Economics: How relevant is economics during a pandemic and in what way might economists make things better?

This is an essay shared with us by Ee Jenn, a Year 12 economist at Garden International School KL, which has been entered into an economics essay competition. It has been a while since we have posted and following the recent pandemic and a period of online-learning, we are now back in school and wanted to get this blog back up and running so we can share some of the thoughts, ideas and wonderful work from within our community. 

We wish Ee Jenn the best of luck with the essay, and hope you enjoy reading it as much as we did...

How relevant is economics during a pandemic and in what way might economists make things better?

The economy is socially embedded in modern society. Almost every individual is an economic agent, impacted by the decisions of economists, corporations and legislators – economic crises spillover into the everyday lives of individuals; vice versa, seemingly un-economic environmental crises like natural disasters or pandemics have proven to have detrimental economic impacts. This time of crisis, transcending sectors and borders, has highlighted the importance of holistic, interdisciplinary contributions in tackling a pandemic.

Economics remains relevant in a pandemic in three main ways: firstly, the intersection of econometrics and epidemiological modelling; secondly, the application of economic concepts such as markets to healthcare, and finally, policies to revitalise a pandemic-afflicted economy. This list is not exhaustive, but foregrounds the diversity of potential applications of economics during pandemics and encapsulates how it can ‘make things better’. 

1 Economic epidemiology and disease modelling

Firstly, the field of economic epidemiology aims to improve disease predictions by modelling the feedback mechanisms between disease dynamics and the behaviours driving host contact. The classic SIR model simulates the evolution of a disease by tracking three populations: Susceptible, Infected, and Removed. While its simplicity makes it reliable, the basic model neglects underlying socioeconomic factors that can vary the basic reproduction number (R0) of the disease for different groups.1  Thus, to predict the trajectory of SARS-CoV-2, economists have extended it to include individual economic decisions. Aware of transmissions that occur in workplaces and shops, Eichenbaum, Rebelo and Trabandt (2020)2 incorporated labour and consumption market participation rates into their calculations of infection rates. This aligns with individual rationality theory, which posits that susceptible individuals may or may not alter their economic behaviour based on whether they are a) willing to trade off the utility derived from shopping or working and/or b) fully internalise the effect of their decisions on the spread of the virus. 

Behavioural economics indicates that the mental calculus involved in such behaviour is subject to change, for instance, as the waning of perceived risk may actually increase risky behaviour. This is demonstrated by heightened incidences of HIV after the introduction of an antiretroviral therapy which reduced HIV/AIDS mortality rates3, and perhaps best discerned in increased economic activity after headlines of SARS-CoV-2 vaccine breakthroughs. Additionally, Kahneman and Tversky’s (1972) seminal research on cognitive biases found that individuals are intrinsically bad at assessing risks, especially those involving small probabilities.4 Therefore, low mortality rates and case counts – despite their potential to exponentially increase – may lead people to severely underestimate the riskiness of contact.

Taking into account behavioural observations and economic activity using parameters such as consumption hours, the SIR model is thus better able to model infection rates among the economically active population. It can, therefore, also help compute the Pareto-optimal balance between health and the economy. Alvarez, Argente and Lippi (2020) further extended the SIR model to incorporate lockdown measures, discovering that the optimal lockdown policy to minimise both economic loss and loss of life is a rapid and severe one peaking at 60% of the population.5 In combination with such studies, the incorporation of economics in aspects such as geographical economic valuation, the necessity of essential sectors, and companies' ability to move online enables countries to form more region- and sector-specific SOPs to strike a better balance between physical and economic health.

Integrating economic parameters and considerations into epidemiological models improve predictions and ground them in social reality, better informing disease management strategies.

2 Healthcare

Moving away from statistical modelling, economics can also be applied to address issues in healthcare that arise from pandemics, foremostly, shortages of medical equipment. Widespread ventilator shortages have forced doctors to make difficult triage decisions, whilst efforts to increase production face difficulties as countries block exports and factories cannot produce past full capacity. Ernesto Stein of the Inter-American Development Bank proposes a ‘market’ in ventilators to rectify this problem: hospitals with spare ventilators can lend – or perhaps rent – them to others in hard-hit hotspots, creating a sharing economy that addresses geographical disparities in ventilators as needed.6 Medical staff can be similarly transferred between regions, provided that this ‘market’ is effectively regulated by federal legislation. Stein’s proposal parallels the rise in peer-to-peer services (P2P) which aim to reduce idling assets (e.g. Uber, AirB&B), and is proven feasible by existing resource-sharing agreements between governments, most notably firefighting deployments between the U.S. and Australia7.

Economists also forward long-term solutions to ease such shortages, namely, the restructuring of Just-In-Time (JIT) supply chains that receive production inputs just before they are needed for assembly. While JIT production is efficient, it is also susceptible to supply- and demand-side shocks from Black Swan events like pandemics as disruptions in any part of the supply chain can stall production entirely.8 This is evidenced by the shutdown of manufacturing hubs worldwide in what Baldwin and Freeman (2020) deem ‘supply chain contagion’,9 as well as the skyrocketing prices of N95 surgical masks as hospitals, governments and profiteering middlemen alike compete for a limited pool produced almost exclusively in China.10 Companies are advised to increase their inventory levels and have geographically diverse supplier back-ups, while governments can also play an active role in restructuring by localising important value chains and preparing contingencies in case large-scale additive manufacturing is needed (e.g. President Trump’s invocation of the 1950 Defense Production Act).

There are numerous other applications of economics to pandemic-era healthcare, from its role in the development of COVID-19 vaccines – rigorous incentive structures and regulatory mechanisms are needed to spur innovation – to hospital price transparency policies surrounding COVID-19 tests.

To the extent that allocative inefficiencies and adverse incentives to cut costs already exist, economics allows us to evaluate production and distribution systems and encourage a shift towards greater resilience and equity. While the above examples are healthcare-specific, this statement is true of all industries, most of which have been detrimented by the pandemic and require solvency mechanisms that only economists can provide. 

3 Economic policy and charting a path to recovery

Finally, the field of economics is critical in addressing the inevitable economic fallout of a pandemic. The International Monetary Fund (IMF) projected global GDP contraction of 4.9% in 202011, a statistic reflective of skyrocketing unemployment, stalled supply chains and the breakdown of industries like tourism and hospitality. The IMF stresses the role of the public sector in supporting the economy and providing resources for those most adversely affected. Its policy recommendations are divided into ‘wartime’ and ‘post-war’ policies: during the ‘war’, the course of the pandemic, the state should supplement its social safety net through ad hoc legislation and provide aid to firms in the form of loans, guarantees and/or wage subsidies. At the time of writing, as vaccines begin to be rolled out worldwide, the world must also look towards ‘post-war’ recovery steps, optimally a mix of liquidity (credit provision, loan moratoriums) and solvency (cash transfers, equity injections) stimuli to facilitate the reopening of the economy.12 

The implementation of a more comprehensive safety net, including unemployment aid, universal healthcare etc., is primarily advocated for by Keynesian economists, but even fiscal hawks concur that greater intervention is justified by the exceptional current circumstances, so long as it is done with clear sunset clauses. Aside from bolstering consumer spending, social security measures also serve two additional purposes: protecting public health – by ensuring the vulnerable have adequate access to sanitation and, in the long-term, better living conditions – and minimising the inequalities that are often exacerbated in pandemics. Substantiating the second, McCormack et al. (2020) found that essential ‘frontline’ workers at highest risk of contracting the virus – usually blue-collar occupations in critical manufacturing, food services etc. – were disproportionately economically vulnerable minorities.13

However, ad hoc and supplementary legislation is insufficient. In a world of expanded travel and trade, combined with increasingly polarised climatic conditions, it is evident that we are vulnerable to the emergence of major pandemics which threaten mass illness, death, and economic disruption. The attack of SARS-COV-2 on our economic and social systems has revealed where they fell through the gaps: inadequate unemployment insurance and sick leave, neglected pre-pandemic national stockpiles of respirators, a dearth of regulation surrounding the living conditions of migrant workers, and many more. Government programmes and socioeconomic structures require periodic scrutiny, lest we rely upon crises like this to identify their failings. In spite of, or rather, because they are not themselves policy makers, economists should ‘make things better’ by continuing to spotlight these issues and presenting comprehensive, empirical solutions that cut through political noise.

Conclusion

The economy and those who study it do not exist in an economic vacuum. While the distinction between theory and application is not always perfect, economists offer up valuable contributions that have wide-reaching socio political impacts. As the basis of fiscal policy, economics most obviously ‘makes things better’ in the midst of a pandemic through legislative support for hard-hit markets, but as demonstrated above, economic models and concepts also augment disease modelling and healthcare, and can be further applied to any study of behaviour, shortage, or incentive structure. Ultimately, economics helps us better understand and grapple with the unprecedented times we are experiencing, drawing upon past insights and new ideas – such expertise is more relevant during a pandemic than ever.

Works Cited

1. Hur, Sewon, and Michael Jenuwine. “Lessons on the Economics of Pandemics from Recent Research.” Economic Commentary  (Federal Reserve Bank of Cleveland), 2020, pp. 1–7., doi:10.26509/frbc-ec-202011.

2. Eichenbaum, Martin, et al. “The Macroeconomics of Epidemics.” 2020, doi:10.3386/w26882.

3. Blower, S. M. “A Tale of Two Futures: HIV and Antiretroviral Therapy in San Francisco.” Science, vol. 287, no. 5453, 2000, pp. 650–654., doi:10.1126/science.287.5453.650.

4. Kahneman, Daniel, and Amos Tversky. “Subjective Probability: A Judgment of Representativeness.” Cognitive Psychology, vol. 3, no. 3, 1972, pp. 430–454., doi:10.1016/0010-0285(72)90016-3.

5. Alvarez, Fernando, et al. “A Simple Planning Problem for COVID-19 Lockdown.” 2020, doi:10.3386/w26981.

6. Stein, Ernesto. “A Sharing Economy for Mechanical Ventilators.” Ideas Matter, 31 Mar. 2020, blogs.iadb.org/ideas-matter/en/a-sharing-economy-for-mechanical-ventilators/.

7. Dovey, Ceridwen, et al. “‘It's a Worldwide Problem’: How North American and Australian Firefighters Work Together.” The New Yorker, www.newyorker.com/news/dispatch/its-a-worldwide-problem-how-north-american-and-australian-firefighters-work-together.

8. “Just-in-Time Supply Chains after the Covid-19 Crisis.” VOX, CEPR Policy Portal, voxeu.org/article/just-time-supply-chains-after-covid-19-crisis.

9. “Just-in-Time Supply Chains after the Covid-19 Crisis.” VOX, CEPR Policy Portal, voxeu.org/article/just-time-supply-chains-after-covid-19-crisis.

10. Nicas, Jack. “It's Bedlam in the Mask Market, as Profiteers Out-Hustle Good Samaritans.” The New York Times, The New York Times, 3 Apr. 2020, www.nytimes.com/2020/04/03/technology/coronavirus-masks-shortage.html.

11. “World Economic Outlook Update, June 2020: A Crisis Like No Other, An Uncertain Recovery.” IMF, 1 June 2020, www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020.

12. “Economic Policies for the COVID-19 War.” IMF Blog, 2 Apr. 2020, blogs.imf.org/2020/04/01/economic-policies-for-the-covid-19-war/.

13. Mccormack, Grace, et al. “Economic Vulnerability of Households With Essential Workers.” Jama, vol. 324, no. 4, 2020, p. 388., doi:10.1001/jama.2020.11366.