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Could it have been much worse?

Summary:
Toward the end of a recent podcast, Tyler Cowen remarked that the pandemic could have been much worse, and because we’ve been through this we’ll be much better prepared next time. At first I agreed with both observations. But while I still believe that we’ll be much better prepared next time, I have doubts as to whether it could have been much worse. This might have been the worst possible epidemic that could possibly have hit the world in 2020. It all depends on what economists call “elasticity”, which means responsiveness of behavior to changes in incentives. I don’t doubt for a moment that one can imagine viruses that are much more deadly than Covid-19, including SARS, AIDS and Ebola. But just because a virus has a higher case infection fatality rate (IFR)

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Toward the end of a recent podcast, Tyler Cowen remarked that the pandemic could have been much worse, and because we’ve been through this we’ll be much better prepared next time.

At first I agreed with both observations. But while I still believe that we’ll be much better prepared next time, I have doubts as to whether it could have been much worse. This might have been the worst possible epidemic that could possibly have hit the world in 2020. It all depends on what economists call “elasticity”, which means responsiveness of behavior to changes in incentives.

I don’t doubt for a moment that one can imagine viruses that are much more deadly than Covid-19, including SARS, AIDS and Ebola. But just because a virus has a higher case infection fatality rate (IFR) doesn’t necessarily mean it leads to a higher total death toll, or a longer economic depression. The damage depends on both the IFR and the number of cases. And in general, the number of cases will be inversely related to the IFR, other things equal.

The best way to see my argument is to look at some data. When looking at incentive effects, I am going to use the term “response” rather than “policy”, because I’m interested in the response of both governments and private individuals, not just governments.

Germany has a fatality rate per million that is between 1/4th and 1/6th the rate of other populous countries such as Italy, France Spain and the UK. It seems plausible that the difference in death rates is due to a difference in response (although of course other factors such as genetics and luck may play a role.) If the disease had been 5 times more deadly, then it seems quite possible that the other big European countries would have responded as effectively as did Germany.   They’d still do more poorly than Germany (which would also respond more strongly to a deadlier epidemic), but not more poorly than they actually did with Covid-19.  In a deadlier epidemic, the Italians would respond more like the Germans did in this case, and the Germans would respond more like the Chinese did in this case.

[If you are thinking that Italy had the disadvantage of being hit first, then compare Germany to the UK in this thought experiment.]

Some readers may be thinking, ‘You can’t compare Germany to the other four countries, as Germans are more disciplined in following rules and their government has more state capacity.” If that’s what you are thinking, then you’ve completely missed the point. Those cultural differences are likely real, but they merely explain why Germany did better than the other four when faced with this particular epidemic. It tells us nothing about counterfactuals of how Germany and the other four would have reacted to a much more serious epidemic.

Italy responded to the epidemic in March and April far more effectively than in February. Basic Italian culture did not change in one month—they simply became more aware of the need to try to control the epidemic. Chinese provinces outside of Hubei had death rates that were only a tiny fraction of the death rates in Hubei province. That’s not because the non-Hubei provinces of China had a different culture, rather they responded differently to the epidemic because they knew more about the risks by the time it got there.  The response of the population is hugely important.

So don’t confuse cross sectional comparisons of response for a given epidemic, with counterfactual responses in the same country for a wide range of hypothetical epidemics. Young people would not be having Covid-19 parties if the death rate were 50%, and almost everyone would be wearing masks.  There’d be a sort of WWII mobilization push for test/trace/isolate (which helped keep the German epidemic under control.)

We know that lots of countries controlled the epidemic more effectively than the US or Western Europe. And there are wide variations even within areas like Western Europe. Had the epidemic been far worse, then many more countries would have responded much more strongly. Taiwan had a death rate of 0.3 per million from Covid-19 (so far). Assume their case fatality rate were 100 times worse, making the disease close to 100% fatal. Even in that case, and even in the worst case with no behavior response, the fatality rate in Taiwan would have been only about 30 per million. That’s less than 1/20th the UK rate. So even a highly deadly epidemic doesn’t kill that many people if controlled effectively.  And the UK actually had more time to prepare than Taiwan. My claim is that if Covid-19 had been as deadly as AIDS, then the UK (both public and government) would have taken steps so that the total number of British deaths was no higher than the actual number—roughly 45,000.

So maybe it could not have been much worse; maybe this was the perfect storm. Just deadly enough to shut down the global economy, but not deadly enough to make most countries take Taiwanese-style precautions.

PS.  Australia was recently hit by a second wave.  We know the specific mistakes that led to this happening, and it seems very unlikely these mistakes would have happened if the IFR had been 50%.  (Guards were partying with quarantined airline passengers.)

PPS.  You can think of this in economic terms, where the societal demand for safety is roughly unit elastic.  This is different from individual demand elasticity, as there is a public good aspect to public health.

PPPS.  I have doubts as to whether my argument applies to poor, densely populated countries with low state capacity.  Perhaps in some places there was no feasible level of response that could have prevented disaster if the IFR had been high. (Recall the Black Death.) But we know that’s not true of developed countries, or even many developing countries such as Vietnam.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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