As the COVID-19 pandemic shows some signs of slowing, the response to it is also evolving. While the initial blunt measures to control contagion were necessary, more targeted "smart containment" should be the next phase of the response to the epidemic.
New research, conducted along with my colleagues Martin Eichenbaum from Northwestern University and Mathias Trabandt from Germany's Freie Universitat, shows how smart containment could, at the same time, reduce the number of people infected and improve economic conditions. Attaining these goals, however, requires substantial investment.
Smart containment relies on widespread coronavirus testing, which continues to be challenged by shortages and reliability. Paul Romer, a Nobel laureate, has been tirelessly advocating for the necessary public investments in large-scale testing. Recent breakthroughs in testing also hold promise for both accuracy and availability.
The billions spent on widespread testing would be a good investment to avoid the trillions of dollars in economic damage, with grave lingering impacts such as a rising number of bankruptcies. With widespread testing, people infected with COVID-19, including those who have mild or no symptoms, would be isolated. This combination of testing and quarantining reduces the risk of infection, allowing more people to go back to work and resume activities such as shopping.
Mortality data shows clearly who is most at risk of dying from COVID-19. Although people of all ages, including children, have died from COVID-19, mortality rates are significantly higher among those age 60 and older, and become more pronounced for those over age 70. Protecting at-risk populations is a priority in a smart containment strategy.
An Evolving Response
Smart containment is less of a reversal of the initial response and more of an evolution based on what has been learned since the early days of the crisis. After severe initial outbreaks, first in China and then in Italy, with its large population over the age of 65, governments around the world introduced shutdown policies. For example, in the United States, nearly 90% of the population has been under stay-at-home orders.
Flattening the curve was necessary to keep the virus from overwhelming hospital systems, particularly in countries such as Italy and the United States, which have fewer hospital beds per capita compared to countries like South Korea.
Moreover, government-directed responses to COVID-19 were necessary since the market economy, on its own, would not provide an efficient solution. The reason is the externality created by individual behavior. For example, it is easy for individual people to convince themselves that having a slight fever or feeling moderately ill is no reason to stay home instead of making a quick run to the grocery store. Such individual choices, in the aggregate, end up raising contagion risks considerably.
As governments cracked down, companies followed suit. Those who could allow employees to work from home did so in virtually every industry. The economic impact of the shutdowns, however, has been devastating, particularly on industries such as airlines, hospitality, and tourism, as well as non-essential small businesses. To illustrate the impact, for first quarter 2020, U.S. GDP contracted at an annual rate of 4.8%; for the second quarter, forecasts are for a plunge of as much as 25%.
While COVID-19 is primarily a global health crisis, economics cannot be overlooked, especially the impact on vulnerable households. It is important to implement policies that alleviate hardship during the crisis and leave production capacity intact at the end of the crisis. Given the rising levels of government and corporate debt in both Japan and the U.S., resumption of economic growth is essential to stave off long-term fiscal problems.
The New World of Work
Even as economies reopen, there will likely be lasting changes in how work gets done. The most obvious is the rapid and widespread increase in remote working. While employees typically value the flexibility of remote work, many employers have been reluctant to sanction these arrangements out of fear of losing productivity and efficiency.
Now, having seen the benefits of remote working, and the potential cost savings from reducing office space, more employers will likely institute working from home -- or a hybrid model that includes periodic team meetings or other group gatherings.
Other transformations across the economy include a burst in e-commerce, which could further displace bricks-and-mortar retail. Telemedicine, which prior to the pandemic had never really gained traction, has made a leap forward in progress and acceptability. Similarly, financial technology (fintech) had been hampered by regulatory hurdles, but consumer acceptance of mobile apps and other fintech offerings has pushed these solutions to the forefront. Finally, having experienced the risk of offshore supply chains, many companies will likely "re-shore" some of their sourcing of components and manufactured goods.
How the Crisis Will End
The pandemic will come to an end eventually. How that happens remains to be seen. It is possible that, as the coronavirus mutates, it will become less lethal, as sometimes occurs with pathogens. A second scenario is the discovery of effective treatments and vaccines. Although widespread research is ongoing, and some progress has been reported, we are nowhere near declaring victory over COVID-19.
Alternatively, it will take time -- most likely 1 to 1.5 years -- for the epidemic to run its course, with a longer timeframe being the consequence of flattening the contagion curve. In time, herd immunity, a situation in which a large fraction of the population (upwards of 50%) has been exposed to and has recovered from the disease, will be established. Getting to this level of immunity, however, is risky and could result in a second surge of cases that swamp health care systems.
Smart containment is a way of responsibly reducing contagion while gradually achieving herd immunity, without putting the most at-risk populations in mortal danger. Equally important, smart containment allows the economy to start recovering before the epidemic comes to an end.
Given that the pandemic has affected populations everywhere, so too should the solutions. There is an opportunity to learn from the crisis the importance of working together, across the world, on the problems that face humanity.
(By Sergio Rebelo, MUFG Bank Distinguished Professor of International Finance at Kellogg School of Management at Northwestern University)