Understanding the policy choices: Saving Lives vs Saving Economy

Frederic Boissay, Daniel Rees and Phurichai Rungcharoenkitkul of BIS in this research:

The world has never been required to pay such a high price – effectively shutting down the global economy – to tackle a health crisis. Understanding the costs and benefits of these decisions is an important economic question, given its immense economic consequences. Although many aspects of Covid-19 remain unknown, most epidemiological studies suggest that, until a vaccine or an effective treatment becomes available, limits on social interactions are necessary to prevent the spread of infections from overwhelming the capacity of public health systems (eg Ferguson et al (2020)). In many countries, imposing these restrictions has involved shutting down large parts of the economy, creating an apparent trade-off between safeguarding public health and maintaining economic activity.

Economists have sought to evaluate this trade-off in two ways. One is to convert health and economic outcomes into a common unit of analysis so that costs and benefits can be compared. Typically, this involves putting a monetary value on the lives lost to the virus, which, though controversial philosophically,
has been adopted in public policy evaluations whenever there has been a need to directly compare health benefits and economic costs.1 The second approach is to simulate the joint evolution of health and economic outcomes within a single analytical framework, taking into account policies to contain the epidemic. This allows for counterfactual analysis and sheds light on principles that could guide an optimal policy response. This Bulletin reviews these complementary approaches, drawing on selected works that have proved influential in the recent debate.

Summary? Saving lives matters:

  • Containment policies save lives but restrict economic activity. Standard approaches to accounting for the value of human lives lend support to these policies despite their high short-term economic costs.
  • Integrated epidemic-macroeconomic models provide a coherent framework for quantifying the costs and benefits of containment policies. Part of the benefit comes from limiting externalities that would otherwise arise if social distancing were purely voluntary. 
  • Standard epidemiological and economic parameters suggest that several months of strict containment policies that lead to as much as a 30% decline in GDP for the period of the lockdown could be preferable to alternatives with more casualties and a less severe recession.



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