Book Review: Economics in the Age of COVID-19

Summer 2020

When I saw, at the end of April, that MIT Press had published a book on the economics of COVID-19 I was both impressed and alarmed. Impressed by the sheer speed with which all concerned must have acted in order to research, write, and produce (albeit digitally) an entire book in that time.

“This is the fastest we’ve ever moved a book through our system due to the immediacy of the content. The launch of the MIT Press First Reads series and the swift publication of Economics in the Age of COVID-19 reflects our ambition to address important topics in a fast yet responsible and authoritative manner."
Amy Brand
Director, The MIT Press

The key question, though, is whether the book is actually any good. I feared the worst when I noticed a typo on page 2 of the preface, but from then on it was all good news – the book is excellent. No doubt by the time you’re reading this some things will have become much clearer than they are as I write this review (in May 2020), or when the book was published, but I suspect that we’ll still be wrestling with the impact of this pandemic, the decisions we need collectively to make, and what our best route out of it looks like.

Joshua Gans takes an economist’s view of the pandemic, but resists the urge to paint public health and economic welfare as being in opposition. His argument is important enough that I think it’s worth giving a detailed summary of the whole book…

Health before Wealth

Pandemics dramatically shift the relationship between public health and the economy, so seeking to find a balance is a mistake. Under normal circumstances, because production is finite, public health and the economy is a trade-off, with diminishing returns. A pandemic changes that; it hollows out our ability to produce. That changes the balance, meaning we now need to give up a large degree of health to improve the economy. We must prioritise public health (for example by locking down swiftly) for both social and long-run economic reasons.

Predictable Surprises

Cumulative processes (e.g. exponential growth) are hard to understand, but predictable. The rate of infection (R0) is not just a biological number, but also a social one. Epidemiological models sometimes ignore this, and it means that by taking action we can mitigate the maths.

“…pursuing public health can be consistent with superior long-run economic performance.”

A War Footing

Markets are great, but in times of crisis it’s necessary to move to a “war footing” of centralised control. Markets are efficient because they work even though people within them don’t have full information, but that takes time. Should I convert my factory to make ventilators or facemasks? What if we end up with too many of one and not enough of the other? Maybe I should wait and see? Central coordination prevents duplication and delay, because of the information available to government.

Governments must adopt central control to coordinate both public health response and economy. Their health policy should be to “surf the curve” (i.e. to both flatten the curve and temporarily increase health capacity), then move to heavy infection testing until/unless widespread immunity is achieved. Other important central interventions include price controls on key goods, such as hand sanitiser.

This Time It Really Is Different

The inevitable recession, caused by policy, is importantly different to other recessions, because it’s something we are choosing to do. Gans likens it to a public holiday (e.g. the short recession we choose to have every 25th December). This is important, because it means that (unlike a normal recession) there is nothing fundamentally broken in the economy, so we want to continue business as usual when we can. If customers aren’t turning up today, it doesn’t mean you don’t have a good business.

Economic policy, therefore, should be to “pause” the economy, preserving businesses and jobs, using some mixture of approaches such as banning foreclosure, paying bills/wages, and making loans. The best solution may be income-dependant loans, to try to ensure the burden is allocated relatively fairly. If no action is taken to pause the economy, there is the potential for a “dark recession”, more like a natural disaster, caused by damage to production capacity (i.e. workers dying or being too ill to work).

“We know exactly why businesses have seen their customers disappear…Moreover, we know that, ideally, we want people to go straight back to their economic activity afterward.”

The Testing Economy

Testing is vital to recovery. Testing is the only way to control the rate of infection without blanket bans. If there proves to be no lasting immunity, then strict social distancing, tracing, and testing will be necessary for a long time.

Re-emergence

Opening up after lockdown will be staggered, for example to prioritise those who can’t work at home and who can work relatively safely, probably starting with workers in construction and manufacturing. Hubs such as offices, schools, conferences, and especially public gatherings are likely to be locked down for much longer.

If a vaccine is possible, it will take at least a year, and will inevitably require prioritising and rationing at least in the early stages.

“The testing economy is what emerges when you have the virus under control, but you do not have widespread immunity…This means that tests, like post-9/11 security measures, will likely be part of our daily lives for many years to come…”

Rallying Innovation

Because of the enormous public interest in making any vaccine, or other health innovations, widely available, there is a danger that this may disincentivise innovation for fear of potential profits being squashed. Advanced Market Commitments or other similar tools that help to guarantee minimum profits may help.

We may want a new “Manhattan Project” to address this and future pandemics.

The future

Perhaps most importantly of all, in the future we will need some kind of global pandemic response institution (similar to IMF), and we should be prepared to spend 100s of billions on it. We will need a global pandemic response unit, which creates issues to be resolved around national sovereignty, costs, etc. There is a danger of complacency, so it’s important to note that in some respects we got relatively lucky with COVID-19 (it doesn’t stay alive in the air, it seems relatively genetically stable, and so on). Next time could be much worse.

“The difficulty for a vaccine maker is that a low price on the vaccine reduces their profits but generates much more value for other firms as the economy recovers.”

Stephen Hampshire

Client Manager

TLF Research

stephenhampshire@leadershipfactor.com

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