When Should States Lift Their Restrictions?

Medical staff collect samples at a COVID-19 Community-Based Testing Site. Image source: Photography by Matt Hecht

The number of newly reported cases of the novel coronavirus seemed to have reached a plateau in some countries last week, which is an early indication of the positive progress that has been made so far in the global effort to stem the outbreak by ‘flattening the curve’ of transmission. A pattern has surfaced which illustrates the relationship between the time it took a given country to impose a state of national emergency after it reported its first cases of COVID-19, and the current severity of the epidemic it faces at present.

That is why the number of new cases and deaths in the UK and the US, the latter of which is quickly turning into the global epicentre of the disease, continue to rise steadily, as the two countries responded to the threat comparatively late. In contrast, countries like Italy, Austria, Germany and Spain, which went on full national lockdowns relatively soon after the first confirmed cases were reported, are now reporting fewer new infections.

Even though the danger from the virus remains prevalent in Europe and elsewhere, such encouraging figures have prompted some countries to consider starting to ease off their restrictions and gradually restarting their economies. This begs the question of how are governments going to know which is the best time to let individuals go back to their workplaces?

Some critics of the strident social restrictions in Europe have already expressed concerns that the preventive measures might be costlier than the virus itself. A popular argument is that the economic toll exerted from continued lockdowns might be worse off than the healthcare risks inflicted by pursuing policies such as ‘Herd Immunity’, which is the case in Sweden. It is claimed that younger people who are less likely to develop life-threatening complications from SARS-CoV-2 should return to work so that the general economic activity can be resumed.

The argument from mass immunity posits that older people and those with underlying health conditions should continue to practice social distancing. At the same time, the healthier members of society should carry on the brunt of the economic recovery. While it is true that a potentially deep recession is going to impose new detrimental consequences in the longer term, the healthcare risks from a seemingly restrained outbreak should not be downplayed in the short term.

We have argued previously that one of the most substantial issues with the current situation is that non-economic, external pressures prompted the market selloff. The pandemic served as a catalyst for the current economic contraction, but the resilience of the global healthcare systems is eventually going to provide the necessary metric in assessing when things can ‘return to normal’. In other words, the major challenge for economists and policymakers is that they have to learn how to think like epidemiologists so they can adequately evaluate the underlying economic risks from lifting off the restrictions.

Part of the problem stems from the fact that economists have not only to evaluate the extent of the economic hit, but they have also to understand the intricacies of the evolving recession, which is unlike anything previously seen. The aforementioned proposition seems to be inspired by the central argument in Keynesian economics – the theory of the circular flow of the economy. Proponents of the herd immunity approach perceive the rising unemployment as the most severe threat to the global economy, so mitigating this trend becomes of primary importance to them.

The apparent assumption is that if individuals are allowed to return to their workplaces promptly, albeit with the pandemic still raging on, at least the rampant loss of jobs globally could be averted. However, this assumption makes sense only if one perceives the economy as resembling a mechanism with gears that can be shifted and adjusted, as opposed to approximating an organic system.

The circular flow of the business cycle works best on the macroeconomic level, but it is not an all-encompassing model. There are no guarantees that a major recession can still be thwarted if all repercussions are dropped today. In fact, the neoliberal approach might even caution against early interventions, which could potentially jeopardize the global economic outlook even more.

If one looks at the economy as an organic and self-adjusting system based on the laissez-faire assumption, it becomes apparent that all government interventions pose potential risks to growth. In that sense, letting people return to their workplaces prematurely could be just as detrimental to the economy as the lockdowns themselves.

For the most part, what Keynesian economics fails to account for is the fact that the labour market is not a rigid and mechanic system. In light of the current situation, the premature return of individuals to their workplaces would almost certainly lead to a faster spread of the disease. This, in turn, would strain the healthcare systems, as more and more workers start to seek medical attention.

Essentially, there are no guarantees that employment would return back to normal if governments ease off their restrictions right now. Moreover, overstraining the healthcare systems with thousands of infected people could be even more injuries for the economy. An overwhelmed healthcare system would not be able to protect and support workers, which, in turn, would lead to diminishing returns for the labour market as a whole.

The central question advanced by the article presents a major dilemma for governments. On the one hand, prolonging the lockdown risks incurring the loss of more jobs. On the other hand, the premature lifting of the restrictions risks overwhelming the national healthcare system, and thereby prolonging the crisis indefinitely. Having to make a choice between protecting the labour market or the healthcare system is a dubious undertaking. In the first scenario, the threat is mostly comprehensible in that economists can measure the extent of the job losses. In the second scenario, however, weighing the risk becomes insurmountable because no one knows what could be the long term economic consequences from overwhelming the healthcare system.

There is no straightforward answer to the underlying predicament, but perhaps a roadmap to the most efficient decision-making process can be proposed. Instead of thinking in terms of what would be best for the economy, governments should deliberate on which course of action would inflict the least damage to both the economy and society. That way, at least, the uncertainty factor can be mitigated from policymaking.