The Cheapest Covid-19 Response is the Most Expensive

A quick exercise to understand the costs

Irrespective of whether governments apply more aggressive or more moderate mitigation strategies to their Covid-19 outbreaks, the social and economic costs will be devastating if these continue for an extended period.

This suggests that from a purely social and economic point of view, we should favor more aggressive action over more modest policies if the more aggressive measures significantly derisk or otherwise accelerate the mitigation phase. Such a decision thus has two components: an epidemiological one that I will not address, and a social one that I’ve tried to address in a very preliminary way.

Further, this exercise looks solely at mitigation rather than containment policies, as most countries (notable exceptions being S. Korea, Taiwan and Singapore, for now) must take drastic measures to reduce community transmission before reentering the containment stage, which is more targeted management based on widespread testing and rigorous contact tracing.

Is a moderate mitigation effort cheaper or more sustainable than an aggressive one?

Using US Economic Census data, I overlaid some arbitrary assumptions of how different economic sectors might be affected by aggressive vs. modest mitigation efforts (see Table 2). Under each scenario, businesses will have difficulty staying open, and the longer such mitigation continues, the greater the social and economic cost.

• Aggressive mitigation means the near-complete shutdown of all non-essential commercial activity that must be performed away from homes.
• Moderate mitigation means the shutdown of bars, restaurants and personal care services; widespread adoption of “social distancing” measures; and a substantial scaling back of other activities like home services and brick-and-mortar retail.

This is just a “cocktail napkin” analysis. Per week, a policy of aggressive mitigation could reduce economic output by about 57%. A policy of moderate mitigation could reduce economic output by about 35%. This analysis was run on the top 22 economic sectors or sub-sectors under the NAICS classification, representing about 84% of receipts and 100 million employees. (See Table 1)

Table 1: Total weekly costs, assuming they are uniform through time, of strong vs. moderate mitigation efforts. Note: this approach should be treated as a “cocktail napkin”-grade analysis.

In reality, the true costs of each would be much higher, as many businesses will simply close down if they lose 60% or 80% of their revenue. I made the catastrophic scenario an 80% drop in receipts to leave some room for businesses that figure out how to keep operating under quarantines and extreme social distancing, perhaps because their business models are less affected under certain scenarios (e.g., food delivery) or they adapt to the current climate (e.g., a cosmetics company or distillery retooling to manufacture hand sanitizer).

Table 2: Top 22 Sectors or NAICS classifications and the effect of stronger vs. more moderate mitigation regimes on each. These represent 84% of total US receipts in 2017 and employ 100 million US workers.

Intuitively, any disruption would increase non-linearly over the duration of the mitigation effort as businesses start to fail. How the costs of these efforts differ and compound over time is an important secondary question because at some point the resources available for the public health emergency may be exhausted by a large-scale economic and social dislocation.

If allowed to persist, both options are devastating.

The wrong mental model to apply would be to compare the efficacy of a week of modest mitigation to that of 4.3 days of more aggressive mitigation and construct an indifference curve between the two. Instead, we should understand that the cost of both options adds up quickly, and many businesses will close if this persists — first, temporarily, and then permanently.

Singapore’s restaurateurs contemplate a world that’s open for business, but without any customers. Theirs is still an easier existence than one under even moderate mitigation.

The lost revenue to a restaurant operating at only 20% of normal over 12 weeks is greater than the lost revenue suffered by 6 weeks of closure. Either disruption would shutter most restaurants, which must pay ongoing expenses like rent. Putting things differently, falling off a 100-foot ledge has the same result as falling off a 200-foot ledge.

The solution is thus to favor the outbreak mitigation approach that most effectively uses or otherwise de-risks the shutdown period.

The economic and social consequences of a shorter and more aggressive mitigation effort may be far less and consume fewer public resources than a more protracted but weaker regime of half-measures.

We cannot fight the pandemic effectively once we’ve exhausted public resources.

This economic and social question might seem trifling when viewed against the well-being of what could be millions of Covid-19 patients. In fact, it relates directly to society’s ability to address the epidemic, because resources to pay for the public health emergency are in competition with those available to mitigate its social and economic effects.

The diversion of more resources than necessary to contain economic and social shocks risks undermining the response to an immediate public health emergency. It also jeopardizes longer-term budget needs (whatever those are: expanded social programs, deficit reduction, infrastructure and education, defense, etc.).

We must ask ourselves: how do we minimize the risk of this being a protracted and colossally expensive failure?