Something new and timely from three economists who work for the Federal Reserve’s Board of Governors, the Federal Reserve Bank of New York, and MIT, respectively.

It’s possible that 1918 and 2020 are too apples-and-oranges for a study of the former to usefully guide the reality of the latter. 1918 was a wartime economy. Certain regional economic effects may have overlapped with the flu pandemic to create an illusion of causation when there was merely correlation. And if the Oxford model’s theory of coronavirus is correct, this bug is waaaaaaaaay less deadly than the Spanish flu was, which will heavily influence how draconian our countermeasures end up being.

The authors have considered those first two objections, though, along with several others and feel confident that social distancing isn’t an economy-killer. The disease is what kills the economy. If anything, “non-pharmaceutical interventions” (NPIs) like self-quarantine, reduced public gatherings, etc, helped cities recover more quickly economically by limiting the local human toll from the epidemic. It’s not an either/or choice between controlling the contagion and reviving the economy expeditiously. Do the first and the second will follow.

With respect to the economic effects of the pandemic, we find that more severely affected areas experience a relative decline in manufacturing employment, manufacturing output, bank assets, and consumer durables. Our estimates imply that the 1918 Flu Pandemic led to an 18% reduction in state manufacturing output for a state at the mean level of exposure. Exposed areas also see a rise in bank charge-offs, reflecting an increase in business and household defaults. These patterns are consistent with the notion that pandemics depress economic activity through reductions in both supply and demand (see,e.g., Eichenbaum et al., 2020). Importantly, the declines in all outcomes are persistent, and more affected areas remain depressed relative to less exposed areas from 1919 through 1923…

Our second set of results center on the local economic impact of public NPIs. In theory, the economic effects of NPIs could be both positive or negative. All else equal NPIs constrain social interactions and thus economic activity that relies on such interactions. However, in a pandemic, economic activity is also reduced in absence of such measures, as households reduce consumption and labor supply to lower the chance of becoming infected. Thus, while NPIs lower economic activity, they can solve coordination problems associated with fighting disease transmission and mitigate the pandemic-related economic disruption.

Comparing cities by the speed and aggressiveness of NPIs, we find that early and forceful NPIs do not worsen the economic downturn. On the contrary, cities that intervened earlier and more aggressively experience a relative increase in manufacturing employment, manufacturing output, and bank assets in 1919, after the end of the pandemic. The effects are economically sizable. Reacting 10 days earlier to the arrival of the pandemic in a given city increases manufacturing employment by around 5% in the post period. Likewise, implementing NPIs for an additional 50 days increases manufacturing employment by 6.5% after the pandemic.

Note the point about how earlier is better. Anthony Fauci has been hammering at that since day one. Better that we act too early and be seen in hindsight as “overreacting,” he’s said, than act too late. An effective containment strategy that prevents a mass outbreak (too late for New York now, unfortunately) will by definition look like an “overreaction.”

I posted this graph a few weeks ago but it’s worth looking at it again now since it also deals with 1918 data:

We’re gonna redux this chart, huh (credit: @jeremyphoward) pic.twitter.com/r15svQWNit

— Andy Berner (@AndyBrnr) March 9, 2020

Social distancing can reduce the number of deaths and the load on hospitals enormously, which we already knew. What this new study suggests is that it’s also a shrewd way to protect the economy. There’s no way to avoid a hit: Whether people are locked in their homes via self-quarantine or gasping for air in an ER because they didn’t stay home from work and got infected, they’re no longer meaningfully contributing to the economy. The difference is that the people in the first group are ready to hit the ground running once it’s safe to work again. Some in the second group will also return quickly to the job after they recover, but some will still be too impaired. Some will be dead.

It’s common sense. But if the common-sense pitch is unpersuasive, there’s a second study out today that attempts to quantify how much value in “human capital” will be saved by imposing social distancing measures if the Imperial College model of the disease’s spread is accurate. (Which is a *very* big “if.”) Result: $8 trillion.

$8 trillion is over one-third of US GDP and larger than the entire annual federal budget. Put another way, the benefits of social distancing are roughly equal to current median household income of $60,000. Whether in regular times or during a pandemic, it is difficult to think of any intervention with such large potential benefits to American citizens. Importantly, while we measure benefits of distancing in dollars, they reflect the high value Americans place on small reductions in their chance of death – including consumption, leisure, time with family, and other aspects of life not easily monetized.

It is likely that the $8 trillion figure is an underestimate of social distancing’s benefits because it misses several other channels. For example, the analysis has failed to account for the reduction in uncertainty around the mortality impacts of COVID-19, and valuing it in ways that reflect an individual’s risk aversion would certainly increase the benefits. There is also the potential for social distancing to reduce the rates of non-fatal sickness experienced by the population, although this ultimately depends on the impacts on long run infection rates (Yang et al. 2020). Almond (2006) is an important data point in this direction, because it documents substantial long-run damages from in utero exposure to the 1918 influenza pandemic. Further, it seems reasonable to presume that social distancing will increase the quality of care for non-COVID-19 medical problems by reducing the strain on medical care providers, facilities, and supplies.

If I’m not mistaken, that $8 trillion represents only the value of lives saved. It doesn’t include economic productivity saved by preventing mass infections of workers who would survive the disease but end up missing time on the job as they struggle to cope with their illness. Include that number and the price tag of relaxing social distancing grows even more astronomically. Although, again, this assumes that the Imperial College’s model of mass deaths is accurate. The model’s own author no longer believes that, apparently. So the actual price tag in lost lives may be far lower, if still very large.

Some people are more willing than others to bear a heavy price, of course:

“Approximately 7500 people die every day in the United States.

That’s approximately 645,000 people so far this year.

Coronavirus has killed about 1,000 Americans this year.

Just a little perspective.” @RealCandaceO

— Rudy W. Giuliani (@RudyGiuliani) March 26, 2020

That number will go much higher and he knows it. Times reporter Maggie Haberman saw his tweet and sniffed that she didn’t remember Mayor Rudy doing any keep-it-in-perspective calculations when Al Qaeda killed a few thousand New Yorkers on 9/11. I was there and I don’t remember it either. What I do remember is Giuliani being asked in the hours after the attack what he thought the death toll might be and answering, memorably, “More than any of us can bear.” Good for him for learning to shrug at mass-casualty events since then, I guess.

Anyway, most Americans understand the stakes here. I’ll leave you with this, bearing in mind that these numbers would soften if Trump were to turn around and start complaining frequently that businesses should start reopening already. Some cultish supporters like Rudy would decide that running interference for the president takes precedence over the lives and wealth that would be lost if that policy went into effect.

Who do people *believe* about #COVID19?

88% staying home essential to slowing spread
85% important to stay home if you're young
81% social distancing will reduce total number of cases
71% it's much worse than the flu pic.twitter.com/zrEz14vUd9

— Patrick Ruffini (@PatrickRuffini) March 26, 2020