March 29, 2020
We are Still Underreacting to COVID-19 Risks
No individual human life is possessed of infinite value. At least, none of us actually behave as if it does. No matter how fully each of us wish to live, we inevitably take risks. We ride in automobiles, eat food prepared by unknown hands, trust in medicines and home appliances tested by scientists. At some point, nearly all of us take some risks to save another, care for or comfort a loved one, or volunteer for some public service that risks injury or death.
Economists have long worked to place a dollar value on individual human life. We do this so that we can better understand how rational people value their own lives and those of others. Some of that calculation is readily tractable. It is straightforward to estimate lifetime earnings or the contributions someone can make to their care of their family. Estimating the value that others place upon a life is harder. We acknowledge that companionship has value but is much harder to calculate than lifetime earnings.
Of course, people don’t do mental mathematics this way anymore than a teenage gymnast on the uneven parallel bars solves differential equations in her head. Instead, we have social norms that help guide us. These are in full display in decisions of life and death. Here an example tells a clear story.
Suppose we were to find ourselves in a burning building with others. The strong help the weak, the fleet support the slow. We expect children, the elderly, and the disabled to be evacuated first. Perhaps we do this with the implicit knowledge that at some time, nearly all of us find ourselves as children, disabled or elderly. More likely it is because that is what is expected of us by society. This is tacit acknowledgement that individual life possesses existence value. Successful societies develop rules of thumb to recognize that value.
The poets tell us that risk or sacrifice we make for one another is a noble thing, or a supreme sign of love. To this cold-hearted economist, it is instead evidence of a unvarnished rationality, or the simple calculus of survival. In the midst of COVID-19, we find ourselves squarely in the realm of these calculations. I write this to make clear that those who think we are overreacting or should immediately re-open our economy are profoundly mistaken.
Epidemiologists in the U.S. now estimate that without extreme actions, COVID-19 will infect more than 70 million Americans, and as many as 150 million. The case fatality rates in the most densely infected places runs more than 6.0 percent. In the best places it is more than 1.0 percent. As I mentioned in my last column, combining treatment costs and value of life estimates reveals that the expected cost of the COVID-19 disease is about $7 trillion.
Hopefully the epidemiologists are very wrong about the widespread risks of transmission; maybe they have incorrectly calculated the case fatality rate. Perhaps the value of life estimates should be lower than average because this illness afflicts mostly older persons. Still, these are estimates from scientists who’ve spent a career not just studying but materially adding to the science on these issues. It takes a special hubris and ignorance to disregard these warnings.
Those of us who do the mathematics of modeling disease or recessions must do so with some humility. Some of the various estimates of the disease are surely wrong, but error is not asymmetric. Outcomes could be far better, or far worse than the mathematical predictions suggest. So, the $7 trillion cost estimate for the U.S. employs the more optimistic estimates. It could just as easily be far, far worse.
To prevent having to bear a $7 trillion cost, most of the world’s leaders have chosen responses that guarantee a recession. That recession of choice is now upon us. According to a study published last week by my center, about one in six U.S. jobs are at risk from our extreme social distancing. First quarter corporate earnings reports will be shocking. Job losses in March, April and May will break all records. This is a recession of choice, in the same way rationing in World War 2 was a choice. We endure something bad so to prevent something worse, and we bear the burden unequally.
We are not overreacting to this disease. Indeed, thus far, a back of the envelope cost-benefit analysis argues that we have profoundly underreacted to these risks. The loss of $7 trillion is a full third of GDP this year, and as of this writing we’ve spent nothing like that to reduce risk. Moreover, the immediate costs of entirely closing our economy for a month are perhaps $550 billion. Of course, we aren’t shutting down most of our economy. Healthcare, schools, government, food production and delivery all operate.
I don’t know how long we should remain shut down to limit transmission of this disease. Such a decision must combine what we know about the spread of this disease and the costs and benefits of our policy choices. What I do know is that public policy in the form of federal relief can substantially reduce the costs of this shut down. I also know that a rigorous and unemotional benefit-cost analysis concludes that the current economic shutdown can continue for many months before the costs of doing so outweighs the benefits.
About the Author
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