Jagadeesh Sivadasan: Reopening economy poses challenges and risks, might not achieve intended aims

May 1, 2020
Contact: Jeff Karoub jkaroub@umich.edu

Economy amid COVID-19 pandemic. Image credit: iStock

FACULTY Q&A

Jagadeesh Sivadasan is a professor and chair of business economics and public policy at the University of Michigan’s Ross School of Business. He discusses economic issues tied to the pandemic.

In this second installment, he talks about reopening the economy and long-term effects of the pandemic. The first part covered government actions to limit the damage from the crisis.

Jagadeesh Sivadasan

Jagadeesh Sivadasan

What strategies can help limit the long-term economic damage from the pandemic?

The most effective solution for minimizing the economic impact would be the speedy discovery of an effective cure or vaccine, the expected time frame for which is unfortunately very uncertain. The only currently effective approach to tackling the pandemic is through mandated social distancing and stay-home orders. Unfortunately, these norms impose significant and unavoidable economic costs. As these costs mount, the prospects for a speedy economic recovery recede the longer the norms remain in place.

Another approach many commenters have been advocating is to use widespread testing as means to facilitate reopening of the economy. One approach stresses testing for antibodies that indicate if a person has already been infected and recovered from the virus, which potentially means they are both noninfective and immune (at least in the short term), so that these persons can safely return to usual economic activities (both as workers and consumers).

Unfortunately, as with many important questions about the COVID-19, there is significant uncertainty about many parts of this argument. First, there are serious concerns that the tests currently being used have too high false positive rates. Some reports suggest reinfection is possible, it is unclear how long immunity to the virus would last and some reports suggest infected persons continue to shed the virus for several weeks after recovery (and hence are potentially infective for longer than normal). The biggest practical challenge for this approach may be availability of a fast, scalable and highly effective test.

Another alternative would be quick, widespread and frequent testing for the infection itself so that uninfected people can resume normal activity, infected people can be identified very quickly and quarantined, and contacts traced and isolated. A trace-test-treat approach appears to have had success in South Korea. To allow for return to work, these tests would need to be repeated frequently, as a negative test at one point in time does not guarantee non-infection for any period of time.

Finally, the enormous economic costs associated with strict social distancing rules suggest we should examine other bottlenecks that may allow us to relax the norms. One important constraint is the availability of intensive care unit beds and potentially life-saving equipment such as ventilators. Ramping up production of ventilators, which appears to be happening including through initiatives by Michigan’s auto companies, complemented with investments in increasing ICU capacity, could allow the healthcare system to manage a higher disease load. This then means governments could move to less economically costly social distancing norms.

There’s already considerable pressure to reopen the economy immediately. What needs to happen before the stay-home orders are scaled back? What effect will reopening have?

All of the alternative ways to relax social distancing norms discussed above are relevant here. Without an effective cure or vaccine, widespread testing and quick isolation of infected workers will be necessary. The critical factor is the risk of a spike in infections, severe illness, and deaths. Reintroduction of stay-at-home orders may be needed if infections spike. Widespread testing and data will help epidemiologists improve their models, which can then better inform how and when to relax rules.

One important point to highlight here is that simply announcing relaxation of stay-home orders may not be enough to revive economic activity, so long as consumers and workers perceive high risk of infection and high mortality rates for the disease. Businesses will also need to weigh the reputation and legal risks from potential harm to consumers and workers.

It will be essential to increase confidence in business owners, workers, and consumers that there is an effective system in place for mitigating the spread of the virus. Direct personal experience of widespread testing and a persistent pattern of reduction in infections in their neighborhood may be necessary to provide people the confidence to return to normal economic activity.

What long-term effects do you expect the pandemic will have on the U.S. and global economies?

While it’s always true that “it’s difficult to make predictions, especially about the future,” significant remaining uncertainties about the length and stringency of social distancing norms make it particularly difficult in the current context. The longer that strict social distancing remains in place, the greater the likelihood that businesses will be forced to shut down permanently. This then leads to destruction of valuable physical, reputational, and firm-specific human capital, which would slow down economic recovery when it eventually comes.

The early numbers on the steep decline in employment and economic activity suggest this pandemic is having severe negative effects in countries around the world, with the International Monetary Fund projecting the largest decline in the world economy since the Great Depression. The ascendance of globalization, especially the large daily movement of people around the world, was likely a key factor in the rapid spread of the virus. This is also likely to spread the economic consequences widely.

Looking across sectors, economists are examining which industries could be considered more versus less “social”—that is, where production or sales requires gatherings of people, and hence are impacted by social distancing. Another interesting breakdown is into essential versus nonessential services, as the former are exempted from stay-home mandates. This suggests that regions (within America, as well as looking across countries) that specialize in essential or less social goods may be less impacted by this crisis, both in the short and long term.