Lockdowns lead to faster economic recovery post-pandemic, new model shows

A minute ago

We're starting to count the economic cost of the pandemic. (AP Photo/Emilio Espejel)

An inevitable trade-off exists between an epidemic's health consequences and its corresponding economic impacts, new research concludes, with the optimal containment strategy prioritizing lives and accepting a short-term recession in order to achieve a faster recovery in the years ahead.

In an article published April 7 in The Review of Financial Studies, researchers built upon the canonical SIR epidemiology model to study the equilibrium interaction between economic decisions and epidemics. The two-way model suggests that people voluntarily cut back on consumption and work to reduce their chances of infection during an epidemic, which exacerbates the severity of the associated economic recession but reduces an epidemic's severity as measured by death toll.

The researchers focused on simple containment policies in their model that reduce both consumption and hours worked, such as shelter-in-place mandates and restaurant and bar closures. Containment measures would ideally be gradually escalated over time, roughly corresponding to an increase in the virus' infection rate. By limiting economic interactions among people, these policy choices exacerbate the corresponding recession but improve general welfare by decreasing the epidemic's death toll. Following a sharp contraction in economic activity, the model predicts a robust recovery will occur as the virus wanes and containment measures are slowly relaxed.

This theorized competitive equilibrium between epidemiological risks and economic decisions is not socially optimal, though, because infected people do not fully internalize the effect of their market behavior on the spread of the virus. It is instead preferable to introduce large-scale containment policies that result in a sharper, sustained decrease in aggregate output in the short term but prioritize health and safety.

In the study's benchmark model, which considers both the possibility of vaccines and medical treatment and the impact of the number of infections on the health care system, optimal containment measures substantially increase the recession's severity, with a 22% decrease in first-year consumption compared to 7% without containment. The worse short-term economic impact, however, results in less severe health outcomes compared to the competitive equilibrium model. Researchers found that the optimal containment strategy would reduce the peak infection rate of the initial population from 4.7% to 2.5% and the death toll from 0.4% to 0.26% of the initial population. Considering the United States, the ideal simple containment policy outlined by the study would increase the severity of the recession but save approximately 500,000 lives.

Prematurely abandoning this containment strategy would initially generate a large recovery, the researchers suggested, with an approximate increase in consumption of 17%. However, such a surge would likely cause a subsequent spike in infection rates, resulting in a second, more persistent recession.

Mathias Trabandt, co-author of the study, professor of macroeconomics at Goethe University Frankfurt and a research fellow at the Halle Institute for Economic Research, said he and his colleagues began to investigate the interaction between epidemics and economics last year, seeking to address critical questions in the wake of the first COVID-19 cases.

"The implications of our model are very clear: When vaccines are likely to arrive at some point during the epidemic, governments should buy time to save many lives even at the cost of a short-lived recession," Trabandt told The Academic Times. "Containment measures buy time until vaccines arrive. Achieving herd immunity with vaccines is much less costly in terms of social welfare compared to allowing the epidemic to run its natural course to achieve herd immunity."

Trabandt said the model is relatively simple in order to make the methodology as transparent as possible, which means the researchers weren't able to study "many important policy issues related to the epidemic," such as policies that mitigate the economic hardships suffered by households and businesses.

"But," he added, "we are confident that the central message from our current analysis will be robust: There is an inevitable trade-off between the severity of the recession and the health consequences of an epidemic."

Dealing with this trade-off will be a key challenge confronting policymakers around the world in the months ahead as many countries continue to grapple with the coronavirus pandemic. According to Trabandt, the No. 1 priority for governments hoping to contain the pandemic should be international cooperation on vaccine development, in addition to coordination for "large-scale production and distribution."

"It is likely that recurrent waves will create further virus mutations, threatening the efficacy of existing vaccines," Trabandt said. "In the end, this will cost more lives and cause deeper recessions."

The study, "The macroeconomics of epidemics," published April 7 in The Review of Financial Studies, was authored by Martin S. Eichenbaum, Northwestern University and National Bureau of Economic Research; Sergio Rebelo, Northwestern University, National Bureau of Economic Research and Centre for Economic Policy Research; and Mathias Trabandt, Goethe University Frankfurt and Halle Institute for Economic Research.

We use cookies to improve your experience on our site and to show you relevant advertising.