This also works on the flip side. One option for 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 lower 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. 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 to 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; that is, 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 nonpharmaceutical 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.
The Drift
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 on 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 goes in only 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.7 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 look 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 toward sacrificing the economy and maintaining the line on public health.
Resolve
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.8 Chapter 2 is about such predictable surprises. It discusses why the mathematics of cumulative processes are so difficult to understand and make decisions on. When we look back on this, I suspect the postmortems 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.
Phases of the Pandemic Economy
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. At a high level, these steps communicate a view regarding the hoped-for endgame from the COVID-19 panic.9 The overarching goal is to reduce the rate of infection such that the pandemic ends. This is distinct from a goal of eradicating the virus entirely (as we have done with smallpox, for instance). In other words, cases of COVID-19 may well continue for some time, but their ability to spread in an uncontrolled manner will be curtailed. Nonetheless, how precisely that endgame is achieved—that is, how a sufficient share of the population becomes immune—involves choices that will be outlined in the chapters that follow.
Figure 1.1
The phases of the pandemic economy.
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 healthcare 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.