The Four Rules of Pandemic Economics

Derek Thompson

What are the economic rules of this upside-down world, where opening the economy too soon produces mass death, but shutting it down for too long produces mass suffering?

Rule 1: “Save the economy or save lives” is a false choice.

Last week, a group of economists from the Federal Reserve and MIT published a paper on the 20th century’s most murderous flu, the 1918 outbreak. Because the federal government in 1918 offered little if any economic assistance to suffering Americans, the local response from city leaders varied widely. Some places, such as New York and St. Louis, quickly ordered social distancing and other interventions, while others, such as New Haven and Buffalo, allowed public gatherings even weeks after the flu reached crisis levels. This variance gave researchers the ability to see which cities recovered the fastest after the outbreak.

“We were expecting that the areas with more [social distancing] would have a worse economy but less mortality,” said Emil Verner, a co-author of the paper and a finance professor at MIT. But early and aggressive interventions both saved lives and triggered a faster rebound in several measures, such as job growth and banking assets.

The infamous trade-off between people and GDP? It doesn’t exist—or, at least, it didn’t in 1918. The reason, Verner told me, is that pandemics are “so, so disruptive that anything that you can do to mitigate that destructive impact of the pandemic itself is going to be useful.” Without a healthy population, there can be no healthy economy.

This simple idea has some weird implications. “In a normal recession, you want to boost demand,” said the Northwestern economist Martin Eichenbaum. “But we don’t really want to boost demand in the very short run at all, right now. We don’t want United to be flying full planes. We don’t want restaurants serving food to dine-in customers. We want everybody to stay in and hold on.”

It follows that we should—as incomprehensible as this may sound—hope for a deep, short recession, caused by a cliff dive in many forms of economic activity. That would be a clear signal that people have gone home and that the face-to-face economy has been shut down to limit the spread of disease.

Rule 2: Pay people a living wage to stop working

In a pandemic, public gatherings are a kind of social pollution, and asymptomatic individuals who violate social-distancing rules are like factories that spew invisible carbon. “We can’t ask people to internalize health risks on an individual basis any more than we can expect polluting factories to self-regulate,” Eichenbaum said. “So governments have to freeze the economy and order people to stay home.”

Rule 3: Build companies a time machine

The U.S. has about 6 million companies, according to the census, and 99.7 percent of them employ fewer than 500 people. Many of these small- and medium-size companies face extinction during the pandemic shutdown. While their income has evaporated, they still owe wages to workers and rent to landlords. This is a recipe for cascading bankruptcies.

Rule 4: The business of America is now science

The new rules of pandemic economics are meant to guide U.S. policy during a period of weeks or months—not quarters or years. A three- or four-month freeze is one thing, but a full year of isolation and economic inactivity is untenable.

That brings us to the $100 trillion question: How do we get out of this? A lot more science.

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