suggests the choice is more difficult than even that stark one. The options can drift depending upon how we respond to the pandemic. Put simply, the longer you take to enact social distancing, the fewer options you have. This means that you can no longer achieve the existing level of health and must accept less.
This is the drift. Your ability to generate higher levels of public health during the pandemic is reduced unless you commit to holding the line on health. Importantly, if you spend too long trying to maintain the previous balance between the economy and public health, you are unable to achieve better levels of public health at all.
Importantly, the drift only goes in one direction. If you choose to prioritize the economy and maintain previous levels of economic activity, you may cut off the option of improving public health at all. You no longer have the option to “buy” more public health through a reduction in economic activity. Prioritizing the economy too aggressively is like going through a one-way door. There is no exit.
Instead, holding the line on health initially is the superior way to go. It is the only direction that gives you the option of making a choice once you have learned more information regarding what the pandemic’s effects on your options actually looks like. Consequently, from an economics perspective, the fact that supporting the economy makes the decision irreversible by changing the pandemic production options means that you should be biased towards sacrificing the economy and maintaining the line on public health.
Based on the above, economics tells us that the optimal response to a pandemic is to resolutely hold the line on health while you consider your options. It is critical to prioritize health before wealth until such time as you learn enough information to understand the nature of the pandemic.
Holding the line is a difficult coordination challenge. Expectations matter. To hold the line on health you need to change the behavior of large numbers of people. It is easy to social distance when others are doing so. It is easy to practice good hygiene when you fear others around you will stigmatize you if you don’t. But the flip side of this is that if you cannot achieve that convergence of expectations, you may not be able to achieve significant progress in holding a virus at bay.
This is why resolve, clarity, transparency and other instruments that can help align expectations are so critical. When leaders downplay the magnitude of the crisis or take actions that seem to be guidelines rather than expected behavior with consequences, expectations do not converge. Instead, rather than taking actions that make sense in the public or societal interest, individuals will continue to do as they often do and pursue their own interest. They will keep businesses open and keep engaging in social life. That creates a vicious cycle that makes it harder to hold the line on health and may necessitate more costly policies by governments to contain the outbreak. The cost will be lost time, and by extension, lost lives.
Given this, you might have thought the world’s population would have been better prepared to act quickly on this. However, it is harder than you think as it requires a faith in mathematical predictions that is not easy to come by.7 Chapter 2 is about such predictable surprises. It discusses why the mathematics of cumulative processes are so difficult to process and make decisions on. When we look back on this, I suspect the post mortems will tell us we should have acted sooner. In reality, “sooner” was measured in days. That is a tough standard for decisions that turned out to be vastly consequential.
The remainder of the book is structured along the lines of various phases that arise for the economy during a pandemic. The four phases are illustrated in Figure 1-1.
The first phase is ‘containment.’ This involves three steps. The first, as already noted, is that the virus, outbreak and potential pandemic have to be identified. This is the subject of Chapter 2. While this is going on the pandemic is playing itself out unabated.
Following this is a step that is designed to put the brakes on and stop the virus from spreading. This is the initial part of holding the line to learn more about the virus and to preserve potentially scarce economic resources. The decisions that must be made then are akin to those made by governments during wartime. They involve immediate sacrifice and, as I point out in Chapter 3, they require an approach to resource allocation that would, at all other times be considered repugnant; centrally planned economies. But this is where governments, appropriately, have started to act. There are centralized and military-run operations to improve health care system capacity. There are price controls and subsequent rationing. And there are blanket restrictions on movement. None of these things would have been achievable under a free market regime, and all of these actions have the potential to save many lives and ultimately preserve our economy.
The costs of those decisions are very hard to fathom. Perhaps the largest contraction in economic activity since the Great Depression is taking place. And this is by choice so we could reduce the spread of COVID-19. The impact of that would be unevenly felt with growing numbers of unemployed and bankruptcies from small and medium-sized businesses on the horizon. How to use government policy — both fiscal and monetary — is not simple.8 In Chapter 4, I explain that this type of recession is very different from the past and requires a distinct approach. The goal would be to somehow pause the economy so that it could be later unpaused and life could return to normal. Thus, we couldn’t let businesses fail and people lose their jobs. They needed to be insulated. We needed policies — in particular, loans — to keep people from making those choices.
If COVID-19 is successfully contained, the next phase is to reset everything and start from scratch. A critical insight when thinking about pandemics is that the problem we face is a lack of knowledge. We do not know who is infectious and who might be safe from infection. If we have this knowledge, we can isolate the infectious until they recover and prevent the virus from spreading while maintaining much of our economic and social life.9 In Chapter 5, I describe this reset phase as a move to a testing economy. In that economy, we test widely to determine who is safe to interact with others. Then we repeat that until such time as a vaccine is distributed or the virus has otherwise abated. In this way, moving to a testing economy can expand our production possibilities. This is what we would have liked to do at the outset but either lacked the information or the means to do so. It highlights that the role of the containment phase is effectively to get us back to square one and have a do-over based on better knowledge going forward.
Having reset and developed a means of testing, we will be able to begin the recovery phase from the pandemic. In Chapter 6, I consider the economic issues associated with re-emergence. It is shown that there will be a need to prioritize who is released from isolation as not all of the population will be designated safe for interactions. This is based on network theory that can give us guidance as to what types of jobs, workplaces and other matters can serve as criteria for release. In re-emergence we will also face rationing of certain things — most notably vaccine doses — and will need to consider how those scarce resources are allocated.
Chapter 7 then looks at a related but also on-going part of the recovery — the need to rally innovation. Innovations will be needed for tests, treatments and vaccines for COVID-19 but also for dealing with pandemics in the future. The fundamental problem is that these innovations are global public goods that we want wide distribution of but that the urgency and other factors means that normal market-based processes of innovating are not going to cut it. Instead, I discuss various tools that might accelerate innovations including advance market commitments to purchase the products based on innovations. These can overcome some of the incentive-dampening pressures that might otherwise emerge for innovators in this area.
Finally, having evolved from the current crisis we will reach a new phase — the future. My assumption here is that, like major crises of the past, we will want to find ways to avoid them in the future. There are opportunities for global cooperation and also to consider the differential impact of these crises and their resolution on different groups. Thus, I will end the book reflecting on these but noting that much of the work outlining that truly does lie in our future.
Readers who do not enjoy graphs are free to skip directly to Chapter 2 without missing any crucial information. For economists and other graph lovers, this section will go into more detail of the hollowing out and drift effects so critical to the economic conclusion that health should come before wealth.
The key thing to note about a pandemic (like COVID-19) is that it fundamentally changes the production possibilities set for the economy. A production possibilities set tells us what we can produce with the resources at hand. It does not tell us what we should or want to produce; you would need to think about preferences (in this case, social preferences) to get that. Instead, the production possibilities set only focuses on what the economy can do, and that is all I need to do to point out the flaws in beliefs that fine-tuning and maintaining the previous balance between health and the economy is possible.
To keep things simple, Figure 1-2 is the production possibilities set during ‘normal’ times when we have a choice between how much public health we want and how much of other stuff — which I will label ‘economy.’
The black line in Figure 1-2 is the production possibilities frontier (or PPF for short) and it shows the upper limit of the combinations of the economy and health we can achieve. We can, of course, obtain lower levels of the economy and health than this but we would try not to. If we can, we want to choose a point (like the blue dot) that is on the frontier which gives us a certain amount of economy and a certain amount of health.
The key feature of the textbook PPF is that the shape of the curve is concave. What this means is that, if you start from a very low level of health and want a bit more, you only have to give up a little bit of economy. However, if you start from a high level of health, to gain even more health, you would need to give up a larger amount of economy. This is the law of diminishing returns. Put simply, it is harder to produce more of something when you already have a lot of it.
These are not normal times. We now have a pandemic. What a pandemic does to the PPF is something like what is depicted in Figure 1-3a. There are two big changes illustrated by the new line below the normal PPF. First, the pandemic PPF lies below the normal PPF. That means we can’t produce as much economy or health as before. In particular, we can no longer produce the blue dot even if we can have the same amount of health or the same amount of economy as before. This is the logic many have when thinking of why we face a trade-off in a pandemic when we didn’t before.
Second, there is a hollowing out of the PPF. That arises out of the nature of a pandemic. To consider this, suppose that we started from our original level of the economy (at a point like E, the black dot). Then, if we want more health during a pandemic, we need to give up a lot of the economy to get it. This is the social distancing argument — we need a lot of social distancing in order to halt the spread of infectious disease and a little bit won’t have much effect. The same logic applies if we start from our original level of health (at a point like H, the green dot). In that situation, if we look to give up a little health for a better economy we find that we cannot do that. Even to achieve a level of health remotely close to what we previously had, we have to employ lots of social distancing which means that the only way to get a better economy is to give up a ton of health. (Notice that the less virulent is the infection, the smaller the bite is likely to be.) The point is that if we take the epidemiologists seriously then our usual marginal thinking about trade-offs does not work.10
Before moving on, it is useful to reflect on a couple of other things we learn from this approach. First, it is highly unlikely that we want to choose a point in the hollowed-out portion (say, by maintaining the previous balance between health and the economy). Doing this would leave us with lower health or economy than we could achieve at either end.11
Second, there is a certain logic to the idea that you might choose to give up entirely on trying to slow or contain a virus and, instead, choose a point like E where you have the economy you had before but with much lower public health (aka fewer people surviving). The logic here is that it is really, really hard to preserve public health because the economy really has to suffer. Of course, the same logic applies to a point like H. If you want to preserve public health (save lives) you have to accept that you will harm the economy in a large way. In other words, the bite forces us into a big either/or situation — that is, a choice between H and E.
Figure 1-3a as it is drawn assumes that we can achieve the same level of economic performance even if we have low public health. That is potentially very unrealistic. If we let a pandemic run its course without mitigation that lowers economic activity, leading to ‘a dark recession’ as depicted in Figure 1-3b. If this is the case, you can see that a point like E will be far less desirable than H.
The drift can also be represented using PPFs. This is done in Figure 1-4. Figure 1-4a shows that if you do not hold the line on public health to keep it at its previous levels. You will see that option no longer is viable and lies outside the moving pandemic PPF. Figure 1-4b shows what happens if you try and maintain the previous economy level and delay too long on social distancing. In this case, the PPF has a cliff and it is no longer possible to control the pandemic after a time.
There are two final things worth demonstrating using the pandemic PPFs. First, Figure 1-5 shows what happens if you hold the line on public health but do not institute the type of macroeconomic policy life support mechanisms that allow to pause the economy. As will be discussed in Chapter 4, introducing those mechanisms can improve the economy along with maintaining public health as you move from a point, like B, within the PPF to the frontier itself.
The economist Eric Budish observed that it is very important to consider the correct mindset when thinking about how to reach the frontier.12 In particular, if you have a mindset that focusses solely on reducing the infection rate as quickly as possible, this will not necessarily get you to the frontier. Instead, that frontier involves targeting an infection rate that stops the pandemic13 but, otherwise, picking allowable activities that reflect both their value for the economy and their risk in terms of public health.
Second, there are some innovations and investments that can be made that will improve the pandemic PPF. In Chapter 5, I describe the use of tests to make interacting physically safe again. This has the effect – shown in Figure 1-6 – of expanding the production possibilities set. This makes H more desirable. However, it is useful to note that such innovations and investments are of no value if you decide to move to a point like E. Thus, another reason you may want to hold the line on health is to provide breathing space for the reset phase to be prepared for and then conducted.