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.