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Coronavirus and the economy: what are the trade-offs?

The Covid-19 health emergency has caused economic havoc on a scale not seen in living memory. It is important to understand the interactions between the epidemic and the economy to be able to deal with the difficult trade-offs facing policy-makers and the public.

Many governments have responded to the pandemic by imposing very severe restrictions on economic and social activity. Understandably, this has created tensions in society, as many have been unable to return to work and continue life as usual. While some have argued that keeping the economy going should be the immediate priority, others have insisted that saving lives must take precedent over economic objectives.

In the middle of this national conversation, economists can offer a unique interdisciplinary perspective on the difficult balancing of interests and objectives.

Why do economists study infectious diseases? Is their approach different from that of epidemiologists?

To understand the key features linking epidemiology and economics, it is perhaps useful to consider the thinking of an imaginary ‘naïve epidemiologist’ and a ‘naïve economist’.

The naïve epidemiologist will take the behaviour of people as largely given and then study how the disease spreads through the population. Based on this analysis, the epidemiologist may suggest ways in which the health authorities or the government may reduce the spread of the disease by imposing restrictions on social gatherings, travel and other activities that entail face-to-face interactions. Importantly, the naïve epidemiologist will have little to say about why people behave the way they do or how new policies may influence such behaviour.

Next, turn to the naïve economist, who will take the spread of the epidemic as largely given and try to understand the consequences of the disease for individual behaviour and economic outcomes. For the naïve economist, the current epidemic would be akin to the 2010 eruptions of Eyjafjallajökull in Iceland, which prompted the closure of airspace in 20 countries and left millions of travellers stranded for weeks. But the problem then was very different from the problem now. While both the volcanic eruption and the pandemic have dire economic consequences, there is a key difference – namely the role played by human behaviour.

Infections like Covid-19 spread through the population via person-to-person contacts and thus require close proximity of people to others. In other words, the disease spreads when people meet at restaurants, when they shop, work, attend concerts or take public transport. In a nutshell, what people do in everyday life is exactly what allows the disease to spread.

This means that to understand the interactions between the epidemic and the economy, we cannot take the approaches of the two naïve scientists. We must adopt a holistic framework and analyse them together as an interacting system that has both a set of epidemiological and socio-economic features. Only then can we understand the problems we are facing and start formulating policies to end the crisis.

What are the main economic-epidemiological trade-offs that we face now?

Whether studying individual behaviour or formulating sensible policies, it is necessary to understand the trade-offs involved. So what are the trade-offs involved in the middle of a pandemic? It turns out that there are many, some for the individual citizen and some for society as a whole.

For the individual, the central trade-off is one of balancing the risks and benefits of exposing oneself to infection. On the one hand, going shopping or going for a walk may be attractive, but on the other hand, it exposes people to increased infection risk. The strengths of these effects are likely to differ depending on the stage of the epidemic. They may also differ from person to person.

Related question: Externalities: why do we need coordinated public action in the pandemic?

For the policy-maker, as for society as a whole, the trade-offs are typically more delicate, as they often weight the interests of different groups in society against each other. A complicating factor is the presence of externalities.

Economists talk of externalities when the decisions of an individual have positive or negative effects on others. The classic example is pollution, where the owner of a polluting factory does not take account of the effects of pollution on the environment and the wellbeing of others. It turns out that infectious diseases offer many interesting instances of externalities.

For example, if you are vaccinated, you cannot get infected and therefore you cannot infect others. Thus others benefit (indirectly) from your decision, even if you are only thinking of the benefit to yourself, not to others. Right now, we can think of there being positive externalities from engaging in social distancing. By protecting yourself, you help to stem the wave of infection and thus benefit society as a whole.

Here are a few of the trade-offs that we currently face and with which economists are grappling.

Protecting yourself and protecting others

When deciding how much to socially distance, each person may not fully consider the effects of their choices on third parties. Even if you do factor in the possibility of infecting your neighbour, do you also consider that your neighbour may infect her cousin, and that the cousin may infect the fishmonger, and so on? So self-protective behaviour like social distancing has positive external effects that the individual may not take into account and thus they will tend to protect themselves too little.

Today and tomorrow

Contemporaneous trade-offs between economic and social activity and spreading the disease also lead to intertemporal trade-offs. Any short-term gains from economic activity today may lead to increased disease tomorrow, making economic and social activity tomorrow even harder to achieve. So rather than thinking about the social activity versus health today, we can rephrase the question as thinking about social activity today against the feasible social activity tomorrow.

Low-risk and high-risk segments of society

On the whole, children and young healthy adults have lower risks from infection than the elderly and people with underlying health conditions. But the restrictions on social and economic activity are imposed on almost everyone, so in this sense there is a trade-off between restricting the activity of low-risk groups and protecting high-risk groups. This is an important trade-off to keep in mind because it has redistributive effects.

Low-income and high-income people

In relative terms, staying away from work is much more costly for a low-income person than for a high-income person. But when society restricts everyone’s ability to make a living by going to work, we are doing so to everyone’s benefit but asking low-income people to pay the highest price.

Seen in this light, the furlough scheme by which the state replaces lost income can be seen not only as a fiscal measure, but also as a health promotion measure. When society pays low-income people to stay at home during the epidemic, it is not merely subsidising their incomes: it is also paying them to help to stem the epidemic.

Primary deaths and secondary deaths

Primary deaths are those caused directly by the disease. Secondary deaths are those that are caused indirectly by the epidemic by overwhelming the NHS and thereby making it harder to prevent death from other causes.

The government chose to delay the closure of schools even after it had encouraged general social distancing. As the government’s scientific advisers made clear at the time, this decision was made because of the trade-offs involved. In essence, the decision did expose some children and teachers to additional infection risks. But by doing so, the government sought to ensure the continuing operation of the NHS and thereby reduce the number of secondary deaths. Again, there is a clear trade-off between competing considerations.

What needs to happen next?

These trade-offs are difficult and often profoundly uncomfortable to deal with, as they force us as a society to make decisions that cannot please everyone. Like never before, economists are engaging actively with these and many other difficult questions. While many are new to the field of epidemiology, they are well-versed in using many of the tools needed to make meaningful contributions to the field of public health.

Going forward, it is important that we as a society have the conversations necessary to enable us to make hard choices and face difficult trade-offs. In doing so, we may benefit enormously from sharing the insights of economists and epidemiologists.

To further this important research programme and to ensure that it helps to inform public policy, it is also important for epidemiologists and economists to talk to each other and not just among themselves. It is only by crossing over and fully understanding the other part of the story that we can make scientific progress and contribute with effective solutions to the crisis.

This will also enable us to start thinking hard about how to prepare for the next epidemic outbreak and in so doing, benefit from the best that epidemiology and economics have to offer.

Where can I find out more?

Some non-technical, general interest introductions to the economics and policy of infectious diseases (some written pre-Covid-19) written by Flavio Toxvaerd for the Bennett Institute for Public Policy are available here:

From epidemiology to economic policy (on Covid-19 policy)

Thought experiments - can economic models help disease control?

COVID-19 Policy Must Take All Impacts into Account: Charles Manski argues that human health is obviously crucial, but epidemiological models should not ignore economic and ethical considerations

More technical research papers can be accessed here:

Equilibrium social distancing (March 2020) considers the individual trade-offs faced by individuals and how these influence the course of the epidemic.

The optimal control of infectious diseases via prevention and treatment (April 2020) considers the notion of external effects in detail and discusses how policy interventions can help to align private incentives and public goals.

A multi-risk SIR model with optimally targeted lockdown by Daron Acemoglu and colleagues (2020) is an example of a paper that considers trade-offs between different risk groups.

Health versus wealth: on the distributional effects of controlling a pandemic by Andrew Glover and colleagues (2020) considers the redistributive effects of lockdowns.

Who are experts on this question?

Many UK-based economists are now working on different aspects of Covid-19. The following is a list of researchers that have published peer-reviewed academic research on infectious diseases to date, some of them also working specifically on the current crisis:

  • Flavio Toxvaerd at the University of Cambridge has published research on the economics of infectious diseases, with an emphasis on behavioural responses, social distancing and lockdowns and vaccination and treatment strategies.
  • Andrea Galeotti at the London Business School has published research on infection and control in network models.
  • Aditya Goenka at the University of Birmingham has published research on how epidemics influence economic growth and the macroeconomy.
  • Aureo de Paula at University College London has published research on how uncertainty about health outcomes interact with individual decision making and behaviour.
  • Alice Mesnard at City University of London has published research on the spread of infections, with an emphasis on the interaction of disease spread and migration choices.
Author: Flavio Toxvaerd 
Picture by John Longley on iStock
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