Monday, April 6, 2020

Social Distancing Benefits Exceed the Costs

There is a lot of shocking economic news at the moment with new terrible projections of economic impacts of Covid-19 by the day.  I will be contributing to the scary economic projections with some local/regional assessments later this week.

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, 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.