I’m not a fan of mandatory lockdowns. At the same time, I have argued that the crash in the global economy is mostly caused by voluntary social distancing, not mandatory lockdowns.
It seems like the Swedish Riksbank agrees:
Data released from the country’s central bank and a leading Swedish think tank show that the economy will be just as badly hit as its European neighbors.
That’s what I expected from the very beginning, although I would have much preferred to be wrong.
This is really bad news for the US, where some states are beginning to gradually lift mandatory lockdowns.
READER COMMENTS
Alan Goldhammer
May 4 2020 at 8:36am
Isn’t this rather obvious? Pre-pandemic, most of those visiting restaurants in our area are over 60 years of age (I don’t count the bars that appeal to younger clientele). Even if these reopen in the near term, that age cohort is still likely to social distance based on the high levels of morbidity and mortality in the age group. My wife and I have discussed this and we won’t be dining out for some months, nor will we visit stores, malls, etc. that don’t have some type of social distancing controls.
Restaurants and other businesses that may lose 50% of their patrons upon reopening won’t make it.
Daniel Hill
May 4 2020 at 4:40pm
And if they don’t, it will only be a temporary phenomena. Dead seniors don’t eat out.
John Alcorn
May 4 2020 at 8:43am
Dr. Sumner,
I am not an economist, but will venture a comment.
Shouldn’t we draw an analytical distinction between economic contraction caused by a policy of voluntary social distancing and economic contraction caused by disruption of international trade? I can’t read Swedish, and so can’t read the underlying study by Sweden’s National Institute for Economic Research. The brief excerpt in English at your link (cnbc) emphasizes disruption of Sweden’s international trade patterns:
(I acknowledge that it might be impossible to estimate empirically, as separate magnitudes, the impacts of these two causes of economic contraction in Sweden; and surely there are other causes, too.)
I emphasize the distinction between these two causes because, all else equal, voluntary social distancing involves much less coercion than lockdown; and, I think, reduces risk of political strife, compared to lockdown and to thorny exit from lockdown policy-formation. In other words, Sweden’s approach might be preferable on political grounds, even if the performance of Sweden’s relatively small economy is largely (or mostly?) determined by global economic contraction and by disruption of supply chains. (Of course, there is also the crucial metric, pandemic fatalities; where Swedish public-health authorities say they are playing a long game.)
Separately, I would like to ask about quality and consistency of international economic data. If I understand correctly, the cnbc report seems to use data from different sources. Moreover, data from Economist Intelligence Unit at the Wikipedia entry, “Coronavirus Recession,” provide a different picture of impact on GDP. SeeTable, Summary of National Impacts. There, the “annual effect on GDP” is estimated at -2.3% for Sweden. The figures are much higher for other countries in the region (Norway = -6.0%, Netherlands = -7.0%) and for the large European ‘lockdown nations’ (Italy = -7.0%, France = -5.3%, Spain = -6.0%, UK = -4.7%). However, it must be acknowledged, the data also indicate that Sweden has suffered substantial increase in unemployment (7%), and falls in the middle of this group of countries in the unemployment-increase metric. I’m not competent to assess the quality of the data, and would appreciate your guidance. Thank you!
Tom DeMeo
May 4 2020 at 9:50am
John,
You are conflating economic choices with pandemic viral transmission risk. You can make an excellent argument that it is in both individual and the public interest to leave economic choices to individuals. I have an acceptable capacity to choose whether or not to involve my interests with yours. With pandemic viral transmission, not so much.
John Alcorn
May 4 2020 at 11:26am
Tom DeMeo,
Where does my comment make such a conflation? Perhaps we’re back to the Henderson-Wolfers debate about lockdown. See my comments and sources there.
Scott Sumner
May 4 2020 at 1:55pm
Yes, I tend to agree with you, which is why I am skeptical of mandatory lockdowns.
Matthias Görgens
May 4 2020 at 11:31pm
John, Google Translate has become really, really good in the last few years. You can read Swedish now!
John Alcorn
May 5 2020 at 8:18am
Thanks, Matthias. I will follow up on your suggestion! – Signed, Rip Van Winkle 🙂
Ray
May 4 2020 at 8:55am
The main problem is actually fear. Even with restrictions loosened, if people won’t voluntarily return to normal activities, it won’t really matter.
Michael
May 4 2020 at 4:20pm
The main problem is the virus itself.
Todd Kreider
May 4 2020 at 6:10pm
But nothing remotely this extreme happened during the 2017/18 flu season when 70,000 Americans died. Coronavirus is probably deadlier than the flu but not by that much. The vast majority of Americans didn’t realize it was the worst flu season in over 30 years until after flu season was over.
Scott Sumner
May 4 2020 at 8:39pm
Actually, it’s much deadlier. If we treated this like flu (no social distancing) then a million Americans would die.
robc
May 5 2020 at 9:08am
Citation needed.
I have seen no evidence that is the case. My best guess is still about 200k, with or without social distancing.
robc
May 5 2020 at 9:30am
This is from the SD governor’s reopening plan letter:
That is what social distancing achieves, which does save some lives. But I don’t think we are talking a huge number of deaths saved. The total infections is not greatly reducing by flattening the curve (from looking at the basic set of differential equations used in simple models, the area under the curve isn’t exactly the same, so flattening does reduce total infections a wee bit).
Todd Kreider
May 5 2020 at 3:11pm
No, a million Americans would not have died, nor anywhere close to that number. As epidemiologists have repeatedly said, social distancing doesn’t prevent Covid-19 deaths as long as there is no vaccine or treatments. It’s not clear how much social distancing has slowed the spread since there were already many coronavirus around the country.
derek
May 4 2020 at 9:11am
I think you are being too pessimistic. See #10 in this MR link collection.
https://marginalrevolution.com/marginalrevolution/2020/04/wednesday-assorted-links-243.html
A decrease in health care spending accounted for almost ONE HALF of the Q1 GDP decline. Many states have bans on elective procedures at hospitals, essentially mandatory appointments for other things have been delayed, dentists/orthodontists are shut down, etc. These bans have to get lifted some time. While restaurants and recreational services are going to be under a lot of pressure for probably a while due to social distancing, there is a big chunk of medical GDP that got delayed/paused in March/April, and it should start to come back in May/June as things open back up and bans on elective procedures expire.
I agree that stuff is really bad, but it’s not the case that gradual reopenings won’t have any economic benefit.
robc
May 4 2020 at 9:20am
One data point for that. I had a elective procedure scheduled for March, moved to April, and now to late May, when it will happen baring some major outbreak.
But while medical may have been the major drop in Q1, I see Q2 being much larger and across the board. I live in a fairly heavy tourism area that has been killed by this. Even with reopening, I think the summer is going to be mostly lost? Are people going to travel for vacations? How many won’t be able to afford them due to job losses/furloughs/etc?
derek
May 4 2020 at 9:41am
To be honest, if my planned vacation destination for this summer is open, I will likely go. I don’t really expect full openings within the year, and this summer, after large-scale shutdowns but before winter reintensifies spread conditions, seems like the best time to travel over the next 12 months.
Scott Sumner
May 4 2020 at 1:59pm
I think it’s important to distinguish between changes in policy and changes in perceived risk. I expect activity to pick up this summer as the perceived risk falls, regardless of policy decisions. For instance, right now it’s perfectly legal to fly on domestic vacation, but few people will do so. That activity will gradually increase over time.
Mandates matter, but not that much.
AMT
May 4 2020 at 2:54pm
Well, [at least up until now] the main reason is not because “flying” is prohibited, it’s because most of the fun things you would like to do on a vacation are prohibited. I mean, do you want to just eat fast food or make yourself sandwiches at the hotel room, since you can’t eat at sit-down restaurants or go to a bar?
Scott Sumner
May 4 2020 at 8:41pm
I doubt that. I doubt many people would be flying even if restaurants in vacation spots were open.
Dylan
May 5 2020 at 11:34am
Anecdotal evidence from mid to late March was that a lot of the NYC to Florida flights were pretty full. The people that I spoke to that decamped for other places, did so because they could work from anywhere and wanted to be some place where there was something to do.
robc
May 4 2020 at 9:25am
Scott,
Any idea on the breakdown of the economic losses between voluntary and mandatory? I saw one paper suggesting it was 20%/80%, but that seems unlikely, I would expect the voluntary social distancing to account for more than 20%. But I am not sure I would go as far as to flip it and say the vast majority was due to the voluntary actions either.
Then again, can we use the 1968-69 Hong Kong Flu pandemic as a way to estimate the effects of voluntary social distancing? Because maybe I do believe the 20% number after all. It might even be too high.
robc
May 4 2020 at 9:41am
Just saw an article from 2013 suggesting that if a pandemic the size of the 1968 HK flu would cost about .7% of world GDP and one the size of the 1957 pandemic would cost about 2%. (source was 2008 World Bank study)
I think those are good ballparks on what this one should have cost. So 1-2% of GDP for typical voluntary social distancing efforts during a pandemic.
That study suggests a spanish flu sized pandemic would “only” cost about 4.8% of GDP.
Dylan
May 4 2020 at 10:22am
Honestly, I think it is particularly hard to really disentangle voluntary from mandated response here, particularly when you look at countries like the UK and Netherlands, that initially were going the Sweden route, only to have their population rebel at the idea and get forced into mandated lockdowns. I’ve got no knowledge about the ’57 or ’68 pandemics, but I do wonder if there were mass calls for mandated mass closures during those outbreaks?
robc
May 4 2020 at 10:38am
I don’t think there was, I have seen no evidence for it. There weren’t mandatory closures and I doubt there were any large calls for it.
Dylan
May 4 2020 at 10:56am
Which makes it seem like it is difficult to extrapolate from that experience. Seems obvious that we’re seeing more severe voluntary measures than we have in past pandemics, whether that is from being a more globally connected world, the severity and uncertainty surrounding this novel virus compared to past flu outbreaks, media stoked fear, or other causes.
My understanding from speaking with friends in the Netherlands is that they’re social distance mandates are much less severe compared to their neighbors. Most shops are still open and schools remain open for children of essential workers (not sure if that is still the case, but was a couple of weeks ago when I spoke with a friend). Yet, the economic decline appears to be greater than their neighbors as well. Of course a lot of that is probably due more to the nature of their economy, than the effect of voluntary vs, mandatory social distancing.
The only prediction I’ll make is that we’ll still be arguing about the impacts and causal relationships in a decade.
robc
May 4 2020 at 11:02am
Dylan,
I agree with your prediction, but it may be more than a decade.
robc
May 4 2020 at 10:50am
That reminds me of the Mencken quotation: Democracy is the theory that the common people know what they want, and deserve to get it good and hard.
Dylan
May 4 2020 at 11:55am
Figure we’ll be too busy foraging and hunting by then to do much in the way of debating.
Scott Sumner
May 4 2020 at 2:22pm
In terms of gross economic losses, I believe it’s mostly from voluntary decisions. If the criterion is welfare, then the cost of mandatory actions rises somewhat.
I suspect the 4.8% figure for the Spanish flu is too low, as that killed a lot of young people It would have led to even greater fear on the 21st century, where we are accustomed to high levels of safety.
Jon Murphy
May 4 2020 at 10:17am
This is a very good point. I think it was Arnold Kling who recently said that the government cannot reopen the economy because they’re not the ones who closed it.
This recession does indeed appear to be caused by an increase in the demand for leisure (ie not working). Seems like the Real Business Cycle folks finally got one right*
*These last two sentences are tongue in cheek. I do think this does appear to be a RBC shock, but I am being a little sarcastic here.
Scott Sumner
May 4 2020 at 2:23pm
Good point.
Michael
May 4 2020 at 4:22pm
The more influential government policy may be in facilitating voluntary decisions (ie, via its unqiquely generous unemployment benefit) as opposed to mandatory lockdowns..
Tsergo Ri
May 4 2020 at 3:16pm
The benefit of the Swedish policy compared to that of Italian or French policy is that bartenders, restaurant workers, hair dressers, etc. will be less impacted.
Daniel Hill
May 4 2020 at 4:45pm
One thing we ought to remember as middle class white collar workers. We can probably do more voluntary social distancing without completely destroying our lives and futures than a lot of working class people.
Scott Sumner
May 4 2020 at 8:42pm
Agreed, and that’s a very important point.
robc
May 5 2020 at 9:11am
Agreed. About 1/2 my office was work-from-home on any given day before the virus. Moving it to 100% was a fairly trivial change.
Gordon
May 4 2020 at 5:31pm
Sweden’s exports normally are 45% of GDP with 73% of those exports within Europe. So to some degree its GDP was impacted by the mandatory measures imposed by all the other countries in Europe.
Scott Sumner
May 4 2020 at 8:43pm
I agree, but I also suspect their domestic economy is severely depressed.
robc
May 5 2020 at 9:14am
It will be interesting to see what % things like restaurants and retail sales dropped in Sweden during this time, versus the US where it is very close to 100%* drop in those.
*Obviously, some restaurants are doing take out, so maybe not 100%, but retail stores the completely shut down will be 100%.
Dylan
May 5 2020 at 11:41am
From talking to various restaurants in the neighborhood, some of the restaurants are doing much more business than they were before, while others closed because there just wasn’t enough delivery business to keep them open. The surprising thing to me is it’s the exact opposite of what I would have expected. A couple of places that were primarily takeout only (had just a couple of tables in them) are the ones that closed early and have stayed closed. A couple of really expensive places, whose food doesn’t travel all that well, have lines of delivery guys around the block waiting to pick up food. A pretty visual clue of the two different sides of the neighborhood.
Mark Z
May 5 2020 at 6:34am
This may invite a reconsideration of the idea of trying to save affected sectors of the economy by trying to tide them over for a few weeks with bailouts or subsidized loans so whole industries don’t have to restart from scratch once the crisis is over. The idea of doing this for a month may make sense. But for six months or a year? or longer if many people wait for a vaccine to return to ‘normal?’ If it will take that long for enough customers to return to restaurants for most of them to be profitable again, the best thing to do may just be to let the reallocation happen and accept a much smaller restaurant industry or tourism industry for the time being (to some extent maybe permanently), rather than keep 30% of the economy on life support at public expense for such a long time.
Dylan
May 5 2020 at 11:46am
This may unfortunately be correct. In my opinion, the best rationale for the bailouts was that this would be the best (or at least a politically feasible) way of pausing the economy and minimizing the fallout. That seemed doable as long as the lockdowns were relatively brief, but the longer this goes on, the harder that will be to maintain.
Thomas Hutcheson
May 5 2020 at 10:47am
But how much would the shift in perception of risk in consumer choices matter (in fall of real gdp) if the Fed were pumping out enough inflation to keep NGDP growing normally? How can businesses follow Caplan’s advice that gouging is good if the Fed is keeping inflation expectation far far below it’s supposed symmetric target?
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