A $12 billion drop in GDP and 400,000 further job losses. This predicted toll of Melbourne’s stage-four lockdown on the Australian economy captures losses in jobs, incomes and business viability. We must also factor in the erosion in mental health, rising incidence of domestic violence and suicide, losses in educational opportunities, and all other elements of wellbeing we are forfeiting during the lockdown.
When we consider the scenario we are aiming to avert – look at the US – tighter lockdowns should be considered a short-term investment that minimises our overall losses over the longer-time horizon.Credit:AP
Even if we factor the human costs arising from tighter restrictions, does this give us the full picture of the cost of the lockdown?
Economists would say no.
The true economic cost of any decision should not be measured against "what we had before".
It needs to be measured against "what is our alternative now?".
Comparing the fallout of Melbourne’s tougher lockdown to the previous state of the economy is not the right counterfactual here.
We need to compare this fallout to the alternative scenario we would be facing if these tighter lockdowns weren't implemented. Here’s where we need to factor in scientific knowledge about the rampant way the coronavirus spreads.
If stage-four lockdown means saving more lives, avoiding overload and burnout in our health care system, and resuscitating jobs, business confidence and mental health sooner rather than later, then tighter lockdowns do not constitute a net cost in the long run.
When we consider the scenario we are aiming to avert – look at the US – tighter lockdowns should be considered a short-term investment that minimises our overall losses over the longer-time horizon.
Governments around the world wouldn’t be embarking on these lockdowns if it wasn’t for the purpose of generating a net gain to society.
This question of "what would be the damage if we didn’t get the virus under control?" is what economists call opportunity cost.
University of Michigan economist Justin Wolfers sums up this parallel universe thinking neatly: “If you think shutdowns hurt the economy, you should see what pandemics do."
His observation is based on an analysis of the effects of restrictions imposed in the US during the 1918 Spanish Flu. The study found that letting a pandemic sweep through the community is what causes most damage to the economy – not the effects of the restrictions themselves.
Looser restrictions have not spared Sweden’s economy. Higher rates of infection and deaths are not great for GDP.
Achieving the long-term gain out of this short-term pain will require patience, compliance and inclusive communication. It will require innovation by businesses.
And it will require ample support for those who are copping the brunt of this short-term pain.
We know this short-term pain won’t be equitably distributed and will ripple into longer-term repercussions for many. But this doesn’t mean we should shun the lockdown – it means we invest intensively to support and compensate those who are shouldering this cost.
Counterfactual thinking also requires realising that, as long as the virus is circulating, loosening or lifting lockdowns will not take us back to the pre-pandemic world we might be longing for. Watching death counts rise bring its own wave of anxiety and distress. Going out to your favourite restaurant again won’t be much fun with ambulance sirens wailing in the background. Hospital resources won't be steered back to non-COVID patients, they’d be diverted away further.
The spread of COVID-19 infuses more risk and uncertainty into everyday life, draining the economy of confidence and stability, and magnifying socioeconomic inequities. Not a net boon to society’s wellbeing.
Some hefty number-crunching, using techniques like computable general equilibrium modelling, will help us better understand the net pay-off of tighter lockdowns compared to the alternative. But even in these calculations, our lack of knowledge about the long-term health repercussions of the virus among those who survive it means that any calculated benefits of loosening restrictions are clouded by immense uncertainty.
While a swelling budget deficit will place a heavy weight on the next generation, leaving our children with the angst of an COVID-ravaged country would be an even worse inheritance, and for many of us, a blight on our moral conscience. The repercussions of not getting this virus under control is the cost we need to focus on.
Leonora Risse is a lecturer in economics at RMIT University and a research fellow in the Women and Public Policy Program at Harvard University.
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