{"id":8220,"date":"2020-05-29T13:38:10","date_gmt":"2020-05-29T12:38:10","guid":{"rendered":"http:\/\/www.economicsobservatory.com\/question\/epidemic-and-economy-what-are-trade-offs"},"modified":"2022-10-18T11:58:22","modified_gmt":"2022-10-18T10:58:22","slug":"epidemic-and-economy-what-are-trade-offs","status":"publish","type":"question","link":"https:\/\/www.economicsobservatory.com\/test\/epidemic-and-economy-what-are-trade-offs","title":{"rendered":"Coronavirus and the economy: what are the trade-offs?"},"content":{"rendered":"

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.<\/p>\n

In the middle of this national conversation, economists can offer a unique interdisciplinary perspective on the difficult balancing of interests and objectives.<\/p>\n

Why do economists study infectious diseases? Is their approach different from that of epidemiologists?<\/h3>\n

To understand the key features linking epidemiology and economics, it is perhaps useful to consider the thinking of an imaginary \u2018na\u00efve epidemiologist\u2019 and a \u2018na\u00efve economist\u2019.<\/p>\n

The na\u00efve epidemiologist will take the behaviour of people as largely given <\/em>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 na\u00efve epidemiologist will have little to say about why people behave the way they do or how new policies may influence such behaviour.<\/p>\n

Next, turn to the na\u00efve economist, who will take the spread of the epidemic as largely given <\/em>and try to understand the consequences of the disease for individual behaviour and economic outcomes. For the na\u00efve economist, the current epidemic would be akin to the 2010 eruptions of Eyjafjallaj\u00f6kull 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 \u2013 namely the role played by human behaviour<\/em>.<\/p>\n

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.<\/p>\n

This means that to understand the interactions between the epidemic and the economy, we cannot take the approaches of the two na\u00efve scientists. We must adopt a holistic framework and analyse them together <\/em>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.<\/p>\n

What are the main economic-epidemiological trade-offs that we face now?<\/h3>\n

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.<\/p>\n

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.<\/p>\n

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Related question:\u00a0Externalities: why do we need coordinated public action in the pandemic?<\/a><\/strong><\/p>\n<\/blockquote>\n

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<\/em>.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Here are a few of the trade-offs that we currently face and with which economists are grappling.<\/p>\n

Protecting yourself and protecting others<\/strong><\/p>\n

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.<\/p>\n

Today and tomorrow<\/strong><\/p>\n

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.<\/p>\n

Low-risk and high-risk segments of society<\/strong><\/p>\n

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.<\/p>\n

Low-income and high-income people<\/strong><\/p>\n

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\u2019s ability to make a living by going to work, we are doing so to everyone\u2019s benefit but asking low-income people to pay the highest price.<\/p>\n

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.<\/p>\n

Primary deaths and secondary deaths<\/strong><\/p>\n

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.<\/p>\n

The government chose to delay the closure of schools even after it had encouraged general social distancing. As the government\u2019s 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.<\/p>\n