The Economics of COVID-19
Evidence-Based Answers to Frequently Asked Questions & Comments (FAQ)
This list grew out of responses to our Open Letter to the Swiss Government from November 2, 2020. We strongly believe that it is crucial for us academic economists to engage with the public and convince people that our recommendations result from a comprehensive analysis of scientific evidence based on all available data.
It is common practice in academia to criticize preliminary evidence, and this situation is no exception. On the contrary: We welcome feedback ⎼ both positive and critical ⎼ because we need broad support in the population for these evidence-based policies to work. Otherwise they will not be adopted and hence won't be effective. Therefore:
👉 Please feel free to use this Contact Form to add questions and to provide feedback
Please also check out the concise explanations in the Policy Briefs prepared by the fantastic economists on the Swiss National COVID-19 Science Task Force. Our views aling very closely with theirs. However, to maintain independence, no member of the Task Force has signed our letter.
Thank you for engaging with this very important topic!
Table of Contents
As explained in our answer to another question here, the best policy is "test-trace-isolate-quarantine"(TTIQ). However, this policy cannot be implemented as long as the daily number of new infections are high, because demand both for testing and especially for contract tracing are above their respective capacities.
The economy can be opened again once both the level and the rate of new infections are low again. The opening should occur in combination with close monitoring of the situation with frequent, representative and efficient testing. Interventions can then be much more targeted and hence are much cheaper at low levels of daily infections than at high levels. This is explained in more detail in this Policy Brief (in German only) of the Swiss National COVID-19 Science Task Force.
A: Yes and no ⎼ but mostly no.
This is a commonly raised issue and one that many people get wrong, because they are not trained to think in terms of counterfactuals, i.e. in "what if" scenarios.
Yes, the virus will cost us a lot ⎼ and by us we mean the entire economy or society (i.e. children, working-age adults and retirees). However, thinking that we can somewhat avoid these costs by not intervening in the economy is wrong and dangerous. An intervention such as a "lockdown" (to be specified in collaboration with health experts and adjusted to the situation) will cause a recession, but not intervening and letting the virus spread will cause an even deeper recession and potentially even a depression ⎼ which would be the first since the Great Depression in the 1930s.
Hence, the lockdown is only costly if we compare it to a situation where the virus did not exist, but that is unfortunately not the reality we live in. We need to compare two scenarios:
Many studies ⎼ for example this article in the Brookings Papers on Economic Activity ⎼ show that countries that had a lockdown in the 1st wave ⎼ and especially those that did it earlier (e.g. Switzerland) ⎼ saw their economy decline by a smaller or similar amount than those that didn't impose tight restriction (e.g. Sweden); see also this study by the International Monetary Fund.
However, countries with a lockdown had significantly lower numbers of deaths per 1 million people than countries without a lockdown (as we discuss here).
How can that be? One reason is that people and businesses started to respond to the virus even before the lockdown. For example, people were afraid of the virus and reduced their activities such as frequenting restaurants or traveling (especially because of the long asymptomatic phase of the disease, which makes it hard to see whether co-workers and friends are infected, so people stop trusting each other).
The figure below provides direct evidence for this channel by showing both economic activity (consumer spending; blueish line labeled 'Sales Activity') and physical activity (red line 'Physical Mobility). The authors of this study, Florian Eckert and Dr. Heiner Mikosch of ETH Zurich, find that:
"The Swiss population substantially reduced its activities already before the shops closed and before the authorities introduced containment policies in mid-March 2020. Activity started to gradually recover from the beginning of April onwards, again substantially before the first phase of the shutdown easing started at the end of April."
Another reason is that many countries, in particular Switzerland, are open economies that depend heavily on exports as well as imports (i.e. international supply chains). Therefore, an internationally coordinated policy leads to fewer economic costs than if each country imposes lockdowns at different times, every time disrupting these international flows of goods and services again. Of course, different countries must adjust the severity and the duration of these interventions to the evolution of the virus in their respective economies.
Source: Eckert, Florian, and Heiner Mikosch. "Mobility and sales activity during the Corona crisis: daily indicators for Switzerland." Swiss Journal of Economics and Statistics 156, no. 1 (2020): 1-10.
In normal times, there is of course a trade-off. For example, we all decide whether to spend more money to buy a safer but more expensive car or to use this money for something else, knowing that this choice might potentially kill us in case of a severe accident. Our budgets are limited, so we need to decide. In fact, one definition of economics is "the science of trade-offs"!
But the situation is very different in a pandemic, especially when the virus grows exponentially (i.e. when a population is on the exponentially growing part of the epidemiological curve).
Several studies have analyzed the relation between the economic costs of the pandemic (measured by the fall in the country's GDP) and the country's health during the 1st wave (measured by the cumulative number of Covid deaths per million inhabitants). These studies find no relation (based on data from comprehensive analysis across many countries, such as this article in the Brookings Papers on Economic Activity or this study by the International Monetary Fund) or even a negative relation. For example, the following figure shows that countries with a high number of Covid deaths also had a large decline in income (e.g. the UK, France), while countries with low deaths also had smaller income declines (e.g. Denmark or Switzerland).
Moreover, several studies of the last pandemic ⎼ the "Spanish flu" of 1918 ⎼ reached the same conclusion that there was no trade-off between mortality and the economy, and some studies even found a negative relation such that fighting the virus early has long-term benefits for the economy; see e.g. Correia, Luck and Verner (2020), "Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu".
A more rigorous study of the trade-off is provided by J. Andrés, J.E. Boscá, R. Doménech, and J. Ferri in a recent research report for BBVA (Original in Spanish: Bienestar Social y COVID-19, Social Welfare and COVID-19). In the first Figure reported below, the authors use data similar to the one from the previous figure to calculate an “iso-welfare curve” (see Jones and Klenow for the formal definition). As Andres et al explain, the Jones-Klenow social welfare function allows to calculate how much per capita consumption society would be willing to give up in order to increase life expectancy, for example, by a year and maintain social welfare. This trade-off ratio is represented in the Figure by the blue iso-welfare curve, drawn through the average of the countries in the sample. The iso-welfare welfare curve thus gives all the combinations of deaths and recessions that provide the same loss of social welfare as that associated with the average sample of countries. Countries below this line have experienced above-average falls in welfare during the crisis. For example, this line allows us to see that, in terms of loss welfare, the situation in Greece, Canada, Sweden or the United States is very similar, despite the very different position in terms of declining GDP per capita and mortality rate. Note that these relative positions change through time as both pandemic situations and economic recessions evolve: This data refers to the situation as of Oct. 17. Switzerland is close to average up to mid-October, and it will be interesting to see its evolution thereafter in this context.
Fig: GDP per capita forecasts for 2020 and COVID-19 deaths: Social welfare implications
Source: J. Andrés, J.E. Boscá, R. Doménech, and J. Ferri, Bienestar Social y COVID-19
The secondFigure allows to represent the equivalent loss of well-being in terms of declining GDP. Regardless of whether it is due to policy to manage the crisis, initial conditions, or pure luck, the Figure decomposes the loss of social welfare into one component due to the fall in GDP and another caused by COVID-19 induced mortality. Great differences across countries are apparent, not only in the aggregate social welfare loss, but also in the decomposition of their causes.
Fig: Loss of social welfare due to COVID-19 in 2020 in equivalent terms of per capita consumption
Source: J. Andrés, J.E. Boscá, R. Doménech, and J. Ferri, Bienestar Social y COVID-19 based on Goldstein and Lee (2020) and Jones and Klenow (2016), FMI, AMECO, OECD and GapMinder.
This means that the evidence supports the view that there is no sharp, dichotomy-like trade-off between health and wealth during a pandemic. However, in normal times (or with low levels of new infections) there is a trade-off and society as a whole (not individual lobbies and not us, the science experts) must make this difficult choice. (See our answer to next question below.)
This is also the conclusion reached by the economists on the Swiss National COVID-19 Science Task Force who surveyed the international literature that emerged since March of 2020.
A: 1) Get virus under control as quickly as possible; and 2) manage the virus at low rates of infections at lower human and economic costs
This is a very good and important question. The fact that we don't observe a trade-off at the high rates of infections, hospitalizations and deaths as we currently have in Switzerland implies that our current policy of waiting in fear of hurting the economy is not optimal.
Economists try to study the economic consequences of government programs in their entirety, including how they affect different segments of the population (old/young, rich/poor, workers in exposed sectors/workers who can do home office, etc.) as well as the dynamics (short-run, medium-run and long-run).
A useful approach used by economist is to assume that society ⎼ i.e. the citizens of a country ⎼ tries to achieve the highest social welfare possible. To do this, it has several goals. In the case of the current COVID crisis, we ⎼ the people ⎼ try to prevent as much suffering (i.e. the public health goal) while also preventing our economy from suffering (the "wealth" goal). Because our resources are limited, our societal choices are constrained. In the current context of the pandemic, we call the different mixes between public suffering and economic suffering the Pandemic Possibility Frontier (PPF).
It is the role of economists, in close collaboration with epidemiologists and other scientists, to trace out this frontier (based on our best knowledge of the virus and its effect on the economy) so that our political representatives can choose the optimal point that reflects the preferences of their citizens.
We are well aware that this is a very difficult choice! However, economists are largely silent about this choice and believe that it is the role of the public ⎼ not the experts ⎼ to make this difficult choice.
The following figure is a highly simplified representation of the difficult choice that we face as a society.
Source: Authors' drawings based on Kaplan, Greg, Benjamin Moll, and Gianluca Violante. "The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the US." NBER Working Paper w27794 (2020).
The black curved line shows the possibility we face to "exchange" economic well being ⎼ i.e. "the economy" (on the vertical y-axis) ⎼ for public health (on the horizontal x-axis). This is the Pandemic Possibility Frontier (PPF).
As previously noted, the vast majority of research papers that studied data from pandemics ⎼ either historical (e.g. the 1918 Spanish flu) or from the 1st wave of COVID in the 1st quarter of 2020 ⎼ find that there currently is no tradeoff between more health ("lives saved") and the economy ("livelihoods preserved"). In the figure, this means that most country's policies are suboptimal, too cautious, and are located on the increasing part of the PPF, which is the part of the black curve between the black point "Do nothing" and the pink point "Wealth/health trade-off starts here".
On the part of the black PPF curve between the pink point "Wealth/health trade-off starts here" and the red point "Lockdown" (which is a complete shutdown of the economy), society faces a painful trade-off between public health and economic well being.
How does society trade-off public health and the economy? The citizens' choice is reflected by the green U- or L-shaped curves, which economists (unfortunately) call social welfare indifference curves. This does not mean that society is indifferent between health and wealth. Instead, it means that the society judges each point on one of those continuous green lines as equally bad ⎼ hence the term "being indifferent between any two points on this green line".
How should policy makers choose the optimal policy? Each green curve that is further up and to the right (i.e. in the direction of north-east in the figure) is strictly better than one that is below it. Hence, policy makers must try to choose the highest possible green line that is still on the black PPF curve. This point is the black point denoted "Where 60+ economists would like us to be".
How can they achieve this? The first step is to leave the inefficient region between the black and the pink point, by which we mean getting the virus under control by imposing stricter measures (in accordance with the best scientific evidence provided by the Scientific COVID Task Force). Once this is achieved, the government must listen to its people to figure out how much it is willing to sacrifice economic well-being to save lives and public health. Note that this trade-off is much easier (i.e. the shape of the PPF curve is much more favorable) if the virus can be well managed, because it is much cheaper to implement a targeted Test-Trace-Isolate strategy at low levels of new infections than at high levels.
A: No, not necessarily.
This is a very good and important question. As we wrote in our open letter from November 2 (emphasis added):
"[We] recommend a swift second lockdown (the nature, extent, and duration of which is to be decided by public-health experts) accompanied by strong fiscal support: to small and medium firms, small entrepreneurs, and to the most vulnerable categories of workers, especially those most exposed, in the most affected sectors; and to sustain the development of state-of-the art testing and contact tracing."
As summarized nicely in these two Policy Briefs by the Swiss Covid Task Force's Policy (Policy Brief 1, Policy Brief 2; in German only), the best policy with the least harm to the economy and public health is to substantially expand the testing and contract tracing capacities ⎼ already now and also while the stricter measures are in place. This is necessary to implement the TTIQ strategy: testing, contact tracing, isolation and quarantining (TRIQ-Strategie in German: Testen, Rückverfolgung der Kontakte, Isolation und Quarantäne).
The reason this strategy is currently our best action plan is that the costs of waiting before intervening grow exponentially fast, while the benefits from delaying only grow linearly (i.e. proportionately to the waiting time). Moreover, at current levels of new infections (not just the rate of infections!), contact tracing breaks down. For each new infected person many additional people must be contacted. Hence, the number of people to contact grows at an even faster rate than the virus itself.
A: Yes, we looked at it extensively. No, it performed much worse.
Sweden performed among the worst both in terms of health (e.g. number of confirmed Covid-deaths) and the economy (lost income).
a) Health. Because the virus spread from Italy to the rest of Europe, it reached Sweden later. It is therefore important to compare Sweden with its neighboring countries that were hit by the 1st wave around the same time. As the figure below shows, Sweden has a much higher cumulative number of deaths per one million inhabitants compared to its neighboring nordic countries Norway, Denmark and Finland. The number of deaths remain much higher also when including the 2nd wave. Moreover, contrary to what Swedish policymakers expected, the spread of the virus during the 2nd wave was not lower than in its neighboring countries. In fact, both Norway and Finland also fared much better in the 2nd wave than Sweden in terms of lives saved.
b) Economy. Early on in the 1st wave, it looked like the Swedish economy was suffering less or not at all because Sweden did not impose the same restrictions as the other countries surrounding it. As shown in the figure below, Sweden's GDP even increased slightly from the last quarter of 2019 to the first quarter of 2020 (i.e. from Q4 2019 to Q1 2020). This early economic success led many analysts to prematurely claim that there is a trade-off between health and the economy ⎼ even in the peak of a pandemic ⎼ and that Sweden chose to weigh the economy more than health.
However, Sweden's GDP fell by more than 8% in the 2nd quarter of 2020 (Q2 2020) such that the cumulative decline in the Swedish economy over the first half year of 2020 is comparable to the economic recessions of its neighboring countries (about 4% over 6 months or 2% annualized). We explain the reasons in this response to a similar question here.
Source: Authors' own calculations based on data from FRED, Federal Reserve Bank of St. Louis.
Please also read this Policy Brief by the Swiss National Covid-19 Science Task Force (in German only), Analyse der umfassenden Durchseuchungsstrategie.
It seems fairly uncontroversial that we need to compensate employees who are affected by a lockdown; work in sectors that are heavily affected by the spread of the virus and the necessary containment measures; have already or might lose their job; must involuntarily work part-time instead of full-time; or see their salary substantially reduced. We therefore focus on those Q&As that are related to why we should also generously compensate employers (i.e. companies, firms, businesses, the self-employed, etc.).
A: Yes and no ⎼ but mostly no.
Yes: Supporting business broadly means that some firms will survive longer than they otherwise would have.
No: The survival of this relatively small fraction of firms is the economic cost we must pay to prevent an even worse evil ⎼ a large fraction of businesses that would be profitable if it wasn't for the virus (or more precisely, would add value to our economy) must declare bankruptcy because of illiquidity or insolvency.
This view is called liquidationism and is shared only by a very small minority of economists on the fringe of our profession. Their view, however, is currently shared by many Swiss politicians and lobbyists and can be summarized as follows:
"Liquidationism is the heterodox Austrian school belief in economics that no actions to mitigate the effects of recessions should be taken by the government or the central bank, but, rather, that the "temporary pain" of companies being liquidated, on account of crises, is a solution in itself. In contrast mainstream economists think that 'we have every reason to think that governmental efforts to provide liquidity and fiscal stimulus, and to prevent the panic of contagion from collapsing the financial system, are warranted.' " (Source: Wikipedia.)
There is a lot of historical evidence about the negative short- and long-run consequences of letting business fail in a national crisis to avoid supporting inefficient firms for a little longer. In fact, there is such broad agreement across the political spectrum ⎼ ranging from Lawrence Summers on the left to even Milton Friedman on the right ⎼ that it is surprising to us that this argument still has any credibility in today's political discussion. A good summary of our argument is provided here (emphasis added):
"Economists like Barry Eichengreen and J. Bradford DeLong note that President Herbert Hoover tried to keep the federal budget balanced until 1932, when he lost confidence in his Secretary of the Treasury Andrew Mellon and replaced him. An increasingly common view among economic historians is that the adherence of many Federal Reserve policymakers to the liquidationist position led to disastrous consequences. Unlike what liquidationists expected, a large proportion of the capital stock was not redeployed but vanished during the first years of the Great Depression. According to a study by Olivier Blanchard and Lawrence Summers, the recession caused a drop of net capital accumulation to pre-1924 levels by 1933. Milton Friedman called leave-it-alone liquidationism "dangerous nonsense". He wrote:
I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You've just got to let it cure itself. You can't do anything about it. You will only make it worse. ... I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm. "
In our professional opinion, it is therefore difficult to understand why the Swiss government adopted a liquidationist position recommended by a few business lobbyists.
The more detailed answer can be found in a recent blog post (in German) by Prof. Marius Brülhart and Prof. Thomas von Ungern-Sternberg, both at the University of Lausanne.
A: We all ⎼ but not all at once.
Economics teaches us that it is unwise to increase current taxes to pay for a temporary adverse event such as a pandemic, a war, or a financial crisis for example.
Why? There are two sets of arguments: The second is based on economic efficiency while the first is based on both risk management and/or fairness. For example, the pandemic is not our generation's fault and it could have hit an earlier generation or it could hit again later generations. Hence, sharing the burden across generations is part of our social contract or intergenerational social insurance. This is one strong argument for keeping government debt low relative to GDP in good times, to pay for such rare, bad events. This strategy is called "saving for a rainy day". However, economics is mostly silent about questions of fairness or moral philosophy on the ground that these decisions should be left to the people and the political process.
The second set of arguments is based on economic efficiency. Taxes are distortionary, meaning they destroy some of the societal value that could have been produced in the absence of imposing taxes. Since it's necessary for the government to raise taxes to finance public services (e.g. public health, public education, defense, social insurance, etc.), economists have studied for a long time how to raise a certain amount of tax revenue while minimizing the costs to society of taxation. A central finding is that raising taxes over a short period of time by raising (marginal) tax rates is much more costly for society than raising taxes a little over a long time period. This finding is called "tax rate smoothing". In fact, it's possible to not raise taxes at all if the government is thinking about the long-run future and constantly sets aside tax revenue in good times to pay for extra spending in bad times: the "rainy day fund" strategy.
Today it is even better, because we might not even have to raise taxes, because the interest rate the Government pays on new debt is lower than the rate at which the economy has been growing over the past few decades and is expected to grow again after the crisis. In fact, if we academic economists were forced by an evil spirit to pick a date and location during the past 200 years to experience a pandemic, Switzerland in 2020 would probably be at the top of most of our lists. Why?
(The following is based on a recent study cited below by one of our signatories, Cédric Tille, Professor of Economics at the Graduate Institute for International and Development Studies in Geneva. In a Twitter post, we provide a simple analogy of the current financial situation of the Swiss government to the problem of a homeowner who could borrow money by taking on additional mortgage debt. The link is here: https://twitter.com/LorenzKueng/status/1327142776929214464 [in German only].)
Switzerland has strong political and fiscal institutions and built a reputation as a trustworthy partner over decades and centuries such that its public debt is considered one of the safest investments in the world. As a result, it pays one of the lowest interest rates on its debt in the world, and these interest rates have further decreased over the past decades, together with the worldwide downward trend in interest rates as shown in this figure.
Source: Tille, Cédric. "The «burden» of Swiss public debt: Lessons from research and options for the future." No. 14-2019. Economics Section, The Graduate Institute of International Studies, September 2020.
Moreover, over the last 20 years, Switzerland has paid down nearly a quarter of its public debt as shown in the next figure, and it has voted to impose a "debt brake rule" to prevent politicians from increasing government spending too much.
Source: Tille, Cédric. "The «burden» of Swiss public debt: Lessons from research and options for the future." No. 14-2019. Economics Section, The Graduate Institute of International Studies, September 2020.
It is important to understand that the Government support programs we are advocating for are a temporary response to the COVID crisis, not a permanent expansion of government. They have the characteristic of an insurance contract ⎼ right now Switzerland is paying out money that was saved in good times as insurance (similar to contributing health insurance premia to an insurance fund) against such catastrophic events (like a visit to the emergency room). This form of spending is therefore very different from other government spending programs such as entitlement programs. The debt brake was introduced to slow down the expansion of regular government spending, but not to prevent the Swiss government from acting in a national emergency like this pandemic.
This view is also shared by our creditors ⎼ i.e. the people and institutions who lend us money through the financial markets ⎼ as the following figure shows. When the Swiss government announced its 42 billion rescue package at the end of March 2020, interest rates did not jump up (see the vertical line in the figure below indicating the interest rate in April), because investors understood that these are extraordinary times. On the contrary, because controlling the virus and preventing business from failing as a consequence of such an exogenous event is good economics, the rescue package reassured financial markets that the Swiss economy will come out of this recession better than without this package and hence be able to pay back its debt. Interest rates since the announcement have further declined from -0.37% to -0.49%.
Source: Organization for Economic Co-operation and Development, Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for Switzerland [IRLTLT01CHM156N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/IRLTLT01CHM156N, November 19, 2020.
Finally, if the government borrows long-term over say 20 or 30 years, then there is a very high chance that it does not have to raise taxes at all! Since the economy is expected to grow at a rate that is higher than the interest rate on the new debt, debt as a share of national income (GDP) will continue to decline as it has over the past two decades (see Figure 1), even without further cuts in spending or increases in tax rates (i.e. without changing the primary deficit).
In our professional opinion, it is therefore difficult to understand why the current Swiss Finance Minister, Mr. Ueli Maurer, said in an interview to the Tagesschau on September 15, 2020:
"Switzerland cannot afford a second lockdown. We don't have the money for that."
Both the data and economic analysis do not back up his claim.
Of course, when it comes to the details of how to finance, different economists will have different views as we state in our open letter:
"To be sure, subtler economic trade-offs exist: the cost of a lockdown is borne now, and especially by some sectors and categories. Whereas the (economic) costs of a pandemic staying out of control are borne later, as the economy stalls, and spread to other sectors. We trust that good economic and especially fiscal policy will be designed with such trade-offs in mind, seeking a fair redistribution of these costs over time and across sectors and households."
A more detailed analysis is provided by Prof. Cédric Tille in his Policy Insight from April 2020, "The «burden» of Swiss public debt: Lessons from research and options for the future".