Keith Rankin Analysis – Economic Impacts of Pandemics

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Analysis by Keith Rankin.

Keith Rankin.

The conversation around the 2020 covid19 pandemic has been widely framed as ‘health versus the economy’. It has been quite political, with people leaning to the left emphasising ‘health’, and people leaning to the right emphasising ‘the economy’.

A couple of weeks ago (27 May), on RNZ I heard outspoken British author Lionel Shriver enunciating her view favouring ‘the economy’.

Mulligan (interviewer): “You’ve said that the virus has shaken you, but not because you might get sick. What disturbs you most about this moment in history?”
Shriver: “I’m nervous about what it’s doing to the world economy. … I am concerned that these lockdowns internationally were not considered beforehand, and there’s been a kind of creepy consensus; I’m especially uncomfortable with the union of government and the media. Both in the UK and the US …”
Mulligan: “You are keen to point out that the lockdown won’t be the hard part?”
Shriver: ” … many of the businesses have plywood over the windows, and I just wonder whether I am looking at a landscape that is … long-term; and I’m also worried about a whole generation graduating from university with very few prospects.”
Mulligan: “You have written dystopian fiction about the breakdown of society and economic collapse …”

There is no doubt that 2020 has become a year of great economic and political uncertainty. We need to understand that a fullscale pandemic necessarily creates much global uncertainty and consequent economic change. Part of the uncertainty and change is due to the pandemic itself; and part of the uncertainty and change is due to actions taken by governments and other authorities. In relation to government health restrictions, these may lessen or aggravate the economic impact that would otherwise have been. Further, the various impacts may be regarded as ‘good’ or ‘bad’, with different people having different views of which impacts are good and which are bad.

The Likely Economic Impact of a Pandemic not subject to Government Restrictions

This is largely hypothetical, because almost all pandemics have been accompanied by mandatory public restrictions and requirements. We need to consider both changes in the economic behaviour of the well, and the consequences of death and sickness.

The most lenient authoritative response in the present pandemic is perhaps that of Sweden, where information is passed on to people – and absorbed by interested and aware people. These people then modify their economic choices in light of new information, and other people modify their choices in light of the choice modifications of others. We note here that, just because one government reacts in a particular way, a pandemic (by definition) is international, and foreign circumstances – healthwise, economywise, policywise – impact on the behavioural choices made by people in any given country. And we note that information from each source will have its own bias and may be subject to frequent revision. National governments and their bureaucracies may convey different messages from those messages coming from other sources. And sometimes the message received is not fully aligned with the message intended; for example, some official messaging may be ‘tone deaf’. Finally, we note that, in such situations, a major source of ‘information’ is rumour.

Economic change arises, firstly, from changes in ‘market forces’, meaning choices by people and households over what they buy, how much they buy, and the extent that they prefer ‘leisure’ (relaxation, family time, ‘hobby’ production) over paid employment. ‘Market forces’ mean ‘demand’. These economic choices are modified, subsequently, by changes in cost structures; these ‘supply’ changes work mainly through the price mechanism. People buy less of things that rise in price, and more of things that fall in price.

The principal demand changes during and after a pandemic will relate to security – especially food security, dwelling security, security from possible agents of infection or crime, and security from mandatory government actions. Re the latter, even a government – such as that of Sweden – may at any time introduce mandatory restrictions or requirements even if, previously, it promised not to. Governments, like people, change their minds; and people know that.

In general, then, demand changes will emphasise ‘needs’ over (mere) ‘wants’. As part of that, many people will demand more free time (‘leisure’), meaning that they will prefer to supply less labour; they will want sufficient incomes rather than maximum incomes. While people may become increasingly protective of their jobs, they may generally favour working fewer hours, and be willing to accept a substantial reduction in income. (There may also be a reassessment of needs and wants. Hanging out for a while in community spaces such as cafes may be re-evaluated; becoming, for many, a need rather than a want.)

Businesses supplying ‘wants’ can expect to struggle; it is difficult to make a case for government to prop-up such businesses. (The new National Party leadership in New Zealand has already promoted a subsidy to prop-up small businesses which hire more workers, seemingly regardless of market forces.) An exception is when there is a good reason to believe that the decline of a particular want will be temporary. The best form of support is subsidised debt; the role of governments here is to incentivise banks to lend to businesses that can put up a good medium-long-run business case, rather than lending to asset speculators.

Many businesses sell goods and services mainly to other businesses. Their post-pandemic viability depends on the viability of their client businesses. Again, primary support for these businesses should come from incentivised banks. Public support comes from a mix of monetary policy and incentives to lend more to businesses and less to speculators.

Historically, the pandemics with the biggest economic impact were those with a high death toll. These changed the whole relations between the ‘land’ and the ‘labour’ classes. For example, in late medieval Europe, labour became scarce and land rents fell substantially. Also, inasmuch as pandemics created ongoing uncertainty around people’s life expectancies, there was an increased incentive for people to live for ‘today’ rather than for ‘tomorrow’.

The most immediate impact of a pandemic is the loss of life itself. Life is priceless. Nevertheless, death soon becomes a ‘sunk cost’, and the ongoing impact relates to the lives of the ‘still living’.

In a pandemic where most of the fatalities are elderly people, one of the main economic impacts will be that many people of the next generation will inherit property. Indeed, for the inheritors, the pandemic will in many cases confer considerable economic benefits. Property, as security, can save a number of businesses; and that security can form the basis for new capital-raising and new businesses.

Of particular importance here is, for different pandemic locations, the balance of mortality to morbidity. Demand for care facilities for the elderly could fall, or could rise. Rather than having many deaths, a pandemic possibility is that recovered victims may suffer ongoing health indispositions, impacting on both what (and how much) they will buy, and, if of working age, on their ongoing productivity in work.

Another point to note is that any pandemic will reduce the demand for international travel; this effect is likely to be accentuated this time, because there are now good substitutes for international travel; namely the proven ability to hold conferences and the like online, and also the availability of ‘slow TV’, whereby people can enjoy simulated journeys. Indeed this latter effect has largely happened to professional sport, with by far the majority of paying spectators preferring to watch from their homes.

Speaking of homes, pandemics give renewed emphasis on people’s needs for safe and healthy homes, and can give political will to address the massive market failures associated with people’s housing.

The economic impacts of government restrictions and requirements.

We should note firstly the case of large restrictions during a pandemic that would have been a comparatively small pandemic even in the absence of restrictions. The adverse impact of such restrictions could easily be disproportionately large, and the beneficial impact disproportionately small. This is not the case of the present pandemic in New Zealand; had New Zealand followed the Swedish policy, the eventual pandemic in New Zealand would probably have been worse than in Sweden, given the onset of winter.

The main beneficial impact of restrictions is that, by shortening the duration of a pandemic, it becomes easier and quicker to either ‘return to normal’ or to settle into a ‘new normal’. Where restrictions are stronger in some countries than others – or for other reasons the pandemic is effectively resolved in some places much sooner than others – then, for the first countries to achieve it, this ‘normal’ can only be partial, and may be biased towards deglobalisation. While government-imposed restrictions may substantially reduce the domestic economic costs of a pandemic, if those restrictions are much more effective in some places than in others, then the staggered timings of the new normals may themselves make a difference to the eventual new global normal.

However restrictions themselves are costly for viable post-pandemic businesses that suffer an enforced loss of revenue during the restriction period. Many viable businesses suffering from losses of revenue during restrictions may not be fully compensated for costs incurred during periods of restriction. Generally the problem of restrictions is worse in jurisdictions where there are inadequate ‘hibernation protocols’, and particularly worse when property owners (especially landlords) paid speculative prices for their properties.

The bigger problems relate to ineffective (ie unnecessary) restrictions or requirements, restrictions or requirements that last for too long, and restrictions or requirements that are imposed without compassion (such as not allowing people to board aircraft, leaving them stranded and maybe stateless). Pandemic-management policies should be smart, not blunt. It is worth easing restrictions whose effectiveness is uncertain, in order to learn about their effectiveness. Information – timely information – is the critical currency in a pandemic.

The result of poorly targeted or poorly implemented restrictions is that people will make choices to avoid these restrictions; choices that may aggravate the pandemic that the restrictions were intended to alleviate. Examples include leaving places of infection for fear of quarantines that may be needlessly prolonged, as distinct from the attempts to flee the pandemic that necessitate quarantines. The fear of quarantines may induce more departures than the fear of disease; this is certainly true of many historical pandemics.

Also of significance here is that a post-pandemic normal may be created in which people fear arbitrary and potentially very costly (and uninsurable) interventions to their future businesses or future travel plans. This includes the world’s many ‘swallows’ – migrant or semi-nomad seasonal workers – who do essential work that is underappreciated, and difficult for young people tied to their parents’ homes to do. Further, after a pandemic, few people will want to travel to countries where too many local people are repressed, or having to resort to criminal activities to survive. Fear of foreign travel represents a long-run cost that can accentuate ‘them and us’ nationalism.

In Summary

All pandemics involve costs to global society; health costs and other economic costs including lost opportunities. As a result, pandemics are generally subject to government policies which remediate some of these costs, while creating some new costs. On balance the interventions mitigate the economic costs of a pandemic. Nevertheless, it is best to follow an economising approach, minimising the costs of interventions while shortening and flattening the pandemic. If the marginal benefit of an intervention exceeds its marginal cost, then that intervention should happen. If we do not know whether the cost exceeds the benefit, then it is generally beneficial to incur some cost to relieve ourselves of our ignorance.

Pandemics can have dystopian consequences. Lionel Shriver has reason to be concerned. Nevertheless, while bad or excessive pandemic restrictions may add to such consequences, smart restrictions may facilitate futures that are not dystopian, and might even be improvements to pre-pandemic life.

Pandemics, even unmitigated pandemics – like other highly stressful world events such as wars and depressions – can have some good consequences. For one, they may get a critical mass of people thinking about realistic change for the better, and fostering a willingness to work towards such change.



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