Martin Wolf, the chief economist of the "Financial Times", intervenes in the heated debate on the economic costs of the pandemic also in the light of a recent paper by David Cutler and Lawrence Summers of Harvard University. The two well-known economists have estimated in a concrete way, i.e. in terms of GDP, the costs that the world economy will pay for Covid-19.
Below is the Italian translation of Martin Wolf's speech entitled "What can the world learn from Covid?" published in the Financial Times of 25 November 2020.
The great vulnerability to the pandemic
The most important lesson we have learned from Covid-19 is how much damage a relatively mild pandemic can cause in light of what has happened in history. Calling it mild in no way diminishes the suffering it has caused and will continue to cause before an effective vaccination plan is implemented and rolled out globally.
But Covid-19 has revealed a greater social and economic vulnerability than experts imagined. It is important to understand the reason for this vulnerability and learn how to better manage the impact of such diseases in the future.
The cost of the pandemic
In a recent paper, Harvard University's David Cutler and Lawrence Summers estimated the total cost of Covid-19 to the United States alone at $16 trillion. This is equivalent to 75 percent of a year's US gross domestic product. Nearly half of this cost, according to the estimate of the Congressional Budget Office - which is not bipartisan - is determined by the lost GDP.
The remainder is the cost of premature deaths and deteriorating physical and mental health, factors assessed by the standard of value customarily used for the world's largest economy.
The total cost is, they estimate, four times that of the recession following the 2008 financial crisis.
Even if the cost to the world were around 75 percent of annual GDP (128 trillion dollars), the loss would amount to a whopping 96 trillion dollars. This is almost certainly an overstatement. In any case, the cost remains enormous.
Impact of Covid and Spanish flu
So far, the global death toll from Covid-19 is estimated at 1,4 million dead. Deaths right now are just under 10.000 a day, roughly three and a half million a year. If this figure were held, the cumulative deaths in the first two years could reach 5 million, just over 0,06 percent of the global population.
Let's contextualize this data. The Spanish flu, which broke out in 1918, lasted 26 months and claimed between 17 and 100 million lives, or between 1 and 6 percent of the global population at the time. A number with the same incidence of deaths from Covid-19 today would be between 80 and 400 million. Other pandemics, notably the XNUMXth-century Black Death, have been far deadlier than the Spanish flu.
Wrong forecast
A 2006 report by the US Congressional Budget Office (CBO) argued that “a pandemic with a highly virulent influenza strain (such as the one that caused the 1918 pandemic) could have a short-term impact on the world economy similar in depth and duration to that of a medium-severity recession in the post-war United States.”
But the Spanish flu killed about 675.000 Americans out of a population then of 103 million. This equates to more than 2 million people in today's situation. If the CBO were right, the economic impact of this pandemic should have been much smaller than it actually has been.
A similar study for the European Commission, also published in 2006, concluded that “even if a pandemic would have taken a huge toll in human suffering, it very likely would not have been a major threat to the European economy”. This conclusion was completely wrong.
Mild pandemic, enormous economic damage
Why, then, were the economic damages of a mild pandemic so enormous? The answer is: because it is so. Well-off people can easily do without much of their normal daily shopping, while governments can support affected households and businesses on a massive scale.
This is also what people expect from governments. The response to the pandemic is a reflection of today's economic expectations and social values, at least in rich countries. We are ready to pay a very high price to contain pandemics. And we can do it much better than before.
How to fight the pandemic?
Some argue that the methods chosen to fight the pandemic, especially the widespread lockdown, have been primarily responsible for these enormous economic costs. They suggest that people should have moved freely, trying to protect only the most vulnerable.
This point of view is highly questionable. One reason is that the higher the incidence of the disease, the more determined people are to protect themselves, as indicated in the IMF's latest World Economic Outlook.
Real experience, unlike cost-benefit analyzes or other theoretical alternatives, further strengthens the argument for completely suppressing the disease where possible. A recent article by the Institute for New Economic Thinking, entitled To Save the Economy, Save the People First, suggests why.
The chart above shows that countries have followed two strategies: sacrificing the economy to save lives, or sacrificing lives to save the economy. In general, the first group did better than the second in both respects. Meanwhile, countries that have sacrificed lives tend to see both higher death rates and significant economic costs.
Now, amid a second wave of infections and lockdowns in Europe, persisting in the goal of achieving full control of the virus, as in the first wave, seems like a big mistake. It would be better to effectively test, trace and quarantine those infected. But this is impossible if infection rates are close to recent levels.
The lesson of Covid
We still have a lot to learn from Covid-19, and we need to, because the next pandemic could be much deadlier than this one. In the meantime, we must try to get out of the current mess and do it as quickly as possible. This will require a high level of global cooperation.
The costs of the pandemic have been out of the ordinary, as has, thankfully, the scientific response.
Vaccines must now be produced and distributed worldwide. An important step is for all countries, including the United States, to join Covax, the initiative to deliver vaccines around the world. Global challenges require global solutions.
Covid-19 has been a far more devastating economic shock than economists expected. This is a huge lesson. An even more virulent disease may well occur in the future. Next time we have to suppress the new disease much faster.
Many are now babbling about freedom. But the security of the people should remain the supreme law of politics, now and forever.
Source, The Financial Times, 24 November 2020
