How Much Freedom Must We Forgo to Be Free?

By Convoco

Freedom is a fundamental good. But it can only be experienced in a context of meaning, and exists in a state of tension with other values. Freedom is not a natural given but rather results from the interplay of socialization and constraints. Rules and laws are needed to maintai

• Language: English
• Publisher: Convoco
• Release date: Jun 2, 2022
• ISBN: 9781916367357

Book preview

CHAPTER 1

THE ECONOMIC CONSEQUENCES OF RESTRICTING FREEDOMS DURING THE COVID-19 PANDEMIC

CLEMENS FUEST

1. INTRODUCTION: IS THERE A CONFLICT BETWEEN HEALTH, CIVIL LIBERTIES, AND THE ECONOMY?

In the debate about the management of the COVID-19 pandemic, the economic consequences of government measures to contain infection are a central concern. The economic impact is closely related to the consequences these measures have on individual freedoms, but they are nevertheless different. Prohibiting people from leaving the house to take a walk in the evening, to visit a museum, or to meet friends is a serious infringement of civil liberties. Economic costs are usually not associated with this, at least in public debates, although such costs do arise, as will be explained below.

In public debates in Germany and many other countries, state-imposed restrictions on social contact with the aim of curbing the spread of COVID-19 were often seen as imposing a heavy burden on economic development. It was argued that there is a conflict between protecting health and protecting the economy. Time and again, demands were made to relax social contact restrictions or not impose them in the first place in order to prevent economic damage. In fact, the idea that not imposing restrictions on social contact and accepting higher numbers of infections would help prevent economic damage is misleading. This essay explains why this is the case and will also discuss other lessons emerging from the crisis regarding the economic aspects of government pandemic management.

2. THE ECONOMIC COSTS OF PANDEMICS

Pandemics are momentous events in human history. The most significant costs of pandemics are the great loss of human life and the damage incurred to the health of many survivors. But pandemics also have far-reaching economic consequences. Epidemics of the plague that affected Europe in the 14th century in particular cost many lives. As a result, labor became scarce in lots of countries and economic output fell significantly.

The global influenza pandemic that struck in 1918 and is still unfairly referred to as Spanish flu,¹ is estimated to have killed 40 million people between 1918 and 1920. It had a serious economic impact. There were three waves to the pandemic. It broke out in the spring of 1918, probably in Haskell County, Kansas. This is a rural area of the United States which was unfortunately the location of a large training camp for soldiers who were preparing for their deployment in World War I— in Europe in particular. When the soldiers were dispatched, the influenza spread first in the US, then in the trenches of the European battlefields, and ultimately worldwide. Between September 1918 and February 1919, a second and particularly deadly wave of infections took hold. A third wave of infections followed in the course of 1919.

The consequences for the war-torn economy were devastating. A study of economic history concludes that economic output in the countries affected plummeted by 6 to 8 percent.² Since the pandemic coincided with the end of World War I, it is not easy to measure the economic impact, but it is undeniable that the losses were huge. Interestingly, the effects of today’s COVID-19 pandemic are creating a similar-sized loss of growth, although economic circumstances have changed significantly over the past hundred years.

Over the past few decades, local epidemics have emerged time and again: for example, the SARS epidemic that broke out in China in 2003. The SARS virus claimed 8,000 lives in 37 countries, so the impact was not comparable to that of the influenza pandemic after World War I or the COVID-19 pandemic. The economic consequences were correspondingly smaller and, according to estimates, entailed no more than a decline in growth of around 1 percent of China’s economic output.

The COVID-19 pandemic is not yet over, but it is already evident that it has incurred considerable costs in the shape of lost economic output. Before the pandemic, for example, Germany’s economic growth in 2020 was expected to be just over 1 percent; in the event, gross domestic product shrank by 5 percent due to the crisis. The loss of growth, i.e. the difference between the expected scenario without a crisis and the growth that actually occurred, amounts to more than 6 percent of gross domestic product. Some countries had to deal with even stronger slowdowns in growth. In 2020 GDP shrank by 10.8 percent in Spain, in the UK the decline was 9.8 percent, in Italy 8.9 percent, and in France 8 percent. Worldwide the recession caused by COVID-19 has greatly exceeded the global financial crisis of 2008/09, bringing about the worst economic crisis since the traumatic global depression of the 1930s.³

However, it would not be appropriate to equate the economic costs of pandemics with the effects on growth of gross domestic product. There are several reasons for this. First, medical expenditure on drugs, masks, and patient care are among the costs of the pandemic, but the production of such goods and health services increases gross domestic product. The costs are entailed in that, without the pandemic, the resources they use up could have been employed for other purposes, such as treating other illnesses that were often neglected during the pandemic.

Second, the decline in gross domestic product does not include the loss of schooling and vocational training. In this instance, costs in the form of reduced productivity due to missed training and education will only become apparent in the future. Third, during the pandemic, companies and employees had to be supported using a substantial amount of public funds. In the short term this was financed by increasing the national debt. In the medium term, however, higher taxes will have to be levied or government spending cut in order to service the debt. Higher taxes or the cancellation of government spending, especially reductions in public investment, could have a negative impact on future economic development.

Fourth, the pandemic entails costs in the form of a lack of social life, which is of great importance for the quality of many people’s lives, but it is not recognized as an element of gross domestic product. If people do not visit friends and relatives, or engage in community life and shared activities, this causes high stress levels that may damage physical and mental health—these too are indeed costs in the economic sense. In order to measure the extent of these costs, we would have to determine how much those affected would be willing to pay to eliminate hypothetically the risk of contagion caused by the pandemic. The sums of money would undoubtedly be considerable.

3. THE ECONOMIC COSTS AND PROFITS RESULTING FROM MEASURES TAKEN TO CONTAIN PANDEMICS

The fact that the COVID-19 pandemic has entailed high economic costs and damaged health, and that these factors cannot be reduced to the production losses recognized as part of gross domestic product, is unlikely to be controversial.⁴ What is controversial, by contrast, is the effect government social contact restrictions imposed to contain the pandemic have on economic development. As mentioned earlier, there is a widespread perception that there is a conflict between protecting health on the one hand and protecting the economy on the other. At first glance, this seems plausible. On closer inspection, however, it turns out that this idea is misleading. The most crucial mistake is not differentiating sufficiently between the effects of government social contact restrictions and the effects of the pandemic itself.

To illustrate this it is helpful to consider the basic economic effects of pandemics and government social contact restrictions. In principle, it is possible that a government-ordered shut-down of economic activities would entail economic costs. If a restaurant that without government intervention would be full or at least well patronized is not allowed to open, prosperity-creating economic activity disappears. However, we should bear in mind that restaurant patrons who are afraid of being infected with a dangerous virus are less likely to go to the restaurant and are more likely to stay at home. During the COVID-19 pandemic, this applies above all to older people, who generally spend more money in restaurants than younger people, but who are at considerably greater risk from the virus. Therefore, we cannot assume that without government social contact restrictions restaurants would have been anywhere near as full as prior to the pandemic. Part of the damage is thus caused by the pandemic itself, not by government social contact restrictions.⁵ Measuring the proportion of the damage caused by the pandemic itself is an empirical question.

Extensive research has now been done on this subject, but it mainly relates to the earlier phase of the pandemic, essentially to experiences and data from 2020. The idea that one could limit the economic damage of a dangerous pandemic by dispensing with government social contact restrictions and accept the spread of the pathogen is refuted by the available empirical literature on the economic effects of the pandemic. There are two main issues involved. First, such a policy prolongs and exacerbates waves of infection. Second, as already mentioned, people react to the risk of becoming infected independently of government measures by refraining from certain types of consumption. This is especially true of high-income older people, whose spending is very important for economic development. This is shown, for example, by studies that compare consumer behavior in US states that have a variety of lockdown policies. US states that locked down later or that re-opened the economy earlier as compared to states with similar rates of infection, show no significantly higher level of social consumption, i.e. visits to restaurants, hairdressers, or events.⁶

An example of an empirical study that documents these relationships in great detail is the study by Goolsbee and Syverson.⁷ Their study uses cellphone data to examine whether customers in US states without lockdown measures visit stores more often than in states where such visits are sometimes not even possible because many stores have been obliged to close. The authors analyze customer visits in 2.25 million retail and service companies in 110 different sectors, in each case comparing customers who live in the same region but are subject to different lockdown measures because the region is divided by a county line or a US state border. The result is unequivocal: in the pandemic in spring 2020, businesses lost an average of 60 percent of their customers, with government lockdown measures accounting for just 7 of these percentage points. With the same infection rate, but without government lockdown measures, the decline in economic activity was almost 90 percent of that observed in regions that imposed lockdown measures.

In Europe, Sweden pursued its own path in the early phase of the pandemic and initially waived lockdown measures. Comparisons of labor market developments in Sweden with other Scandinavian countries show that the crisis-related decline in employment in Sweden emerged a little later and was a little less pronounced than in neighboring countries that had implemented lockdown measures earlier. Nevertheless, the loss of employment was in the end around 80 percent of the loss of employment in countries with lockdown measures.⁸ In addition, in 2020 Sweden suffered a similar drop in growth to other Scandinavian countries, but significantly more deaths—as much as around ten times as many as Norway.

The overall picture provided by the available empirical evidence suggests that at least 80 percent of the costs in the form of lack of added value in the area of social consumption are caused by the presence of the virus and the risk of contagion itself, not by government lockdown measures.

One could argue that lockdown measures are unnecessary if people voluntarily avoid contact. It is true that government regulations restricting social contacts are often less binding than one might think if one doesn’t take account of the fact that in a pandemic situation people avoid the risk of contagion anyway. But to demand that state-imposed social contact restrictions be dispensed with entirely would be a step too far. There certainly exist groups who are not prepared to restrict their social contacts and who accept the risk of infection. In the COVID-19 pandemic, health risks correlate strongly with age. Young people in particular are less at risk from the disease, which is why the voluntary avoidance of social contact is less pronounced among this cohort. That would be acceptable if the risk of infection and other costs only applied to those who consciously take the risk of becoming infected. However, this is not the case because this behavior increases the spread of the virus considerably.

From an economic perspective, we can see a classic problem of external effects here. In making decisions, individuals take into account the risk to their own health but not the consequences for others. In this instance, the consequences are not only that the risk of infection increases for others, but also that people who take risks put a strain on the publicly funded health system, which is reaching the limits of full capacity in the pandemic. In this context, to be fair, it should be noted that there are also other areas in which risks incurred by the behavior of individuals are passed on to the general public via the health system—we might think of leisure activities such as skiing that are likely to cause injury. However, it does not follow from this that such behavior is to be tolerated, but rather that measures such as higher health-insurance premiums for skiers would make sense.

There is considerable evidence to show that state-imposed restrictions on social contacts contain infections, although they are not binding for many people. This is not only because certain groups are unwilling to voluntarily restrict their social contacts; some groups cannot do this at all, for example children who are subject to compulsory education and have to go to school unless state regulations abolish compulsory education or ensure that lessons can take place online.

Government measures to reduce infections are not only able to restrict the amount of economic damage. To the extent that they contain and shorten waves of infection and thus enable social consumption to open up again earlier, they can even reduce the economic costs of the pandemic. However, this does not apply to policies introducing restrictions that operate in such a way that infections tend to remain constant rather than decrease. A lockdown light that does not actually lead to a reduction in the number of infections can be extremely ineffective.⁹ In such a lockdown, it’s possible that introducing tighter measures will not put a strain on the economy, but rather protect it because it shortens the duration of the measures.

However, all this does not mean that lockdown measures of any kind are unproblematic for the economy. In the first weeks and months of the pandemic, national borders were closed not just to private travelers and businesspeople, but also in many cases to the transport of goods. The latter has hardly helped contain the pandemic. However, the disruption to goods traffic has led to a collapse in industrial production. Raw materials and intermediate products were no longer delivered and cross-border value chains interrupted, resulting in a considerable loss of production and short-time working in sectors with sometimes very high added