The COVID-19 Tradeoff

Besides Antarctica, coronavirus (COVID-19) has spread to every continent throughout the world. As rapidly as the virus spreads, so does its economic repercussions. This has left governments struggling to understand and manage the virus, not only medically, but also economically. Among many other important questions, knowing when to close the economy and how long and when to reopen are among the most critical dilemmas currently facing policymakers. One wrong move could mean a dramatic up-tick in covid related deaths.

Recently, economists Eichenbaum, Rebelo, and Trabandt studied the equilibrium between economic decisions and epidemic dynamics, explaining the tradeoff currently facing policymakers and how they should respond. By taking both human lives and economic activity into account, they focus on the tradeoff between containment policies that reduce consumption and hours worked. Their research concludes that it is optimal to carry out large-scale containment measures and that governments have no choice but to reduce economic output, which, while exacerbating the recession, can increase welfare by reducing the death toll.

Their model considers probabilities between health status changes and individual economic behavior. It takes into consideration such factors or scenarios, such as if a vaccine never manifests and whether policymakers face political pressure on restarting the economy, or whether the economy is reopened prematurely or late. 

The three economists recommend that policymakers should escalate containment measures gradually over time as the virus spreads, and relax measures as infection rates decline as well as practice smart containment methods which factor in individual health statuses when reopening the economy. 

The study clarifies many of the ongoing issues policymakers are currently debating and is a must-read.

 

Reference:

Eichenbaum, M, Rebelo, S and Trabandt, M. (2020). The Macroeconomics of Epidemics. NBER Working Paper No. 26882.

https://www.kellogg.northwestern.edu/faculty/rebelo/htm/epidemics.pdf

Eichenbaum, M, Rebelo, S and Trabandt, M. (2020). The Macroeconomics of Testing and Quarantining. Working paper.

http://faculty.wcas.northwestern.edu/~yona/research/Testing.pdf

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