13 May 2020
As the COVID-19 crisis nears six months, focus is growing on economic costs and the pathway to less abnormal activity.
In some countries - fortunately including Australia and New Zealand and many nations in Asia (including China) - this gradual re-opening is happening in a very measured fashion in an environment of better control of outbreaks thanks to early and effective lockdowns.
"There are, obviously, no simple formulae for re-opening nor exactly what lockdowns should look like.”
In others - notably the US, Brazil and Russia - re-opening is being pushed before the virus is anywhere near being under control, guaranteeing wider spread, greater fatalities and ultimately worse economic and social outcomes.
There are, obviously, no simple formulae for re-opening nor exactly what lockdowns should look like. There are (quite sophisticated) models but they are not reality and depend on historical data and projections. They tell you what will happen if certain factors are in play, not what actually is going to happen.
But by this stage there is actually a large body of data showing the impact of interventions. We can see in mortality rates – not just those directly reported but deaths in excess of long term averages – what happened when restrictions are delayed or poorly implemented.
Nations like Italy and Spain, hit hard and early, clearly didn’t foresee the threat. The UK’s policy was late, ill-informed and changed mid-stream, with catastrophic results. The US, Brazil and Russia remain in denial. They are likely to have the worst outcomes of major nations.
Sweden is one example of a policy of looser restrictions entered into with eyes open. Currently its per capita mortality is vastly higher than its neighbours however Sweden is gambling on its strategy being less costly economically and more effective medically in the long term.
But in this world of ongoing crisis, the question of lockdown or reopening is usually misunderstood or misstated as medically optimal or economically optimal.
That is a simplistic statement – argued by too many with some influence – that we cannot afford to pursue the medically recommended course of action. These people further argue – with typically no analysis – that the economic costs of the shutdown in terms of output, jobs, welfare and ultimately health are greater than allowing COVID-19 to spread more widely and kill more people.
This argument is both fatuous and pointless.
The global banking regulator, the Bank for International Settlements (BIS), has now published its own research into the economic costs.
In short, the research supports early and intense restrictions and strictly rationed re-opening.
“Standard approaches to accounting for the value of human lives lend support to these policies despite their high short-term economic costs,” the BIS said.
“Integrated epidemic-macroeconomic models provide a coherent framework for quantifying the costs and benefits of containment policies. Part of the benefit comes from limiting externalities that would otherwise arise if social distancing were purely voluntary.
“Standard epidemiological and economic parameters suggest that several months of strict containment policies that lead to as much as a 30 per cent decline in GDP for the period of the lockdown could be preferable to alternatives with more casualties and a less severe recession.”
Of course, at some point, the cost of economic shutdown is going to be greater than a global pandemic, however catastrophic. That’s the fatuous bit. The pointless bit is it tells us nothing about how to make extremely difficult policy decisions nor on what basis.
How many should we let die? Who should they be? How are we measuring the cost of losing these lives and the impact of the trauma on society, the health system, faith in government?
Meanwhile, how are we measuring the true gains from opening up the economy?
Too often, those making these arguments fall back on a lazy utilitarianism – the greatest good for the greatest number – to justify their positions. Presumably forgetting utilitarianism has been completely discredited as a philosophical system.
Unfortunately, there is actually no humane answer and that’s because we simply cannot put a price on a life and the impact of that life or the loss of it.
If we make judgements on allowing greater mortality, how do we decide which life is worth what? Sacrifice the old for the young? At what age do we make the distinction? Try and put a price on a life? So is a disaffected, gormless youth worth more or less to society than an older philanthropist who is funding vital research and supporting many others?
These questions are unanswerable.
But we do have to make policy decisions and those decisions have to take account of economic costs.
In fact, we do this all the time. We don’t ban driving because the road toll is high. We don’t lock down society during even a severe influenza season.
What we do is create an economic proxy and we acknowledge it is imperfect. We do this too with the legal system: it is a proxy for justice, with rules, assumptions, not perfect justice administered by some omniscient and dispassionate being.
There is a considerable and rigorous body of economic work on how we make decisions based on the value of a statistical life, much based on the work of Thomas Schelling, a Nobel Prize-winning economist.
As the economist Tim Harford explained recently in the Financial Times: ”there must be a better way to weigh the choices that must be weighed. But how? Schelling suggested focusing not on the value of life, but on the value of averting deaths — of reducing risks. A life may be priceless, but our actions tell us that a statistical life is not.”
Others worked on measures of that statistical life. One is the rather antiseptic sounding “micromort”, proposed by an engineer, Ronald Howard. A micromort is a one-in-a-million risk of death.
Harford notes the “value” of a micromort is variable but in advanced societies, where life is valued and much done to prevent loss of it, the value is quite high.
“For example, the US Environmental Protection Agency (EPA) values a statistical life at $US10 million in today’s money, or $US10 per micromort averted,” he says.
With COVID-19, “if we presume that 1 per cent of infections are fatal, then it is a 10,000 micromort condition. Being infected is 100 times more dangerous than giving birth, or as perilous as travelling two and a half times around the world on a motorbike.
“For an elderly or vulnerable person, it is much more risky than that. At the EPA’s $US10 per micromort, it would be worth spending $US100,000 to prevent a single infection with COVID-19.”
Harford concedes these numbers are rough but they are in the ballpark. They clearly demonstrate the more extreme economic lockdowns are justifiable economically – even if we ignore the fact without them we would have seen tens of thousands of deaths in Australia, not hundreds.
Moreover, for all those bleating about the lockdowns being an over-reaction given the lower infection rates in Australia and New Zealand, yes, that is the point.
Without them infections – and costs – would have been vastly higher.
Andrew Cornell is Managing Editor of bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
13 May 2020
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