In recent weeks and months, a debate has raged over how much society should be willing to bear in terms of lockdown and social distancing costs to potentially save a million or more lives from COVID-19. More than anyone, President Trump has embodied the view that “We can’t let the cure be worse than the problem itself.” While economists tend to believe that the strategy will pay off, ironically, many seem to be forgetting some basic economic principles that even their undergraduate students probably grasp.
Those economists who have sat down to tally up the various costs and benefits of social distancing measures have mostly reached similar conclusions: that the costs (in terms of lost output, GDP, unemployment, etc.) are dwarfed by the benefits. A study from University of Chicago economists Michael Greenstone and Vishan Nigam suggests that the economic value of saving roughly 1.7 million lives is $8 trillion, or almost one-third of U.S. GDP. Another, from professors at the University of Wyoming, estimates the value of lives saved even higher, at $12.2 trillion, which the authors expect to exceed losses to GDP by $5.2 trillion.
Studies like these appear to reflect a consensus among economists that the shutdown measures are worth it. But is that the end of the story? Their conclusion may well prove correct, but that doesn’t mean the analysis is without flaw.
One problem with COVID-19 cost-benefit analyses produced to-date is they aren’t fully accounting for how benefits and costs are likely to evolve over time. Consider a simple case: Would anyone argue that spending $100 at a restaurant and investing $100 in a retirement account are the same thing? Of course not. Consumption, while important because it satisfies peoples’ immediate needs and desires, is a static, over-and-done event. Investments, meanwhile, will grow in value, thereby generating more consumption and satisfying more desires in the future.
About 80 percent of the deaths from COVID-19 thus far have been individuals aged 65 or older. Any analysis that attempts to ascribe a monetary value to preventing these deaths must inevitably weigh these individuals’ contributions to the economy — there is little alternative. That means weighing consumption versus investment. Seniors are mostly consumers who aren’t out working on assembly lines and saving for retirement, which means most of the economic benefits of extending their lives will come in the form of more consumption, not more production and by extension, investment. This shouldn’t be controversial; these are just basic facts of life.
What about the costs? Some of our lost GDP constitutes consumption. Families aren’t able to celebrate as many birthdays together at restaurants, enjoy as many nights out at a ball game, or relax on as many cruise vacations. But much of GDP comes in the form of investment.
GDP isn’t just some abstract number. When it goes down, we invest less in new job-creating companies, in new life-saving technologies and in our people, through investments in their human capital. Preventing hundreds of thousands of hospital visits from COVID-19 contributes greatly to the investment side of the ledger as well, and these investment gains should get counted too. What’s critical is that consumption and investment need to be carefully distinguished from one another.
The term economists use for forecasting the returns from invested assets is the “opportunity cost of capital.” It’s a bit of an unfortunate term, because what is being estimated isn’t exactly “opportunity cost,” which normally refers to the next-best alternative use of something. In this case, the term is intended to convey how invested resources appreciate in value over time. It should be obvious to even the most casual observer that saving $1 by investing it and consuming $1 worth of goods and services are entirely different things; treating them the same is to ignore the opportunity cost of capital.
None of this is to say the lockdown orders are not worth it. On balance, the orders may well be doing more good than harm. Indeed, this finding is consistent with forthcoming Mercatus Center research that I coauthored with Michael Kotrous. But the margin of error is likely to be considerably smaller than other economic analyses to-date have suggested, owing to the opportunity cost of capital.
On the bright side, the present crisis offers a teachable moment. In this case it’s not the undergraduate students who require a lesson; they often grasp that a penny saved is a penny earned. It’s the professional economists who would benefit from dusting off those principles textbooks.
James Broughel is a senior research fellow with the Mercatus Center at George Mason University.