Economic guidance for policymakers battling an unprecedented set of circumstances.Three Pillars of the Economic Policy Response to the COVID-19 Crisis
A Simple Framework to Help Revive the US Economy
- April 21, 2020
- CBR - Economics
The COVID-19 crisis has seemingly left US policy makers with a choice between two terrible options: keep the economy shut down, or risk allowing the disease to run rampant throughout the populace, overwhelming the health system and opening the door to an unthinkable number of deaths.
But there is a middle course that decision makers can chart, and Chicago Booth’s Eric Budish has created a framework to help them do so. Managing COVID-19 for the time being, he says, requires bringing the rate of the disease’s spread down to an acceptable level and then finding ways to maximize economic activity without exceeding those epidemiological bounds. And he suggests that some combination of low-cost interventions, such as public-awareness campaigns and requiring people to wear masks in public, could be the way forward.
His framework starts with the rate of transmission of the coronavirus that causes COVID-19. Let’s assume the rate of transmission is 2—one person infects two people, those two infect four, the four infect eight, and so on. The actual rate is currently uncertain, but many estimates put the unconstrained rate, absent interventions, at between 2.5 and 3.
Ideally, interventions would bring the rate of infection to 0 and wipe COVID-19 from the planet. But there could be huge social and economic costs involved, at least until a vaccine or cure is developed. For example, one influential epidemiological model by scholars at Imperial College London, which helped push the US and UK governments to impose lockdown measures, predicts that schools would need to be closed for most of two years, Budish notes.
Is there an acceptable alternative? Reducing the rate to 1 or less would contain the spread, he notes. Take R as the rate of transmission. If R = 2, the number of infections doubles constantly and quickly, but R < 1 constrains the exponential growth. China, South Korea, Singapore, and Hong Kong have all managed to bring the rate under 1 by using social distancing, widespread testing, and other nonpharmaceutical interventions, Budish writes. Other countries could similarly reduce the rate to below 1, maybe by overshooting it at first to err on the side of human health.
After that, policy makers could accomplish health goals while also maximizing social welfare. Rather than seek to minimize the virus’s spread at any cost, officials could use the model to think about trade-offs and develop plans that weigh the health and economic risks.
For example, some relatively simple, low-cost interventions could potentially be used to keep the rate below 1 while allowing certain activities to continue, Budish writes. Such interventions might include public-awareness campaigns that encourage people to wash their hands and maintain distance from others; requiring people to wear masks in public or gloves where necessary; and even putting boxes of tissues in high-traffic areas, such as by elevator buttons and door handles. Officials might temporarily cancel events and shutter places where large groups gather, such as festivals, but permit lower-risk activities to continue, such as jobs where employees can work while remaining at least 6 ft. apart.
There would be some risk of transmission, but it would be low. And some economic activities could resume in a limited, thoughtful manner.
Medical experts would need to lead any discussion about interventions, Budish acknowledges. But he argues that policy makers should be urgently trying to find a combination of policies and interventions that could keep infections low.
“My sincere hope,” he writes, “is that medical experts and economists can work together to engineer creative ways to reduce R and enable the economy and society to return to some semblance of normalcy.”
Eric Budish, “R < 1 as an Economic Constraint: Can We ‘Expand the Frontier’ in the Fight against COVID-19?” Working paper, April 2020.
Neil M. Ferguson, Daniel Laydon, Gemma Nedjati-Gilani, Natsuko Imai, Kylie Ainslie, Marc Baguelin, Sangeeta Bhatia, Adhiratha Boonyasiri, Zulma Cucunubá, Gina Cuomo-Dannenburg, Amy Dighe, Ilaria Dorigatti, Han Fu, Katy Gaythorpe, Will Green, Arran Hamlet, Wes Hinsley, Lucy C. Okell, Sabine van Elsland, Hayley Thompson, Robert Verity, Erik Volz, Haowei Wang, Yuanrong Wang, Patrick G. T. Walker, Caroline Walters, Peter Winskill, Charles Whittaker, Christl A. Donnelly, Steven Riley, and Azra C. Ghani, “Impact of Nonpharmaceutical Interventions (NPIs) to Reduce COVID-19 Mortality and Health-Care Demand,” Working paper, March 2020.
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