What do economic models say about our response to the pandemic?

Every rational person should agree that, in determining how governments ought to respond to the Wuhan coronavirus pandemic, economic considerations must be taken into account along, of course, with considerations of public health. The two sets of concerns are related — economic devastation has health consequences and the economy can’t function normally when the public health system is overwhelmed — but are not the same.

In considering the public health consequences of particular responses to the virus, governments rely on models. It’s not clear that the forecasts of any given model, or even of existing models collectively, are worthy of much reliance, but we’re relying on them just the same. What’s the alternative?

But what about models that forecast the economic consequences of our response to the pandemic? What do they say?

I’ve seen very little about such modeling. However, Robert Samuelson, who writes about economics for the Washington Post, describes what I take to be some leading economic models relevant to the pandemic.

Apparently, the models are all over the place. Some models assume the pandemic will subside during the summer and that the economy will bounce back to a considerable degree by the end of the year. For example, says Samuelson, Goldman Sachs expects U.S. GDP to take a massive hit in the second quarter, but then to jump by 19 percent in the third. For the year, it forecasts a 6.2 percent drop. Another forecast predicts a 5.4 percent decline.

Other forecasters are far more pessimistic. They see the measures taken to “flatten the curve” as having devastating long-term economic effects. They predict that these measures, by eliminating wealth, will crush consumer spending and thus trigger a major deflation that prevents the kind of recovery the “optimists” are predicting. That’s a recipe for a prolonged depression.

When the modeling is this disparate, I think we’re entitled to apply common sense. To me, common sense suggests that if our economy remains shuttered through July, we’re unlikely to see much of a recovery and might well experience the prolonged depression the pessimists are predicting.

If, on the other hand, the shutdown terminates in most the country at the end of this month, replaced by something along the lines of what Sweden is doing and then the easing of many of those restrictions, the prospects for a recovery along the lines forecast by the optimists are reasonably good. This assumes, though, that the virus doesn’t overwhelm us.

I don’t know of any forecast of the public health consequences of this course of action, perhaps because there isn’t yet sufficient data as to how Sweden’s approach is working. But I find it difficult to believe that such a model, if transparent and built without bias, would cause reasonable policy makers to insist on a multi-month shutdown of our economy.

Samuelson concludes that we can’t allow the kind of depression the pessimists foresee to occur. Certainly, we ought not knowingly induce it.

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