Political tensions and the endgame



Political tensions and the endgame

by Joshua Gans, joshuagans.substack.com

Welcome to Plugging the Gap (my email newsletter about Covid-19 and its economics). In case you don’t know me, I’m an economist and professor at the University of Toronto. I have written lots of books including, most recently, on Covid-19. You can follow me on Twitter (@joshgans) or subscribe to this email newsletter here. (I am also part of the CDL Rapid Screening Consortium. The views expressed here are my own and should not be taken as representing organisations I work for.)

Back at the beginning of the pandemic — and throughout sporadically — the debate about whether to prioritise health versus the economy became very strong. It wasn’t long-lived as most countries (except for Sweden) chose health and it is also very clear that those who chose health sooner and more effectively also ended up with a stronger economy. Australia was one of those countries but this week there were protests in Sydney and Melbourne about the lockdowns now imposed there.

In retrospect, the analysis that I conducted in March 2020 on how to think about this seems to have been borne out and also validated by others. With vaccination and rising tensions again, I thought it would be useful to revisit that approach and see what it told us about when we are likely to see more intense debates as we move to the second half of the pandemic. The bottom line is that we can expect vaccinations to shift us towards prioritising the economy over health even though the magnitude of difficulty of that choice is also abating.

Recap: How to think about health versus the economy in a pandemic

The usual way to represent possible outcomes in an economy is using a tool called a ‘production possibilities frontier.’ In this case, we want to trace out the mix of a stronger economy and better health that we can achieve with available resources. When we are not in a pandemic, it looks like this:

Some people balk that there is a trade-off between the economy and health but anyone who operates a health budget knows the sharp end of that trade-off. In normal times, we balance these outcomes and achieve a point on the frontier like N. (Actually, I wish we reached the frontier but that is another story. Let’s just suppose we do for our purposes here.)

When a pandemic is almost upon us, the frontier changes. Pandemics are bad and so the frontier shifts inwards — we can’t have as much economy or health as before. But also, its shape changes. There is a ‘bite’ taken out in the middle. That bite represents the imposition of epidemiology on the production possibilities. It isn’t a short-term thing but a long-term one.

What this means is (a) N is no longer possible and (b) that you no longer want to match the ratio of economy to health that you previously had. Instead, you are better off either choosing the economy you had before (point E) or the health you had before (point H).

Note that this isn’t just theoretical, Greg Kaplan, Benjamin Moll and Giovanni Violante fit the data and traced out this for the US.

If it looks a little different, it is because it is inverted. Kaplan et.al. are downers and put deaths and welfare cost on the axes but turn it upside down and it is the same thing.

This picture suggests that there is a real economy versus health trade-off. And there is if your only tool is a lockdown. But there is also an asymmetry. If you decide not to prioritise health you can never go back. Choosing not to lockdown shifts the long-run frontier. When you let the pandemic rip, you can’t bring the health back.

The same is true if you try for a middle ground — some compromise.

What of the countries like South Korea, Taiwan, Australia and New Zealand that seemed to defy gravity and have both the economy and health? Those countries did not use lockdowns as their primary tool. Instead, they used another set of tools — testing and tracing. If you have that tool, that shifts your options as well.

Solving the information problem brings the frontier closer to its original point. That is precisely why I wrote a book advocating for that.

Let me complete the picture with the impact of vaccines. Vaccines counter all of the pandemic’s bad effects. They improve production possibilities AND they reduce the size of the bite.

Fully vaccinate and you are back to normal.

Political Tensions

Society has a choice between E and H after a pandemic. I have indicated this on each of the graphs with an orange ‘choice’ line. What is important to understand political tensions is the slope of that line.

The point N was already a compromise and if we were using a political economy model for a democracy we would say it represents the trade-off of the median voter. The trade-off between E and H may differ from that. If it is more steeply sloped, then the median voter will favour E rather than H. If it is less steeply sloped, then the median voter will favour H rather than E. This is a simplification because I haven’t considered uncertainty and other factors but it does get at one important driver of political choice.

Now consider what happens to this slope after various events. Below, I have replicated the key events (a) being too slow to prioritise health (most European and North American countries), (b) having a proper testing and tracing system and (c) vaccines. I put them side-by-side so you can compare what happens to the choice slope in each case.

Notice that different things happen. When you try for the middle, the slope becomes steeper and so, once you have lost control of the pandemic, the median voter is more likely to favour prioritising the economy. When you have testing and tracing, the slope becomes flatter and so the median voter will be more in favour of prioritising health.

For vaccines, it is tricky. The slope could change either way. But the point is that it doesn't change as much. Whatever you are prioritising prior to vaccines you might continue to do so but it is also possible that the small change leads to a wild swing in priorities. That potential for a wild swing means that the choice is hard and so political tensions will rise. That is what I believe we are seeing at the moment and I think we will see more of in the coming months especially as we face more outbreaks later in the year.

Summary

The point here is that as vaccines make the economic trade-offs easier, they actually make the political choices harder. In the end, if the median voter is vaccinated, I suspect that will cause a shift towards the economy in priorities and with it, the frontier will change so that is the only choice with health being permanently below what it was in the before times. I don’t have any answers to help here but I wanted to set out a framework where we could at least understand what’s going on.