The Covid-19 virus (CV-19) is first and foremost a health crisis. But it is fast becoming an economic crisis as well. Some observers are asking whether the economic damage will be greater than the health damage. One commentator observed that “we are deliberately destroying our economy to slow the spread.”
When the health damage could involve a large scale death toll, many people will rush to the judgement that any economic cost is a price worth paying — even if they think about it at all. That seems to be the consensus so far — but it may not stay that way as the potential enormity of the cost becomes more visible by the day and people accustomed to freedom bridle at draconian restrictions tying them to their homes and shutting down their businesses.
Recessions are expensive — very expensive — and depressions even more so. Moreover, the deeper they are and the longer they last, the more ongoing damage they do even after the downturn has passed. This happens because the economy’s productive capacity suffers lasting damage from reduced investment and the decay in human capital from prolonged unemployment.
We don’t yet know how bad the coming slump will be, but the Organisation for Economic Cooperation and Development (OECD) had a stab at calculating the cost of the Great Recession associated with the global financial crisis. The cost is defined as the shortfall of actual GDP relative to potential. The latter is a counterfactual and by its nature difficult to measure, but the OECD went to some lengths not to overstate it.
They estimated that the shortfall started at about 6% of potential GDP of OECD countries in aggregate in 2009 and then gradually shrank, but even after 10 years it was still between 2–3% of potential.
Looked at another way, the cost of the GFC was more than one-third of one year’s potential GDP spread over 10 years. For Australia, such a magnitude of cost would currently exceed $600 billion in lost output and income, and inflict widespread misery.
This is only illustrative. The current economic crisis isn’t the same as the GFC — it could be better or worse depending on the choices society makes. The size and longevity of CV-19 economic costs will depend on the depth and duration of the downturn.
One thing in common with the GFC is that the massive fiscal and monetary policy measures taken by Australia and many other countries will help soften the economic blow in the short-term at the cost of greatly exacerbating fiscal management problems for many years after the crisis has passed.
If we think in terms of cost-benefit analysis, the benefit is the value of lives saved and serious illness avoided. Callous though it may seem, there is such a concept as the economic value of a life — and consciously or not, public policy takes it into account all the time. Our everyday activities are full of risks to life that we choose to accept because the cost of eliminating them is too high.
It’s a delicate balancing act. Medical science will greatly shift the balance in favour of lower economic costs the sooner it comes up with a treatment that reduces the severity and mortality rate of CV-19 — and ultimately a vaccine.
In the meantime, public policy will have to grapple with the balancing act and decide just what cost to our economy and liberty we can bear. Let’s not pretend the only answer is any economic cost.