Applied Macro

In the June 21st update, I showed a chart with the US states I was most concerned about. Florida, Texas and Arizona were showing worrying early signs of increases, while other states such as New York were keeping control of the virus. Since then the situation has developed as I feared.

You could interpret this chart as the UK doing a good job and I would certainly agree it shows the positive effect of the lockdown, but I would also argue that this is a warning against complacency. Florida for example opened their bars in early June and 6 weeks later we can see the consequences.

Yet anti-lockdown commentators cite the lack of large increases in the number of deaths in these US states as a cause for celebration. During the outbreak in New York, deaths rose at the same time as positive case results as in the graph below. Some argue this shows the virus is different this time, perhaps less virulent, perhaps we know how to treat it now, maybe it’s less deadly during the summer.

Unfortunately, this is mainly a misunderstanding of the statistics. The biggest reason deaths have not risen is that they have not risen yet. For an individual case, there is obviously a time period between getting infected with Covid, when you can test positive, and dying.

During the first outbreaks in London and New York, most tests were being done on people already very sick, perhaps on admission to hospital. Essentially, we only began to notice the virus once people were already dying. Without widespread testing across the community, we saw no lag between reported cases and deaths but given more comprehensive testing systems, I would expect this time difference to be larger now.

As cases in these problem states started to rise after June 21st i.e. 18 days ago. I would expect to see the death rate to start rising around now. Since this is the first time we have had significant test data in advance of the deaths it is not easy to make a confident projection. We do not know the lag we should use, we know positive tests but not the number of people infected who have not been tested and we do not know the mortality rate. Below I use a simple projection with a 2-week lag between positive tests and deaths, and a case mortality rate of 2% which is roughly what it was before the recent spike. In this projection we might expect deaths per day total in Arizona, Florida, and Texas to reach 400 per day in a couple of weeks’ time as in the chart below.

There may indeed be a lower mortality rate with improved treatments as we learn more about the disease. There is also a positive demographic effect in the short term as the recent cases have been concentrated in younger people who have a much lower mortality rate. This does not actually affect the overall mortality rate of course but it will make it look less deadly at first glance. If the death rate does not rise over the next few weeks, then I will revisit this debate to see if there is something new actually happening with Covid.

The political right has principally argued against lockdown on the grounds that it harms the economy. Sweden has often been the target of their praise, as an example of a country which took the sensible route and did not panic, allowing the economy to largely carry on as before with people staying safe by following common sense. We now have enough data to compare Sweden to similar countries with different policies.

Denmark enacted a strict lockdown, seeing an initial sharp drop in consumption with credit card volumes dropping over 20%.

Sweden did not have a formal lockdown but still saw a drop of 15% in card payments. It was notable that photos in the press often showed happy Swedes drinking in Stockholm, but even without a lockdown the data showed that people’s behaviour did indeed change with many scared to go to restaurants and shops.

Where the paths of the two economies have really diverged is in the aftermath.

Denmark with its early and strict lockdown was then able to be one of the earliest countries to relax measures. They have seen a virtually complete recovery in their economy with retail sales already above last year’s levels and even restaurants only 10% lower.

Sweden, by contrast, has seen very little bounce at all. This chart shows how household consumption is stuck around 10% below the levels of last year.

Credit card payments compared to last year also show a huge gulf between Sweden and its neighbours Denmark and Norway, as this chart from EVA https://www.eva.fi/en/ shows

The obvious conclusion is that the Swedish experiment has not only left them with ten times the deaths of their neighbours (and still rising), but also the continued high prevalence of the virus has left the population scared and lacking confidence to go about as before. Whilst their neighbours can relax and go back to normal, the Swedes are left in a perpetual semi-lockdown state.

As we look around the world, this is great news for countries that have pursued timely and effective lockdowns. It is not good news for the US which opened the economy without controlling the virus. The evidence from Sweden is that this will lead to a prolonged and deeper recession. For the UK, we are relying on Boris’ gamble that we will not see a resurgence of the virus despite our lack of a viable test and trace process.

Lockdowns have not depressed the economy. The virus depressed the economy and lockdowns are the means to get it back on track.

Government policy has been a catastrophic muddle in countries like the UK and US. With eradication now impossible and proper control far less likely, the trade-offs associated with lockdown are far more difficult.

I want to examine more closely some of the relaxation arguments I outlined previously, it may be that no lockdown is a better policy than a mismanaged one.

1. Free-rider

One could as an individual, including perhaps your friends and family, act as you like while everyone else stays in lockdown. You have the freedom and no risk of infection. From the outrage as Cummings’ behaviour and the clear selfishness, I think it is clear this is not a common viewpoint.

2. Let’s all do it

If you are happy to take the risk and also happy for everyone else to do the same, this seems much more reasonable as you get the benefit of freedom but the cost is that you are likely to be infected with Covid.

How risky is COVID?

I have previously written about how the Infection Mortality Rate is around 1%. As we have received more information about the disease, this remains a decent estimate, but it is also potentially misleading as it’s an average across a population, disguising a huge skew in the risks across age. The risks of dying are very low for anyone under 60 and climb sharply for older people.

A young person’s view

The most common cause of death for people in their 20s is accidents. In fact the risk of someone in their 20s dying from Covid if they catch it this year is about the same as them dying in an accident in the next year. The risk of dying in an accident is not something to ignore so we try to minimise risks through the wearing of seatbelts etc, however it does not stop young people from driving or going to work, school or university.

Given the low risk it is not immediately obvious why young people are so in favour of lockdown. It may be that younger people are more inclined to focus more on care and society than on individual liberty. It may also be the case that they overestimate their personal risks as the large death toll and confusing presentation of the numbers creates the impression that the virus would be just as deadly for them. They are young and a 1% chance of dying sounds far too high to live with as it is perhaps 50 times higher than your chances of dying this year from other causes.

In fact, for anyone under the age of 60, the risk of dying from Covid is lower than the risk of dying from other causes this year. I would like to find a poll which asks people under the age of 60 about this risk to Covid. Do they feel it is higher than other causes or perhaps feel it is low but in a similar way to being scared of flying, it is the perceived randomness and lack of control that drives the anxiety.

How about older people

It is striking that the people most at risk from the virus are in the age category most against lockdown. It may be more driven by issues of civil liberties, but it might also relate to an acceptance of the risk of death. Their risk of death for older people from catching Covid is high but so is their risk of death this year from other causes. In fact, they are remarkably similar.

Opportunity costs

Perhaps the costs of lockdown are not the same for people of different ages either. If you have a life expectancy of 60 more years, then losing 6 months to lockdown may seem reasonable. If you have a life expectancy of 6 years then perhaps losing 6 months to lockdown being isolated from your family is a much higher price to pay.

The problem

What I have tried to outline is a case for why younger and older people might both choose to exit lockdown. Despite this, I do not think people are in favour of lockdown because they misunderstand their personal risks. It is because they feel a sense of responsibility to others. From the chart below, we can see that people put the risk to others as far higher than to themselves. People are aware that if they break guidelines, it is not just themselves they put at risk but also everyone else. The outrage at Cummings showed many people feel that it was not acceptable.

Consent and Confidence

Imagine we had a large majority in favour of retaining much looser restrictions and willing to take the increase in personal risk. The problem is that they are imposing a higher risk of death on a significant number of people who have not consented to it.

A possible route for dealing with consent is a policy of shielding those who are vulnerable and who wish to be shielded. I would like to read a paper that explains how this might be possible as I have not come up with a way to do it. As I wrote previously Sweden was the country closest to pursuing this policy but effective shielding proved very difficult to achieve, with large numbers of care home deaths.

Confidence is perhaps even harder to achieve in divided countries like the UK and US with low levels of trust in the government. It might be more possible in countries with higher levels of cohesion and trust but most of those have already chosen the path of controlling the virus.

Can we go down this path?

As I wrote in my May 23rd post https://appliedmacro.com/2020/05/23/3-paths-forward-for-the-economy/ there are ways a society can choose to move forward without lockdown. There is no reason that Pakistan (average age 24) should necessarily take the same path as Germany (average age 47). But the key to success for either a lockdown or a herd immunity strategy is ongoing consent and participation.

The policy mix in the US and the UK appears to be to back into the herd immunity approach by muddled incompetence without consent. The rhetoric of public health with the actions of a libertarian leads to the worst possible outcomes for both public health and the economy.