May 1, 2020
By: Ross Guest
Economic management in Australia has effectively been outsourced to health experts. Political and business leaders are deferring exclusively to public health advice about how to contain the COVID-19 virus with no serious public discussion of the economic costs.
Social distancing is apparently the best means by which to contain the virus at this point. That's fine, so let's look at the full economic costs of doing this and compare to the health benefits. The idea behind social distancing is that it 'flattens the curve', meaning we get fewer critical cases in the short term but more cases in the future than we would otherwise. This allows our hospitals to cope with the case load at any given time. Otherwise some patients would be turned away and more would die. The question is: how many more would die and what is the cost of this?
The Australian Government best practice guidelines advises the value of a statistical life (VSL) to be $4.2m and one year of life is worth $182,000 (in 2014 dollars). The VSL is how much society is willing to pay to reduce the death of a person in full health with 40 years of life remaining. This is a key input into a cost-benefit analysis of virus containment measures such as social distancing.
Let’s just do a rough back-of-the envelope calculation to get us somewhere near the ballpark. Suppose without any interventions we'd have 10 million virus cases (40% of population) and with interventions we’d have 1 million cases (4% of the population) over the period of time until a vaccine becomes effective. The benefit of the interventions is the willingness to pay to avoid the deaths and morbidity associated with the 9 million virus cases prevented. Starting with deaths, we get much less than the full VSL for each life saved because the vast majority of deaths are elderly people with significant pre-existing health conditions. So let’s value each life saved at $1m, and assume a death rate of 1% (it is about half this so far in Australia but higher overseas). We save 90,000 lives at $1m each = $90 billion = 4.5% GDP.
Now add the morbidity prevented. Morbidity costs include the willingness to pay for the loss of functioning, pain and suffering, costs of medical services and loss of work output due to time off work. Assuming morbidity costs apply to the 15% of cases that require hospitalisation, we have 1.35million people with morbidity costs. To calculate the morbidity costs per person we assume the duration of the morbidity to be 10% of one year, and the severity of the morbidity using a ‘disability weight’ of 0.8 (where 0 is perfect health and 1 is death). We then multiply the duration by the severity (0.1 x 0.8 = 0.08). Then multiply this by the $182,000 (as above, 2014 dollars) which is the value of one year of life, which gives a morbidity cost per person of about $15,000. Multiplying this by the 1.35 million people gives about $20 billion = 1% GDP.
Finally adding the mortality and morbidity gives us $90 billion + $20 billion = 5.5% GDP, the total benefit or value of our containment measures.
Would the cost be greater than 5.5% GDP ? We would include the loss of GDP which would occur mainly in this year but there would be ongoing costs associated with longer term losses of physical and human capital. Add the human costs to individuals affected and their families for many years to come (including financial and psychological health and similar associated costs of financial distress. Add the deadweight losses from future taxes to pay off the $100 billion ($200, $300) in new government debt. Add the costs of structural change to industries, occupations and jobs. I cannot put numbers on these costs. However, the Great Depression cost at least 10% of GDP in 1931 alone, which does not include the other costs just mentioned. The current economic damage is expected by many to be as bad as the Great Depression.
The estimates of costs and benefits above are ‘back-of-the-envelope’ and therefore probably have a significant margin of error. However, my main point is that we have not seen any attempt to weigh the costs and benefits in the public discourse so far. Implicitly perhaps this is what occurred through the staged approach to economic shutdown and the proposed economic re-opening, in recognition that there are costs of shutting down over a long period. However it is high time that the public health bureaucrats and their staff of health economists have a frank conversation with the public about costs and benefits of COVID-19 containment policies.
Ross Guest is a Professor of Economics in the Griffith Business School at Griffith University.