Many economists object to framing the response to the Covid-19 pandemic as choosing between health and wealth. Health protection and wealth creation both rely on physical proximity and thus are inextricably linked. We cannot do one of these and ignore the impact on the other.

As a society, we value health and life above almost all else, and it is right for governments and public health authorities to do everything within reason to safeguard the safety and well-being of its citizens. But health is not the governments’ only consideration, as we also value peoples’ social and economic well-being, including their freedom to make decisions about their own lives.

The Covid-19 pandemic, with its dual manifestations of urgent threats to our physical health and devastating economic effects, has made clear that this is one crisis with two faces, not two separate crises that can be understood in isolation from each other. When infection rates started increasing dramatically in March 2020, people sought to protect themselves and as a result, restaurant bookings dropped considerably, dealing a blow to the economic viability of the hospitality sector. Health protection and wealth creation both rely on physical proximity, and thus are inextricably linked. We cannot do one of these and ignore the impact on the other.

Until very recently, we have not had the benefit of pharmaceutical interventions such as effective antiviral treatments and vaccines, and have been exclusively reliant on so-called non-pharmaceutical interventions (NPIs) such as voluntary social distancing, mask-wearing, lockdowns, business and school closures, and travel restrictions. Almost all NPIs work by creating either physical distance or a physical barrier between individuals, making normal life practically impossible. Thus, we have found ourselves in a situation in which the very actions that people take to protect themselves against the disease also cause damage to our economy and society at large.

“We have found ourselves in a situation in which the very actions that people take to protect themselves against the disease also cause damage to our economy and society at large.”

This has led many to view the tradeoffs as between health and wealth and to view restrictive measures such as lockdowns as leading to an economic cost, incurred in order to reap a benefit in terms of health and lives saved. Many economists do not subscribe to the economy versus health framing of the current crisis and vocally argue that good health policy is also good economic policy. A large number of Swiss economists recently penned an open letter urging the government of Switzerland to do more to bring the disease under control. Similar letters have appeared elsewhere, e.g. in Australia, where several hundred prominent economists rejected the idea that policymakers should ease restrictions and risk loss of life in order to save the economy from further damage.

These and many other economists argue that there is no better way to get the economy and society back on track than to effectively manage the epidemic. But this does not necessarily mean bringing down infection at all cost. The pandemic has a myriad of consequences, both in terms of health, social, and economic well-being and in considering different policy options, there are tradeoffs aplenty.

Thinking Beyond Short-Term Pain

A basic feature of infectious diseases is that what we do to curb its spread today has consequences for how the disease will spread tomorrow, and to wit, the policy options and decisions we will face in the future. In other words, we cannot disconnect an analysis of how we wish to act today from the future consequences of these decisions. So the tradeoffs are not only intra-temporal, but also intertemporal.

To understand the intertemporal tradeoffs, it is perhaps useful to think in terms of an analogy. People with starting tooth decay may initially put off an appointment with the dentist for fear of having a painful dental treatment. But we all immediately understand the consequences of not dealing with the problem in a timely manner: the decay worsens, thus exacerbating the problem. In addition, because the problem becomes much worse over time, the inevitable dental procedures become much more intrusive and painful than they needed to be.

“Suppressing economic activity today puts us in a position to be less restrictive tomorrow than would otherwise be the case.”

The same goes for infectious diseases. Controlling the spread of infection today may be painful, but means that there will be less infection tomorrow. This is beneficial in its own right because it has a positive impact on population health, but it is also economically beneficial, because it means that we may not need to make such significant economic sacrifices tomorrow in order to further curb the disease. Thus, suppressing economic activity today puts us in a position to be less restrictive tomorrow than would otherwise be the case. This effect is almost always ignored in cost-benefit analyses. Simplistic and misguided cost-benefit analyses abound, set forward by influential political commentators, health policy practitioners, academics, think tanks, and the press. In summary, while we may recognize the temptation to put off short-term pain to improve future well-being, a rational policy must not be based on such short-term considerations.

Targeted Restrictions

Once we have determined how much we wish to control the spread of the infection by suppressing disease incidence over time, we need to decide how to best achieve the desired level of suppression. Each economic and social activity, such as primary education, hospitality, shopping in malls, etc., have both intrinsic and external effects, and both in terms of spreading the disease as well as in terms of economic impact. These effects have to be weighed against each other when deciding which restrictions we wish to impose.

For example, in many countries, public transport is an important sector, as it enables essential care workers and others to get to and from work. In other words, it has strong external effects. Other sectors, such as hairdressers and beauticians have weaker external effects, as few other sectors depend on their services. On top of that, we need to consider the extent to which keeping these sectors open contribute to spreading the disease. So, when deciding on how to target restrictions, we need to think in terms of both infection externalities and economic externalities. This goes beyond just considering the intrinsic value society assigns to each activity.

In an optimal lockdown policy, it may well be the case that different sectors are treated differently, even though they may contribute equally to spreading the disease. The reason is that once an overall tolerance to disease spread has been decided on, a choice must be made on where to allocate the unrestricted activity. Some countries choose to keep schools open and close down the hospitality sector, while others choose the opposite. These decisions are based on the value that respective governments attach to different activities and have a clear rationale, even if such disparities seem arbitrary. In the UK, schools have been prioritized over pubs, whereas in Brazil, bars have been allowed to open before schools.

“In an optimal lockdown policy, it may well be the case that different sectors are treated differently, even though they may contribute equally to spreading the disease.”

Cost of the Epidemic v. Cost of Lockdowns

A last important distinction is between the cost of the epidemic and the cost of lockdowns. When politicians and commentators argue for the costs and benefits of lockdowns, this distinction is often overlooked, leading to misunderstandings and unwarranted conclusions. While invasive dental procedures may cause significant discomfort to the patient, it is pointless to blame the dentist for carrying out necessary dental work. The underlying cause of the discomfort is, of course, the tooth decay itself.

To more clearly see this distinction, let us start by establishing a benchmark against which we will measure the value of different policies, such as a lockdown. Suppose that no restrictions are put in place and that the disease is allowed to spread unchecked in the population. In this situation, individuals will spontaneously and voluntarily act to protect themselves, as we have seen in many countries, including in the United States and the UK. For example, there is clear empirical evidence that in early March 2020, as the severity of the Covid-19 epidemic was becoming clear, many people stopped leaving their homes and sharply decreased their spending on entertainment and hospitality services. In addition, many businesses made the voluntary choice to cease trading and furloughing their staff. An example in point is the English Premier League, which canceled all games on March 13, days before the UK government imposed a lockdown, which happened on March 23.

All these voluntary measures had significant economic and social costs, relative to the state of affairs before the epidemic started. This, then, is the cost of the epidemic. Namely, the damage caused by the voluntary decisions of people and businesses to protect themselves against infection. Now, consider the effects of a policy intervention such as shelter-in-place orders. To evaluate the economic cost of such interventions, we need to determine their effects over and above the cost of infection—i.e., we need to ask how much additional economic damage is caused because of the restrictions. Otherwise, we would be misattributing the cost of the infection to the restrictions we have imposed, creating the false notion that if the measures were not in place, then our situation would return to the state of affairs before the start of the epidemic.

Exactly attributing the economic damage to the cost of infection versus the cost of the restrictions is not a trivial matter, but recent research suggests that most of the damage stems from the cost of the pandemic. Sweden and Denmark, two comparable countries with similar demographics, socio-economic makeup, and political traditions, took significantly different routes to dealing with the epidemic. While Denmark imposed strict government-mandated lockdowns, Sweden instead opted for voluntary social distancing measures, urging its citizens to act with caution but without resorting to compulsion. Yet the patterns of behavior such as spending and the effects on their respective economies have been comparable, although the cumulative death toll on a per capita basis has been worse for Sweden than for Denmark. What this shows is that it can be misleading to attribute the economic damage caused by the pandemic to the restrictions that governments have put in place to contain the spread of the disease.