Social distancing at the end

What happens to economic activity as the pandemic nears the end?

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.

A popular presumption regarding the end of the pandemic is that all of a sudden it’s over. We get a vaccine and then we are done. We get treatments and we have nothing to fear. In reality, both of these things will take time. Vaccines and treatments, even if discovered, don’t magically appear overnight. They take time to be distributed and may not be perfect.

What happens in the interim? What happens when we know a vaccine or treatment is on the horizon? The answer is that voluntary social distancing (and mitigation behaviour) will change and this will potentially have a big impact on economic activity in the interim. This is something I wrote about many months ago.

The question to ask is: what will happen to peoples’ own social distancing behaviour once a vaccine appears and there is a time when they believe they will become immune and free to return to normality? In that critical time period, something will have changed. Today, without a vaccine, we may socially distance because we don’t want to be infected although we also take some risks because there is a chance we may be infected eventually anyway. This effect is sometimes given the term fatalism.

When a vaccine is on the horizon, the risk equation changes. A fatalistic belief is no longer sustainable and people will realise that, if they take care for a few months, they can come out of this without having contracted COVID-19. In other words, their incentives to socially distance increase when they know a vaccine is available.

In other words, when a vaccine is imminent, the effect could be a larger recession until it is distributed sufficiently widely. This creates another reason to prioritise speed in getting the vaccine out there.

A new paper by Miltiadis Makris and Flavio Toxvaerd confirms this for vaccines but shows that the impact of a treatment could be much different. The graph below shows what happens if a vaccine is likely to be widely available at 60, 80 and 120 days from now. The sooner the vaccine, the greater the social distancing. Moreover, once you get beyond a certain point, more delay does not impact on infections but further delay reduces the short-run economic impact. None of this is a clear answer but it does suggest that a vaccine is more likely to be disruptive than calming initially.

For a treatment, things are different. A treatment reduces the bad consequences of having Covid-19 and, moreover, only has to be made available to those who become infected rather than most of the population (at least at any one time). Holding hospital capacity issues fixed, this makes people less likely to engage in social distancing.

What this means is that, for treatments, sooner is better and it is calming rather than disruptive.

In either case, is this what we want? Not quite:

As is often the case in economic models of infection control, there is a wedge between private and social costs and benefits of social distancing. The reason is that individuals do not internalize the positive external effects that follow from their efforts to avoid infection.

When there is a vaccine, we don’t want people to hide out and wait but before that you want people to continue to behave carefully. When there is a treatment, we don’t want people to party on.

To close this wedge we could have subsidies or penalties attached to social distancing (as we have seen in many places) or, more interestingly, based on your health (with a payment if you stay healthy). The latter could also be achieved by raising the price of hospital care but, that is an economist’s answer, not a sensible one. The tough part is that you have to constantly adjust these schemes as the epidemic changes. The authors suggest an alternative

In contrast, in the present setup there is a scheme that is very simple to implement and which may provide individuals some incentives to self-protect. Under this scheme, once the vaccine becomes available, individuals who get vaccinated also receive a reward. As the health state of an individual is known in our model, only those who have never been infected by date T will get vaccinated. This means that only at-risk individuals are eligible. This scheme achieves two separate goals. First, it incentivizes vaccine uptake, itself an activity that has strong positive externalities (see Chen and Toxvaerd, 2014). Second, it incentivizes social distancing in the pre-vaccination phase by rewarding those who make it through to the vaccination phase having never been infected. This scheme is both easy to communicate and to implement. It should be noted that this is a decidedly second-best policy and that it is unlikely to be possible to implement the first best through this scheme.

Well, that is clever. Make the vaccine even more attractive to cause people to want to take that route rather than treatment. But I have to admit that I think that all of this depends too much on the details of precisely how quickly either option can be rolled out if, indeed, both are on the horizon at the same time.

In the end, the take-a-way is that we are more likely to have mess than miracles.

What did I miss?