Modern Infectious Diseases: Macroeconomic Impacts and Policy Responses

David Bloom, Clarence James Gamble Professor of Economics and Demography, Harvard T.H. Chan School of Public Health, Michael Kuhn, Program Director of Economic Frontiers, International Institute for Applied Systems Analysis and Wittgenstein Centre for Global Human Capital, and Klaus Prettner, Professor of Economics, Vienna University of Economics and Business (WU). Originally published at VoxEU.

In addition to the devastating human toll, the economic upheaval wrought by the COVID-19 pandemic illustrates the inextricable relationship between physical and economic health. This column presents an overview of the macroeconomic effects of the infectious disease epidemics of the 20th and early 21st centuries through the lens of recent COVID-19 research and explores the epidemic–economics nexus. It concludes that preventive policies, containment strategies, and early responses are more efficient, cost-effective, and manageable than combatting a full-scale infectious pandemic outbreak.

The COVID-19 pandemic is a harrowing reminder of the destructive power of infectious disease. In addition to the devastating human toll, the economic upheaval wrought by the pandemic illustrates the inextricable relationship of physical health and economic health. The ubiquity of COVID-19 has transformed our everyday world into a working laboratory, the starkest outcome of which has been the accelerated production of multiple effective vaccines in record-shattering time. Accompanying these scientific breakthroughs is a wealth of research that has been conducted on other methods to fight and mitigate the disease’s far-reaching impact, adding to the accumulated knowledge of the epidemic–economics nexus (see Vox and CEPR’s coverage of the pandemic here). In this column, we present an overview of the macroeconomic effects of the infectious disease epidemics of the late 20th and early 21st centuries through the lens of recent COVID-19 research.

The mechanisms by which health influences economic growth are numerous. Good health means healthy workers, which translates to higher labour productivity and incomes. Good health further means a longer life expectancy and lower morbidity, which leads to increased schooling and human capital accumulation. Increased life expectancy also translates to greater savings and investments. Finally, good health leads to a lower fertility rate and, subsequently, expenditures are redirected to education investments; lower fertility can also produce a demographic dividend – the economic growth potential resulting from changes in a population’s age structure that typically follow fertility decline.

Infectious disease, conversely, compromises economic growth in many ways. The morbidity and mortality caused by disease epidemics results in a reduction in the labour force and, oftentimes, larger indirect effects through behavioural changes in labour supply and education. Some diseases, like the Spanish Flu, disproportionately affect prime-age workers, leading to a large decline in the supply of labour. Some diseases, like COVID-19, are spread through casual social interaction, leading people to avoid those interactions and, therefore, reducing both consumption and labour supply. Other infectious diseases, like HIV/AIDS in sub-Saharan Africa, become endemic to a region and, with their high morbidity and mortality rates and low prospects of recovery, reduce the investment in schooling. This, in turn, hampers human capital accumulation (as do diseases that disproportionately affect children), compromising long-run economic growth.

Effective containment and treatment of a disease, meanwhile, restore productivity and cut mortality, thereby mitigating the loss in labour supply. Yet containment and treatment can tax even the most robust health systems and economies, while often exacerbating underlying inequalities. Financing any policy response to epidemics will disrupt the customary operations of a nation, and the choices as to which policies to pursue and how to finance them will reverberate throughout the country’s economy.

Even over a year into the COVID-19 pandemic, those choices continue to drive a debate that revolves around containing the disease, thus protecting lives, and maintaining economic activity, thus protecting livelihoods. Baldwin (2020) suggests an alternative to the standard cost-benefit analysis of weighing deaths versus dollars. Arguing against a “World War COVID” approach, he proposes that governments must more creatively balance disease containment policies with a remobilisation of workers. The challenge is to develop a strategy of “constrained optimisation” that gets the economy moving without spiking infection rates and overwhelming hospital systems. The dilemma pits a “medical constraint”, characterised as an imperative to avoid deaths, against a “tolerability constraint”, as a quarantined populace loses patience, social and economic discontent rises, production falls, and prices increase. “Testing will help bend both constraints in the right direction”, Baldwin writes, describing the multiple benefits of “flattening the curve”. Governments have instituted massive economic packages to ride out the recessions caused by COVID-19, but more targeted bending of both constraints will be necessary as the effects of the pandemic endure.

Until vaccination programmes are rolled out universally, containment remains reliant primarily on non-pharmaceutical interventions, and the trade-off discussion rolls on. That debate positions, in one corner, proponents of fighting COVID-19 with all available remedies including lockdowns and, in the other, those who favour herd immunity by means of protecting vulnerable individuals while allowing low-risk populations to contract the virus and build natural immunity. In Bloom et al. (2021a), we categorise potential policy responses as lockdown and testing, treatment, and prevention and eradication. Lockdowns, such as stay-at-home orders, can be effective depending on the transmission route of the disease, but can lead to severe economic and human hardship. Bloom et al. (2021b) pitch 14 “simple, effective, and low-cost policy measures” to combat the spread of COVID-19 that by relaxing the trade-off would satisfy those in both corners of the debate. Their suggestions include physical distancing, expanded testing (especially among frontline workers), mandating masks with high-filtration efficiencies, improving ventilation in public indoor places, restricting travel from areas with new concerning variants quickly, and investing substantially more resources in COVID research. These are characterised as achievable measures that carry little downside but potentially tremendous upside.

Rather than pursue a health versus wealth trade-off strategy that inevitably results in cyclical shutdowns and re-openings, Aghion et al. (2021) argue that successful pandemic management aims for “Covid-free green zones”. Areas are deemed green when levels of the virus are low and a working test, trace, and isolate (TTI) strategy is in place. Australia, New Zealand, and several countries in East Asia have sufficiently contained the virus, directly supporting economic growth. Most countries in Europe, however, have not aggressively pursued such containment tactics, forcing them to prepare for the next outbreak instead of investing in the future and boosting their economies. In fact, Aghion et al. (2021) write, “In 2021…GDP in zero-Covid countries will be 6.2 points higher than its 2019 level. In Europe, it will be 3.4 points lower. In total, countries pursuing ‘zero Covid’ gained ten percentage points of GDP compared to Europe”. The absence of long-term planning and investment by European countries may prolong this disparity even after the immediacy of the pandemic subsides, a situation especially relevant to the tourism-dependent countries of southern Europe. Recommending that Europe adopt a coordinated green zone strategy based on TTI, buttressed by travel restrictions and vaccinations, Aghion et al. (2021) state plainly, “[e]liminating Covid-19 is the cheapest path towards economic recovery”.

Until that happens, more than two dozen economics experts agree that one necessary course of action is, in fact, to enact vast fiscal stimulus packages (Baldwin and Weder di Mauro 2020). Hesitating to act or not passing large enough financial remedies could turn the current economic crisis into financial or debt crises with long-lasting impacts. Baldwin and Weder di Mauro write in the introduction to their eBook, “This is the time to bring out the big artillery; this is not a time to be timid, but to do whatever it takes, fast”. In an environment in which the enemy knows neither moral hazard (literally) nor geographical borders, this common hardship requires a common solution. Some of the authors collected in the book suggest that one piece of that solution could involve pandemic bonds issued by the European Stability Mechanism or the European Investment Bank – constituting supranational debt – which would signal a united Europe that could boost the trust, and the spending, of its stakeholders (Baldwin and Weder di Mauro 2020).

Indeed, any country’s policy response to an epidemic does not play out in isolation: COVID-19’s spread reminds us of just how globally connected the modern world is. This connectivity begins with the first step of fighting an epidemic: identification and reporting of the disease. Reporting of cases may be low if a country fears they would be subject to travel bans and trade restrictions, a condition that could be alleviated by richer countries providing financial aid to poorer countries in exchange for the latter shutting down. Epidemic-induced de-globalization and corporate reshoring are genuine threats, as diseases can disrupt supply chains and standard trading patterns (Bloom et al. 2021a). Such outcomes can especially jeopardise the developing economies of poor nations, which could lead to reduced investments in health and education and create or sustain poverty traps (Bloom et al. 2021b).

Calling COVID-19 an “era-defining crisis”, Baldwin (2021) looks at some of these economic and social “shockwaves” trailing in the wake of COVID-19’s direct deaths and illness: rising global poverty, worldwide hunger, and a mass disruption of childhood education. Baldwin notes that, as the world experiences a mono-cultural moment – everyone experiencing the same thing at the same time – that shared experience must translate into an empathetic call to action. A united, global, coordinated cooperation is required to combat both the health and economic repercussions of the disease.

Those economic repercussions often include an increase in the adoption of automation technologies, as robots are not susceptible to disease and, therefore, are more likely to substitute for tasks that would put humans at risk. Because robots excel at low-skill tasks and automation is often complementary to high-skilled workers’ tasks, the wages of low-skilled workers are likely to stagnate or decline while high-skilled workers’ wages are likely to increase in the face of automation. While automation improves productivity (output per capita), it also contributes to a decline in the labour income share with further repercussions on inequality. Pandemics tend to reinforce the increase in economic inequality that accompanies automation, as COVID-19 has demonstrated (Bloom et al. 2021a, Bloom and Prettner 2020). Technology is useful in the fight against pandemics – remote working and improved diagnostics can reduce the spread and also reduce the disease’s economic impact – but it can also exacerbate inequality. Lower-income workers and minorities often have worse access to healthcare and are unable to work remotely, which leads to a reduction in paid hours or an increase in their exposure risk (or both). Policy proposals to counteract these consequences include educational investments, job training for displaced workers, revamped curricula that emphasize skills that are complementary to automation, strengthening the social security system, and amending the labour tax code (Prettner and Bloom 2020).

While the economic effects of epidemics depend on the disease characteristics, population demographics, and cross-country wealth disparities, all infectious diseases extract enormous human and economic tolls. Responsive policy recommendations should be based on the recognition that there is no one-size-fits-all answer to the challenge. Any solution will include value judgments that cannot be answered by science alone, but only through a transparent, evidence-based, ethics-guided, and inclusive social debate. Furthermore, policymaking needs to reflect the underlying socioeconomic and epidemic conditions of the country affected, such as the strength of social insurance, the structure of the economy, the possibility of remote working and schooling, the vulnerability and demographic structure of the population, the healthcare system capacity, and budgetary concerns (Bloom et al. 2021a). Explicit recognition must be given to the varied impacts on different socioeconomic groups and the equity issues they raise.

Generally, priority should be given to the consequential and timely implementation of non-pharmaceutical interventions that allow the avoidance, deferral, or relaxed imposition of lockdowns. These include the promotion of measures of individual prevention, such as improved hygiene, mask-wearing or physical distancing; the timely elimination of unnecessary travel; the targeting of lockdowns; and the implementation of enhanced surveillance and reporting protocols that include functional testing, contact tracing, and genomic sequencing capacity. The pharmaceutical dimension of vaccine development and its equitable distribution is, of course, crucial to returning to a semblance of ‘normal’ life. The research and development of vaccines is a lengthy and expensive process and, when led by private companies, is fraught with economic complications (such as certain populations being priced out). For effective prevention and eradication – to get people to actually take the medicine – vaccines should be free, subsidised, or even accompanied by incentive payments. Social trust can only be established through timely, transparent, and coherent communication about all of these endeavours. Finally, international policy coordination is essential, which could be spearheaded by the G20. No matter the disease, preventive policies, containment strategies, and early responses are more efficient, cost-effective, and manageable than combatting a full-scale infectious pandemic outbreak.

References available at the original.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. The Rev Kev

    Was watching a three part documentary earlier called “Pandemic 2020” about people’s experiences and it really brought home the human price that we have paid. But as this article makes plain, those countries that sought to prioritize their economies before their people by telling them that they had to learn to ‘live with the virus’ on the way to ‘herd immunity lost both their economy and many of their people as well. It was an attempt to keep the economy of 2019 going and it was doomed to failure. They forgot, or ignored the fact, that viruses mutate which mean once embedded into a population, may lead to an evolving threat as well. Ideally now would be a good time to write up a manual of how to deal with a pandemic as the one for 1919 must have been lost or misfiled. Because sooner or later here will be another pandemic coming down the pipeline and hopefully we will be better prepared for it.

    1. Lee

      “…now would be a good time to write up a manual…”

      FWIW, according to author Michael Lewis, in recent interviews plugging his new book on the topic, the manual was indeed written during the Bush II administration at the then President’s behest, and included many non-medical measures such as social distancing.

      All the things George W. Bush said we should do to prepare for a pandemic that Donald Trump ignored (Business Insider)

    2. eg

      At the very least could we remember Mark Blyth’s pithy observation?

      “It turns out that your economy is a wholly owned subsidiary of your healthcare system.”

  2. hoonose

    As a doctor post 9/11 I was on panels and forums where our state produced the zebra manual. More about bio-terrorism (Anthrax), but much of it can be applied to viral Pandemics.

    “Public health is not commonly understood as a security issue, but it should be. Pandemic disease can destabilize regions, undermine economies, and create fertile territory for social and political unrest…We need to break the cycle in which our own public health system is beholden to emergency appropriations for specific epidemics… lacking the long-term budget certainty we need to shore up our defense for long term, accelerate development of vaccines….. bolster America’s public health infrastructure to deal with the new challenges facing our communities and our families, including a new Public Health Rapid Response Fund to better respond to public health emergencies…..Hillary Clinton July 2016.

    “That is why as President, I will create a Public Health Rapid Response Fund, with consistent, year-to-year budgets, to better enable the CDC, HHS, FEMA, state and local public health departments, hospital systems, and other federal agencies to quickly and aggressively respond to major public health crises and pandemics. I will also ensure that our government has strong leadership and is organized to better support and work with people on the ground facing public health challenges. Doctors and public health officials……Hilary Clinton August 24, 2016.

    “….in addition we need to do more to boost our preparedness for biological threats and bioweapons; to support research for new diagnostic tests, therapeutic treatments, and vaccines for emerging diseases; to build capacity in public health departments; to train the next cadre of public health professionals and ensure that public health and environmental health practices are standard to the educations of medical students; and to provide resources for states and local governments to plan for complex, multi-faceted public health threats, like the impacts of climate change and pandemics and build more resilient communities.”….Hillary Clinton October 2016

  3. plunk

    For effective prevention and eradication – to get people to actually take the medicine – vaccines should be free, subsidised, or even accompanied by incentive payments.

    Not enough; Medicare4All (including dental) should be included since vaccines ARE NOT risk-free AND because we should not miss an important bargaining opportunity vis-a-vis the scared PTB.

  4. VietnamVet

    The Western response to the pandemic is a debacle. It is becoming clear that mRNA vaccines allow the asymptomatic transmission of the virus. Endemic in the Americas, new coronavirus mutations will keep arising and variants will be transmitted by the fully vaccinated to the unvaccinated who will get ill and die plus a small percentage of the vaccinated people themselves — especially those who are old or have comorbidities. mRNA vaccines are not risk free. It is just we don’t know exactly how risky thanks to the greatest public/private PR campaign since the invasion of Iraq to sell more jabs.

    The only proven way to eliminate the virus is by testing, contact tracing, quarantines, masks, social distance and personal hygiene, all at once. But in the current neoliberal system, only money matters not the loss of life. Repeat treatments make money not cures.

    Coronavirus could remain deadly for years. The Russian Flu of 1898 lasted for six years. If a fourth spike hits this winter an economic collapse is inevitable. 80% of Americans are head over heels in debt and it is getting worse having to pay for food and shelter with no jobs.

    Already, the USA is in dire straits if half of the gasoline shipments to the East Coast are halted for longer than a week due to the Darkside Hack. Texas was frozen solid for week last winter. Hurricane season is about to start. Western democracies need to be repaired, incompetent political appointees fired, and the governments go on a war footing to unite the people to defeat the virus this year and to rein in the crooks.

    1. drumlin woodchuckles

      There is a small outlier of Western Civilization which did/does have the Coronavid under control and I think even effective absence from within its borders. And that little outlier is New Zealand. We shouldn’t forget about them. They too are Western Civilization. They are one of the Five Eyes! But they controlled the disease within their borders.

      Perhaps inspiring books should be written about New Zealand to encourage movement loads of people to organize into strike-force movements to slow-conquer power-nodes in their respective Western countries as fast as possible to institute various upgrades which would make such actions possible. Such books could have titles like . . . . The Littlest Eye . . . . or . . . The Little Eye That Could.

  5. Eustache de Saint Pierre

    Well 44% in the UK apparently believe Boris & Co have done a great job & I wonder whether that would still be the case if like the 1918 version, the plague had wiped out the young rather than the old.

    Both SKY & the BBC have been showing horrific footage of the likes of Mexico & now India of crappy overun healthcare facilities, oxygen queues & piles of corpses in what amounts to IMO a distraction, which helps to eliminate the memories of the UK 1st wave when there was an oxygen problem in some areas & bodies were piled into parked up freezer truck containers. Not much of that was filmed as far as I recall, although both the BBC & SKY, in order I suspect to push the vaccine did visit an ICU on the same day, which was portrayed as being bad but not like in those poor faraway places where these filthy diseases usually rear their ugly heads.

    Deaths per capita are never mentioned with the UK at No. 13, which Mexico might catch up with currently at No.17 just behind the US, while India who still tragically have a ways to go are down at No. 80. Of course the stats are likely to be much less reliable in the latter 2 but considering the supposed difference of the Global South & the supposed affluent West, personally I think it speaks volumes.

    Of course especially in India the loss of life would be much greater, but I do think that Gov’s should be judged on their performance in relation to the size of their populations & perhaps GDP.

    1. Anonymous 2

      You are right.

      A large proportion of the UK population will believe that the Tories do a good job in government because most of the media tell them that is the case.

      Nothing meaningful will get fixed in the UK until the media is freed from the grip of Murdoch and his allies.

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