When reading all this news, it is natural to wonder if the economic costs of fighting the pandemic
through stay-at-home orders and social distancing is too great. President Trump has repeatedly said, “We
can’t have the cure be worse than the problem.”
Readers of ValleyEcon know that I believe in cost-benefit analysis as a tool to help us analyze complex issues like Covid-19 regulations. The data is bad, but do not by themselves suggest we should be focused on reopening the economy over fighting the virus. In fact, economic
cost-benefit analysis strongly supports the stay-at-home, social distancing orders
in California and the extension of those policies nationwide.
It is important to note that current estimates economic decline are not the cost of stay-at-home policies, because the
baseline for comparison is not a business-as-usual no-pandemic scenario. To estimate the cost of stay-at-home policy,
we would have to compare it the economic loss if the pandemic were allowed to
spread unchecked as schools and businesses tried to remain open in the face of much
larger levels of illness and fatalities.
While the economic loss under our current stay-at-home policies is
massive, about 30% of daily economic output according to Moody’s Economy.com,
it may not be significantly higher than the economic losses under a no-policy
scenario.
Well-established economic tools can also help us estimate
the benefits of stay-at-home policies, which are widely estimated to prevent
1-2 million fatalities in the U.S. compared to a do-nothing scenario. The value of a statistical life is a concept
that has been rigorously estimated and refined over decades and used in
cost-benefit analysis of environmental, public health and safety regulations
for air quality, chemicals, highway improvements and more.
Back of the envelope estimates of the benefits of reduced
coronavirus fatalities from social distancing efforts in the United States
range between $10 and $20 trillion. A detailed paper from University of Chicago economists using very conservative approaches, including low-end estimates of averted fatalities and acontroversial value of a statistical life that decreases with age, estimates the value of social distancing policies at more than $8 trillion. That conservative estimate of benefits
equates to about one-third of U.S. annual GDP, far exceeding any reasonable
estimate of the cost of social distancing policies compared to a no-action
coronavirus scenario.
In this case, strong public health policies are also the
best economic policies.