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The Pandemic vs. the Shutdown: What’s the Worst That Could Happen?

May 20, 2020

The long-term economic effects of the COVID-19 shutdown will be felt for years to come.

Worst case scenarios help guide our choices in life, business, and public policy.  Choice involves imagination: imagining how different courses of action might change the world.  The worst case is often easier to construct because at each point we do not have to determine the most likely occurrence, just the worst.  Choice under uncertainty normally assigns probabilities to different outcomes and calculates an expected value.  But the probabilities of extreme events are largely guesses.  Worst cases establish the range of possible outcomes and consequently play an outsized role in our decisions.

In evaluating various policy choices to contain or slow COVID-19, estimates of the worst case pandemic without any social distancing, stay-at-home, and quarantine policies have figured prominently.  Several worst case scenarios based on epidemiological or statistical modeling have been offered.  Multiple independent estimates help ensure we have imagined everything that could go wrong.  The prominent worst-case scenarios estimated 1.7 to 2.2 million deaths in the U.S. from an unmitigated pandemic.  The worst worst case may be even higher; the Imperial College study which projected 2.2 million deaths did not adjust this total for the extra deaths due to overwhelming the healthcare system.  Half of critical care patients were projected to die, which presumably would be higher when ventilators were unavailable.

We could apply monetary values as in cost-benefit analysis at this point, yet in our personal decision calculus we need only consider how horrific two million (or slightly more) deaths would be.  And as economist Thomas Schelling pointed out, we should be fully cognizant that the lives at risk could be our own, or someone very important in our lives.

Two million deaths would be nightmarish but not apocalyptic.  Society would continue.  My evidence of this is the 1918-19 Spanish Influenza.  This pandemic killed an estimated 675,000 Americans; with an adjustment for the tripling of America’s population, this would be equivalent to two million deaths today.  What happened after the Spanish Flu pandemic?  The decade of the 1920s, the “Roaring Twenties,” a time of increasing prosperity.

The worst case COVID-19 pandemic should include all the elements of a mysterious illness medical researchers do not understand.  I’ve read it described that COVID-19 does not seem to realize it is a “respiratory illness;” it seems to damage the heart and liver, creates blood clots, and is linked to Kawasaki’s disease in children.  We should not sugar coat this.  Perhaps because pandemics are a staple of post-apocalyptic science fiction, however, we might be envisioning the worst case as disastrous.  Even given the frightening uncertainties, I do not see how a COVID-19 pandemic could end society as we know it.  The world is far wealthier today than 100 years ago, so we likely view a repeat of the Spanish Flu as unacceptable, but we should be clear on the dimensions of the worst case.

Now let’s turn to the economic worst case.  The St. Louis Federal Reserve Bank has projected that continuation of the policies in place in April would produce 30 percent unemployment and a 50 percent decline in GDP by the end of June.  The impact of the deliberate shutdown of our economy, the Great Suppression, would exceed the Great Depression.  The effects of a very short term shutdown probably would be less severe, as a couple months of lost production or postponed vacations could be made up.   The epidemiological models, however, make clear that extreme social distancing policies only delay the two million deaths: a vaccine or cure is needed to save these lives.

A two year Great Depression is not the economic worst case.  Our economy is based on specialization and the division of labor, beneath which is a division of knowledge.  Our standard of living results because people specialize in incredibly narrow tasks.  Goods show up in stores or get delivered by Amazon because this incredibly complex system of social cooperation works so well.  Recent toilet paper and hand sanitizer shortages only highlight how well our market economy normally works.

A breakdown of social cooperation based on the division of labor would end life as we know it.  All politicians seem to understand this.  All states’ and nations’ stay-at-home orders exempt “essential” businesses.  No government proposes shutting down the food supply or utilities.  Even the most safety-obsessed elected officials know that without power, flushing toilets, and food in the grocery stores our society would cease to function.  Starvation, disease, and potentially the violence of post-apocalyptic science fiction would quickly ensue.  Shutdown orders exempt the essential economy because everyone gets this.

The specter of empty stores and no power might appear excessive.  And it likely is, given the nature of worst case scenarios.  The market economy is impossibly complex, beyond the comprehension of any team of experts or the most powerful computers.  The patterns of cooperation in society are not designed by economists or government officials.  We do not fully understand the operation of the complex spontaneous order which is society.  Two relevant points follow from this.

First, officials may fail to identify all the “essential” businesses needed to keep the basics supplied.  Officials can guess, but the immediate revisions of business closure orders demonstrate the limits of knowledge.  Leonard Read’s famous story “I, Pencil” illustrates how no one knows everything needed to make a simple pencil; similarly, no government official knows everything required to keep grocery stores full and hospitals operating.  We may discover some seemingly inconsequential item’s essentialness when shortages emerge that cannot be quickly remedied.

Second, we do not fully understand the period breakdowns of the economy known as recessions and depressions.  No thermostat controls a market economy; we cannot power the economy up and down at will.  Seasonal resort communities shutdown for months and then successfully reopen on command.  We do not know when the Great Suppression will turn from a seasonal shutdown to a true depression rendering “reopening” impossible.

A plausible economic worst case scenario might be the decade-long Great Depression. The worst-case pandemic appears to be a repeat of the Spanish Flu, which was followed by the Roaring Twenties.  The Great Depression was a defining event in our nation’s history; the 1918-19 influenza pandemic was a much less consequential event.  Millions of deaths are hard to fully fathom, but the economic worst case scenario seems significantly worse.

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Economy Health Care
Daniel Sutter is Affiliated Senior Scholar at the Mercatus Center and Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University.

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