8-month ‘structured lockdowns’ may halve economic damage

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A pedestrian wearing a face masks crosses an empty street amid the coronavirus outbreak on April 25, 2020 in San Francisco, California.

Liu Guanguan | China News Service via Getty Images

Enforcing eight-month “structured lockdowns” could halve the economic destruction that would be wrought by Covid-19 if no social-distancing measures were imposed, according to researchers from Cambridge University and the Federal Reserve.

Reopening the economy has been a tension point in some countries, with economic damage being weighed against protecting public health and protests against lockdown measures being staged across the United States.

However, according to the study, published Wednesday by economists from Cambridge University and the U.S. Federal Reserve Board, the economic price of inaction when it comes to encouraging social distancing could be twice as high as that of a “structured lockdown.”

Using U.S. economic and population data, researchers combined macroeconomics with epidemiology to determine the economic consequences of lockdown policies. Analysts noted that their model could be applied to most developed economies.

They found that imposing no lockdown at all would be “extremely risky” for economic output, as the spread of the virus would hit workers in sectors that were vital to keep developed economies functional.

Without any social distancing, the core workforce would be hit hard — and the economy would shrink at a peak monthly rate of 30% as their industries came under pressure, the study projected.

Researchers claimed that in order to protect the economy to the maximum, “core workers” — those in key industries such as health care, food and transportation — must be separated from the rest of the working population.

“What seems clear to us is that taking no action is unacceptable from a public health perspective, and extremely risky from an economic perspective,” the report’s authors said.  

The report considered several lockdown policies, projecting how each scenario would impact the economy.

In the first scenario, 15% of core workers and 40% of the rest of the working population would work from home, while 30% of non-working age people could also be kept at home under lockdown. This would last for eight months, and would mean a third of the entire population was kept in lockdown for that period.

In this scenario, the peak monthly economic contraction at any point in the lockdown would be halved to around 15%, compared to the peak monthly contraction of 30% if no action was taken, analysts projected. They claimed that the high levels of social distancing outside of the core workforce would act as a shield.

Giancarlo Corsetti, professor of economics at Cambridge University and co-author of the report, said under this policy, the peak of the infected share of the population would drop from 40% to 15% — although he noted that even this level may still be “far too high” for health-care systems to cope with.

“This milder lockdown scenario for eight months would be one in which we do not wait for the vaccine, but we hope for a form of herd immunity by exposing people very slowly to the disease,” he told CNBC in a phone call.

“As well as containing the loss of life, committing to long-term social distancing structured to keep core workers active can significantly smooth the economic costs of the disease,” he added. “The more we can target lockdown policies toward sections of the population who are not active in the labor market, or who work outside of the core sector, the greater the benefit to the economy.”

Researchers also modeled a scenario where infection rates were kept to a more manageable level of 1.5% of the population for 18 months — around the length of time many experts have projected it will take a vaccine to reach the market.

In this more stringent case, 25% of core workers, 60% of non-core workers, and 47% of non-working age people would need to be locked down. If this policy was implemented, the study projected a peak monthly economic contraction of 20%.

A “very strict lockdown” was also modeled, which would see 40% of core workers and 90% of the rest of the population locked down for three months. This scenario would be as bad for the economy as having no lockdown at all, the study found, as infection rates would simply be delayed and herd immunity would be prevented. 

However, researchers stressed that the scenarios laid out in their study were not forecasts, but should be taken as a “blueprint” for further analysis, as lingering uncertainties around how the coronavirus spreads remained.

Corsetti told CNBC there was “really no tradeoff between health and the economy.”

“One problem that is currently missing in the discussion is the ability to distinguish between essential sectors and non-core sectors, and this idea of thinking very carefully about the effect people may have by going around and infecting those essential workers — essential workers need to be protected and shielded,” he said.

“An unmitigated, very fast spread of the disease would have been quite disastrous on the economic side — there was a high risk of a true, enormous fall in output and economic activity.”

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