The ongoing pandemic has brought concern over whether or not certain policies should be implemented to combat the growth of COVID-19. Certain textbook and classical economic measures have been used as a benchmark to evaluate the effectiveness of a lockdown across Europe and most of the world. While some such as Norway and Sweden differ in the way they have enforced these policies, the evidence is clear that more research into the trade-offs between economic activity and health should be conducted.
A cost and benefit analysis [CBA] of a lockdown in terms of welfare would have three implications (Rosen and Gayer, 2014). One of which would interpret costs and benefits as social costs and benefits. Appropriate social prices would be taken in consideration as it may not be the same as a market price, however, as it is apparent with the lockdown, there may be no specific price to begin with. Lastly, it is vital to identify an appropriate discount factor, yet this is clear that doing so for a national lockdown, isn’t so practical. The group of individuals that are clear to ‘lose out’ from a lockdown are the younger generation and those who are less vulnerable to the COVID-19. This is due to certain losses of liberty and even employment opportunities. Those that are struggling within quarantine confinements, or are experiencing increases in domestic violence, or depression are also part of that group. On the contrary, vulnerable groups who are mostly the elderly or those with preexisting conditions are benefiting from a lockdown.
A CBA should be considered under a “with” or “without lockdown” manner rather than “before” and “after lockdown” to ensure correct features are captured. Any economic costs of a lockdown should be taken in comparison with alternative policies (Harford, 2020). In other words, alternative measures should be compared in a time frame where the “fear” of the virus already existed, as to make this the status quo—this is what Wren Lewis was attempting to elaborate (Lewis, 2020).
Figure 1: Policy Frontiers of Lockdown and Relevant Measures (Initiative, 2020)
Figure 1 depicts policy frontiers and bundles in which a government can choose between welfare preserved against lives saved. Any movement to the right of the policy frontier shows an improvement in the policy proposed, and vice versa. This presents policy makers with a “menu of policy options”. Although it quantifies the relative better bundles of each frontier and their constraints, the model doesn’t take into account [VSL], the value of a statistical life. This is in order to determine not only consistency in the decision-making process of better policies but also respective desirability of different points on the frontier (Initiative, 2020). The concept of VSL is incorporated into OECD economic policy analyses as a measure to determine the benefit of relevant measures, and the amount the society is willing to pay in order to prevent an infection (Coast, 2020).
Tim Harford (2020), states that, “if an economic lockdown in the US saves most of these (2 million) [vulnerable] lives and costs less than 20$tn, then it would seem to be value for money”. The usual approach resides within focusing on the valuation of lives that are “statistical” or unknown. However, this may not hold in policies relating to COVID-19 because of the different effect it contains towards varied age groups. Lockdown as a policy, has impacts, “on lives and life expectancy more broadly across the population”. Therefore, the value of a statistical life year [VSLY] than simply a VSL can help address these distributional factors. This, in return, might alleviate weight in terms of importance to policies preventing COVID-19 deaths and more significance to policies that target the general population’s health instead (Coast, 2020). Covid-induced uncertainty in the market causes loss of business confidence, which in return impacts consumption and investment components of GDP (Baker, 2020). CBA analysis may, in tangency, also address implications in the contribution of an individual’s life to GDP growth. It may be perceived that the younger distribution, those who are less vulnerable, may consume more and therefore increase economic growth. However, this wouldn’t then support the aims of a social welfare economist, that doesn’t measure success through increases in gross national income (Initiative, 2020).
Intuitively, it is possible to say that those who benefit and those who do not can be both compensated through the fact that lockdown measures prevent them from infecting one another. While one is better than the other, the second person may be compensated through an increased likelihood of a healthy life. Is it possible to use VSL to assess the benefits and compensations of those who lost out? A simulation by Adler (2020), attempts to determine whether or not the use of social distancing policies can prevent fatalities caused by COVID-19. Under 3 versions of VSL, it is clear that social distancing measures (with lockdown) would be better than the status quo (without lockdown). However, flawed guidance in the use of VSL-based CBA proves methodological deficiencies. VSL-based CBA can deviate from the Kaldor-Hicks criterion as the approximation of an individual’s willingness to pay becomes larger as a change in fatality risk from a given policy increases. Therefore, such methods used to assess policies that involve significant changes to a person’s risk, are favourable to policies that are not Kaldor-Hicks efficient (Adler, 2020).
Due to the high degrees of uncertainty and complexities, some economists now believe that a full CBA is not the most appropriate measure of analyzing lockdown measures. Instead, it is believed that it is more efficient to adopt the approach to recognize the key trade-offs between the two extreme outcomes as a method to guide public policy. In this way, the compensation may be more vivid and visible to the general public, reducing the uncertainties that arise from the ‘fear’ of the virus. Some interventions discussed include workplace rotation schemes, subsidized workplace testing and even reopening schools (Initiative, 2020).
While classical CBA provides a benchmark into analyzing lockdown measures to address the spread of COVID-19, such as in a “with” or “without lockdown” manner, methodological changes should be optimized to further enhance the credibility of an assessment’s findings. Time as a constraint, a combination of different policies could be the future to sustain not only the health of the general public but also the economy.
References
Adler, M. D. (2020). What Should We Spend to Save Lives in a Pandemic? A Critique of the Value of Statistical Life. SSRN Electronic Journal. doi:10.2139/ssrn.3636550
Baker, S., Bloom, N., Davis, S., & Terry, S. (2020). COVID-Induced Economic Uncertainty. doi:10.3386/w26983
Coast, J., & Sanghera, S. (2020, October 5). Valuing statistical lives: How should such metrics inform pandemic policy-making? Retrieved 2021, from https://www.coronavirusandtheeconomy.com/question/valuing-statistical-lives-how-should-such-metrics-inform-pandemic-policy-making
Harford, T. (2020, April 3). How do we value a statistical life? Financial Times. Retrieved from https://www.ft.com/content/e00120a2-74cd-11ea-ad98-044200cb277f
Initiative, T. (2020, August 14). Economic Aspects of the COVID-19 Crisis in the UK. Retrieved January 11, 2021, from https://rs-delve.github.io/reports/2020/08/14/economic-aspects-of-the-covid19-crisis-in-the-uk.html#fnref:2
Lewis, S. W. (2020, June 15). Fear of coronavirus, not lockdown, is the biggest threat to the UK’s economy. The Guardian. Retrieved from https://www.theguardian.com/commentisfree/2020/jun/15/coronavirus-fear-lockdown-recession
Rosen, H. S., and T. Gayer. 2014. Public Finance. 10th ed. Maidenhead, UK: McGraw Hill Education.
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