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 has been unevenly felt with growing numbers of unemployed and bankruptcies from small- and medium-sized businesses occurring. How to use government policy—both fiscal and monetary—is not simple.10 In chapter 4, I explain that this type of recession is very different from past recessions 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 wouldn’t let businesses fail and people lose their jobs. They need to be insulated. We need policies—in particular, loans—to keep people from breaking economic relationships either because businesses shut down or jobs are shed.
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.11 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 lacked either 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 reemergence. 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, which can give us guidance as to what types of jobs, workplaces, and other factors can serve as criteria for release. In reemergence 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 ongoing 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 the urgency and other factors mean that normal market-based processes of innovating are not going to succeed. 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.
Technical Interlude
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 focuses only 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.”
Figure 1.2
Production possibilities set in normal times.
The curved black line in figure 1.2 is the production possibilities frontier (or PPF) and 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 dark gray 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. This means that, if you start from a very low level of health and want a bit more, you have to give up only 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 to meet the dark gray 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.
Figure 1.3
Pandemic production possibilities sets. (a) Previous levels possible. (b) Dark recession.
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 light gray 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 great deal 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.12
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.13