Managing the economics of COVID-19
Last week, three close friends and family lost their jobs because of COVID-19. Two were in hospitality, unsurprising perhaps, but the other was in engineering. The economic costs of this pandemic are clearly huge. Which led me to think not that the cure is worse than the disease but, more constructively, are there ways to lower them?
Let’s not be shy about balancing the economy against health. Governments do it all the time. The Pharmaceutical Benefits Advisory Committee rejects 69% of anticancer drugs because they are not cost effective. This means the drug would cost the government (that is, society, us) more than $30,000-$70,000 for each (quality adjusted) year of life saved. Anything higher is too much; $4m for a drug that saves a newborn for 80 happy years appears to be the yardstick. Broadly the same approach is used in road safety, the value of a life saved is between $4m and $8m. We should view COVID-19 through a similar lens.
COVID-19 typically causes mild flu-like symptoms, but for some, mostly the elderly and those suffering from other conditions like heart disease or diabetes (comorbidities), it can cause life-threatening pneumonia. There is no vaccine against COVID-19 (unlike flu), no drug cure, nor any likely soon. We are left with public health and social distancing to stem the spread. These aim to do two things: reduce the rate of new infections so that hospitals and intensive care don’t get overwhelmed by new cases — ‘flattening the curve’; this is important because mortality is sharply higher without intensive care. And to reduce the overall number of cases over the course of the pandemic.
We are seeing the beginnings of good news in Australia. The number of new cases is slowing. This has been achieved by shutting down the discretionary economy and, let’s not be coy, forcing people to stay at home — an aggressive social distancing stance. This will flatten the curve, but…
Our modelling, which marries disease modelling to economic outcomes, suggests that these measures could cost as much as 1.9% of GDP for each month they are in place. Government stimuli on the back of borrowing will lessen the impact on the hardest hit but don’t change the fundamentals, they borrow against next year’s GDP. Because we live in a global sea of infections and infections like COVID-19 are hard to eradicate, when we relax them, there is a high likelihood of a second wave. Second waves are a common feature of pandemics. Social distancing, a high degree of national and social isolation, and the economic consequences thereof, will have to continue in some form for some time to prevent this. Putting it all together, you can reach the somewhat alarming figure of $6m or more per life saved.
Can we lessen this cost? The modelling suggests that we can, relying upon some of the features of COVID-19. The people most likely to need intensive care and most likely to die are identifiable. Strict, very strict, isolation of that cohort so that they have a low likelihood of infection is key.
The second arm, and perhaps the most controversial, is to allow COVID-19 to spread through the community in a controlled fashion, necessarily involving significant relaxation of social distancing for those at lower risk. COVID-19 will spread. Some of this group will need hospitalisation. Hospitals will be under stress. Some will die, but far fewer than the number that would die if those at risk were not in isolation. Controlling the spread is managed through temporary quarantining of households where someone shows flu-like symptoms supported by extensive testing.
The modelling predicts that after 6-8 months enough of the population will have been infected and recovered to stop the spread, to confer some herd immunity. We will have engineered an environment where it is relatively safe for those at risk, relatively safe for tourists, for foreign students, and for the Australians who meet them. Not perfectly safe, but sufficiently safe to allow the economy to bounce back. Perhaps that is what our governments are planning once the curve is flat.
We do not know all the characteristics of COVID-19 but we can make some predictions. Quarantining those at risk, quarantining households with suspected infections, but otherwise minimal closures of schools, businesses, gyms and sporting events could save 90% of the lives saved by our current aggressive social distancing stance at much lower cost.
Current Stage 3 restriction for six months would probably cost around 13% of GDP, $240bn. Stage 4 restrictions would cost more. More targeted restrictions with relaxed social distancing could reduce this cost by two thirds. Around 10% fewer lives would be saved, but for the cost of saving those extra lives, we could save up to three time that number through better health care or better road safety.