13 The economic effects of a
pandemic
Simon Wren-Lewis
Oxford University
A little over ten years ago, I was approached by some health experts who wanted to
look at the economic effects of an influenza pandemic. They needed someone with a
macroeconomic model to look at the general equilibrium impacts. In the 1990s, I had
led a small team that constructed a model called COMPACT (Darby et al. 1998), and
these health experts and I completed a paper that was subsequently published in Health
Economics (Keogh-Brown 2009). We reference other studies that had been done earlier
in that paper.
The current coronavirus outbreak will have different characteristics to the pandemic we
studied, and hopefully it will not become a pandemic at all. (In terms of mortality, it
seems to be somewhere in between the ‘base case’ and ‘severe case’ we looked at in our
work.) But I think there were some general lessons from the exercise we did that will be
relevant if this particular coronavirus does become a global pandemic. One proviso is
that a key assumption we made about the pandemic is that it was mainly a three-month
affair, and obviously what I have to say is dependent on it being short-lived.
It is worth saying at the start that the bottom line of all this for me is that the economics
are secondary to the health consequences for any pandemic that has a significant fatality
rate (as COVID-19 so far appears to have). The economics are important in their own
right and as a warning to avoid drastic measures that do not influence the number of
deaths, but beyond that there is no meaningful trade-off between preventing deaths and
losing some percent of GDP for less than half the year.
Let me start with the least important impact from an economic point of view, and that is
the fall in production due to workers taking more time off sick. It is least important in
part because firms have ways of compensating for this, particularly if illness is spread
over the quarter. For example, those who have been sick and come back to work can
work overtime. This will raise costs and might lead to some temporary inflation, but the
central bank should ignore this.