The University of Tennessee, Knoxville.

COVID-19 and the Economy: Confront the Pandemic Now

A Policy Brief by the Howard H. Baker Jr. Center for Public Policy

in Partnership with the Coronavirus-19 Outbreak Response Experts (CORE-19)

March 27, 2020
Tennessee State Capitol and Flag
Using publicly available data from emerging research on COVID-19, this brief was written and reviewed by the Coronavirus-19 Outbreak Response Experts (CORE-19) at the University of Tennessee, Knoxville. It provides insights into the debate over the economic and health trade-off of combating the spread of COVID-19.  

The Economic and Health Consequences of COVID-19

Debate over the rising economic consequences of combatting the COVID-19 outbreak has intensified as public policies like shelter in place and the closure of businesses, along with individual behaviors like self-quarantine, increasingly constrain economic activity.
Prominent forecasters, including Morgan Stanley and Goldman Sachs, have projected steep declines in second quarter U.S gross domestic product (GDP) of 30% and 24%, respectively
To place these figures in context, the sharpest quarterly contraction in GDP during the Great Recession—the most serious economic downturn since the Great Depression—was 8.2 percent. Unemployment insurance claims have jumped to their highest levels in history, wealth is being destroyed in financial markets, businesses and households are struggling with liquidity problems and there is seemingly no end in sight. See Figure (1) below.
Figure (1) U.S. GDP Quarterly Decline Projections and Comparison
US Quarterly Decline

 As data for Tennessee begins to emerge in the weeks ahead, we will have a clearer and sobering picture of the consequences for our economy. If the U.S. economy does in fact suffer a double-digit setback in the second quarter of the year, a similar outcome can be expected in Tennessee because of the way in which state economies are integrated.
These forthcoming data will produce sticker shock because they are likely to rival data in the historical record dating back to before the Great Depression.
A prominent headline statistic is the unemployment rate—it is not hard to envision a scenario where the monthly jobless rate in Tennessee temporarily reaches into the double digits.
For example, if the state’s manufacturing sector loses 25% of its jobs, employment in the retail sector is cut in half and employment in leisure and hospitality services nosedives by 80%, the state unemployment rate could surge above 20%. 

What Price Should We Pay?

For many Tennesseans, the looming economic costs seem extraordinarily high especially in light of the modest (but growing) number of COVID-19 cases that have been reported in the state. Many are asking whether the cure is worse than the disease. The answer largely hinges on a wicked tradeoff between human health and the economy.
At one extreme, society takes no preventive measures and there is a fully open economy. The lack of preventive measures means many people are infected and large numbers of people die. Because there are so many sick workers and deaths, this “open economy” will perform poorly.  
At the other extreme, there is a closed society and closed economy similar to the situation in Wuhan Province when it was in lockdown. The fact is that we are in the middle of the policy continuum, depending on where you live, with varying policies that are intended to place some limit on person-to-person interaction. 
The important point to remember is that the Tennessee economy will suffer regardless of what we do, whether we are at one of the endpoints of the policy continuum or somewhere in the middle. 
 The goal should be to find a balance between the value of efforts to mitigate COVID-19 and the costs imposed on the economy. 
Reducing Deaths
One of the most important benefits of mitigating the incidence of COVID-19 is reduced deaths. There are projections of potential deaths developed by public health experts and epidemiologists that are alarming and can inform the policy debate. A prime example is a recent report from the Imperial College COVID-19 Response Team which has received considerable attention—including from the White House—for their projection of 
the potential loss of 2.2 million American lives from COVID-19. 
Given Tennessee’s share of the national population (about 2.1%), this estimate would translate into 45,589 deaths in Tennessee. The high death rate arises from few limits on the economy and thus extensive person-to-person interaction.
An alternative model provides projections for the next three months for Tennessee under several different policy scenarios.
No action
  • Infection rate in excess of 70%
  • 136,000 deaths in Tennessee
Three months of social distancing
  • Infection rate in excess of 70%
  • 100,000 deaths in Tennessee
Three months of shelter in place
  • Infection rate of 5%
  • 4,000 deaths in Tennessee
To frame the figures below, which are also illustrated in Figure (2), note that 71,074 Tennesseans died from various causes in 2018.
Figure 2: Predicted Outcomes after 3 Months
    Predicted Outcomes after 3 months

    Tennessee today is deemed a no action state, though there are more aggressive policy actions like Shelter-in-Place and Safer- at-Home that are being implemented selectively by some of the state’s metropolitan governments.
    These potential deaths would likely be spread across the cities and counties in Tennessee roughly in proportion to each community’s share of the statewide population.
    For reference, in 2018, the state’s largest counties had the following shares of the state population:
    • Davidson: 10.2% 
    • Hamilton: 5.4% 
    • Knox: 6.9% 
    • Shelby: 13.8%
    As an economic forecaster, I learned a long time ago that all forecasts are wrong.  As a result, I evaluate all projections with a very critical eye. So for the moment, let’s assume that the projected rates of death for Tennessee are off by 50 percent.
    This means that only 68,000 Tennesseans die under the no action scenario and only 50,000 die under the social distancing scenario in the next 3 months. Only 68,000? Only 50,000?
    The COVID-19 outbreak threatens to kill as many or more Tennesseans than die from all other causes in a year. 

    The Economic Value of a Human Life

    While people find it distasteful, it is often necessary to place a monetary value on a life in order to make decisions. In practice, this is referred to as the value of a statistical life.
    Examples include wrongful death lawsuits and public environmental and health policies that seek to protect human life. In the latter context, the value of a life saved is critical information to guide the public policy process, and can be weighed against the social costs of policy implementation.
    Information on the potential value of lives saved from COVID-19 preventive measures can be compared against the economic costs of the same preventive measures.
    A group of experts has recently published a paper focused on the COVID-19 outbreak and the national economy that is in the spirit of this framework, estimating the value of lives safe from mitigation against the loss in economic activity.
    In order to implement this strategy, one needs an estimate of the value of a statistical life. The Environmental Protection Agency (EPA) has promulgated rules that require that a value of $7.4 million (2006 dollars) be used in benefit-cost analysis. Updating this figure to 2019 dollars using the familiar Consumer Price Index (CPI) yields a value of $9.4 million per life.
    Now for some basic math to draw out implications of the COVID-19 projections, also illustrated in Figure (3) below. 
    • If we assume that 100,000 Tennesseans would die under a no action policy scenario, this translates into costs of $940 billion in terms of lost lives. Note that this figure is about 2.5 times the value of state GDP in 2019 ($381.0 billion). 
    • If we assume that 50,000 Tennesseans would die under the social distancing scenario, the economic value of lost life ($470 billion) would still outweigh the total value of state GDP in 2019.
    • If we assume that only half of the deaths projected by Imperial College team are realized (22,795), the economic costs are $214 billion or 56.2 percent of state GDP. 
    Figure 3: Projected Economic Cost for Tennessee for COVID-19 Deaths
    Projected Economic Cost of Lose-of-Life
    These figures are nothing less than staggering on their own, but they fail to account for the full social costs of the COVID-19 pandemic. Other noteworthy costs include those that are incurred by the health care delivery system and the costs of lost work for those who contract the virus but miss short spells of work. These costs have proven to be substantial even for the seasonal flu and will be much higher for COVID-19.

    What Actions Should We Take?

    To answer this question, it is necessary to introduce the costs of mitigating the spread of the virus. Let’s assume that mitigation efforts lead to a 25% contraction in state GDP in the second quarter of the year, roughly commensurate with the dire expectations of economic forecasters for the national economy.
    This figure is on the high side in the sense that economic activity would contract even in the absence of any mitigation policies enacted by government due to illness, death and individual preventive measures; a high figure means it is relatively harder to justify policy interventions since the economic costs are higher.
    A 25% reduction in state GDP translates to lost output of $95.3 billion:
    • If the reduced output saves 100,000 lives, the cost per life saved is $952,558
    • If the reduced output saves 50,000 lives, the cost per life saved doubles to $1,905,115
    • If the reduced output saves 22,795 lives, the cost per life saved is $4,178,800
    Note that in each of the three cases, the value of a life ($9.4 million) far exceeds the social costs in terms of reduced economic output.
    In fact, any mitigation policy that saves more than 10,000 lives would ensure the value of life exceeds the social cost of reduced economic output. 
    Note that the modeling data presented above suggest that both social distancing and safer at home policies would save more than 10,000 lives.   
    One could easily quibble with these numbers on several counts. On the one hand, the figures do not address other benefits of virus mitigation, such as reduced time off work (for those who continue to work) and reduced health care expenditures. 
    On the other hand, weaker economic conditions and the high levels of unemployment that accompany it can generate other social problems and social costs, including addictive behavior and suicide.   
    The information above sheds light on the value of policies like social distancing and safer at home. 
    Assume that social distancing saves 36,000 lives consistent with the modeling data presented above. The value of lives saved is $338.4 billion (or $9.4 million*36,000).  This is equal to about 88.8 percent of state GPD.
    Now assume a safer at home policy that extends for three months, sparing 132,000 lives in the state relative to the no action scenario. The total value of lives saved is $1.2 trillion or about 3.3 times larger than state GDP.
    It is important to recognize that the economy will slump even in the absence of aggressive public policy efforts. People will get sick and not be able to work, some will die and never return to work and individual behaviors like self quarantine will limit economic activity. 
    Thus, the scary predictions of a 25-30% drop in GDP will not go away simply by eliminating restrictions and “opening up” the economy. If the state economy does decline by 25% in the second quarter, only a portion of this can be attributed to the aggressive public policies being discussed and implemented.  

    The Path Forward

    The stark choices confronting society today are often expressed as polar extremes: we can either have a healthy economy or we can have diminished economic growth in order to promote public health. This is a false dichotomy.
    We cannot have a healthy economy in the face of COVID-19 and its accelerating rate of infection. A completely open economy means extensive person-to-person contact and subsequently the mass spread of the disease and its consequences.
    This would overwhelm the health care system and ultimately lead to a subsequent closure of the economy. Mitigation policies will certainly impose costs on the economy and these costs need to be balanced against the benefits of lower infection rates and reduced deaths.
    The evidence presented here is compelling: the costs of a fully open economy in the face of COVID-19 are potentially enormous.
    Key to combatting the virus and getting the economy back on a firm footing are steps that can break the chain of transmission and protect the lives of vulnerable groups.
    This public health action needs to be coupled with other policy action, including the recent federal stimulus package that will inject liquidity into the economy, helping households and businesses alike. Limiting economic activity will buy us valuable time to increase the capacity of our health care system.
    This brief is part of a series that will be produced by the CORE-19 team over the next few weeks answering questions and forecasting the health and economic impact of the virus. The Department of Health for the State of Tennessee is also providing ongoing updates. As this is an emerging issue dealing with a novel virus, information included here is potentially subject to revision as new research and data emerge. 

    For more information on COVID-19 read our other policy briefs:

    Disclaimer: the information in this policy brief was produced by researchers, not medical or public health professionals, and is based on their best assessment of the existing knowledge and data available on the topic. It does not constitute medical advice and is subject to change as additional information becomes available. 

    Coronavirus-19 Outbreak Response Experts (CORE-19) 

    Dr. Matthew Murray

    Dr. Matthew N. Murray, PhD 

    Murray is the Director of the Howard H. Baker Jr. Center for Public Policy. He also is the Associate Director of the Boyd Center for Business and Economic Research and is a professor in the Department of Economics in the Haslam College of Business. He has led the team producing Tennessee's annual economic report to the governor since 1995. 
    Dr. Kathleen Brown

    Dr. Kathleen C. Brown, PhD, MPH

    Brown is an Associate Professor of Practice in the Department of Public Health and the Program Director for the Master's in Public Health (MPH) degree. Her research focuses on the health and well-being of individuals and communities. She has experience in local public health in epidemiology, risk reduction and health promotion.
    Dr. Katie Cahill

    Dr. Katie A. Cahill, PhD

    Cahill is the Associate Director of the Howard H. Baker Jr. Center for Public Policy. She also is the Director of the Center's Leadership & Governance program and holds a courtesy faculty position in the Department of Political Science. Her area of expertise is public health policy. She leads the Healthy Appalachia project. 
    Dr. Kristina Kintziger

    Dr. Kristina W. Kintziger, PhD, MPH

    Kintziger is an Assistant Professor in the Department of Public Health and the co-Director of the Doctoral Program. She has worked in academia and public health practice, and comes to Tennessee from the Florida Department of Health, where she worked as an epidemiologist and biostatistician. She is an environmental and infectious disease epidemiologist.
    Dr. Agricola Odoi

    Dr. Agricola Odoi, BVM, MSc, PhD

    Odoi is a professor of epidemiology at the University of Tennessee College of Veterinary Medicine. He teaches quantitative and geographical epidemiology and his research interests are in population health and impact of place on health and access to health services. He was a public health epidemiologist before joining academia.
    Dr. Marcy Souza

    Dr. Marcy J. Souza, DVM, MPH

    Souza is an associate professor and Director of Veterinary Public Health in the UT College of Veterinary Medicine.  Her teaching and research focuses on zoonotic diseases and food safety issues. 

    Research Support for CORE-19

    Hancen Sale

    Hancen Sale

    Sale is an undergraduate student researcher with the Center. He is a senior majoring in economics with a minor from the Center's public policy analytics program. He has worked on an NSF-funded project regarding rebel group grievances, as well as in supporting The White House's American Workforce Policy Advisory Board
    Howard H. Baker Jr Center for Public Policy
    1640 Cumberland Avenue
    Knoxville, TN 37996
    Phone: 865-974-0931
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