Mechanism of pandemic spread
The wide spread of the COVID-19 pandemic across the world has made the persistently sluggish world economy even worse, and lack of adequate understanding of emerging viral infectious diseases has made it especially difficult to accurately predict the trend the pandemic will take in the short term. Thus the uncertainties around economic activities and the pandemic itself increase.
Baker et al. (2020) have pointed out that these uncertainties include the power of the virus itself, the availability of antigen and antibody detection, the affordability of the medical system, the development period for an effective vaccine, the final death toll, the social isolation period, the near- and short-term economic impacts of the pandemic, the pace of economic recovery after the pandemic subsides, the continuity of government intervention policy, the extent to which consumption patterns have changed, and medium- and long-term impacts on enterprise survival, innovation, and investment in human capital. The impact of infectious diseases on economic operation is equivalent to adding a quasi-exogenous variable into the economic system, while how this variable itself changes requires sufficient understanding. Therefore, research on the scale of output variables affected by the pandemic requires basic knowledge of pandemic spread.
An epidemic model is used to analyze the spread of infectious diseases. The fundamental work of Kermack and McKendrick (1927) provided a blueprint for the development of the epidemic model. They thought that depending on the circumstances of infection, people can be divided into three major groups: Susceptible, Infected, and Removal. The way out of Removal is either recovery or death, and this will affect the size of the total population. Severity of the disease varies, determining the probability of patients facing death or recovery; the core issue of the epidemic model is to understand dynamic changes in the numbers of people in the three major groups and the main factors influencing the changes.
In their generic, simplified mathematical model, Kermack and McKendrick (1927) assumed that during the outbreak, the difference between birth rate and non-epidemic deaths may not be considered; rather, total population may be regarded as three groups, and in different time intervals, probability of transition among the three conditions is given exogenously. Considering the end of the pandemic, the point at which the continuous transition finally stabilizes needs to be made clearâdoes the end of pandemic mean there are no uninfected people any more, or that there is a combination of infection, recovery, death, and other factors while many people remain uninfected? If, in the initial population, all uninfected people have the same opportunity of infection, the way to get complete immunity is to experience the illness-recovery process, but the end of pandemic does not necessarily require everyone to be infected: at the given infection, recovery, and mortality rates, the number of infected people will stop increasing at a threshold of population density. Kermack and McKendrickâs research focused on the potential threshold leading to the rapid spread of infectious diseases or subsiding from the viewpoint of population density; they did not make straightforward social policy suggestions. Since their analysis of the evolution of the relative number of three groups of people and the influencing factors provided a fundamental perspective for the development of the epidemic model, their model was called the KermackâMcKendrick model or the SIR model.
Due to the generality of the classic SIR model, relaxing its prerequisites or including more factors that might influence pandemic spread or continuity may achieve a richer meaning. For example, in a concise epidemic model that only contains an âuninfected-infectedâ process, Kremer (1996) relaxed the homogeneity assumption of the initial population when he analyzed the impact of the AIDS epidemic on the behaviors of different groups based on the endogenous setting of spread parameters in the model.
Tassier (2013) introduced special forms of the SIR model, including the SI form, in which only Susceptible-Infected was considered, the SIS form, in which only Susceptible-Infected-Removal was considered, and the addition of population dynamics into the SIR model. He analyzed decision-making and the economic quantitative methods of the private sector and the public sector from the viewpoint of externality caused by infectious diseases.
Wang and Hennessy (2015) took the SIS model as reference when investigating the general optimal policy of government when facing infectious diseases in animals. Since the COVID-19 outbreak, extensions based on the SIR model have been used widely by public health researchers and economists (Atkeson, 2020).
Mechanism of economic impact caused by pandemic spread
Infectious viruses may be spread extensively through human social activities, and this may generate huge negative externality. Government decisions will also inevitably become trapped in the dilemma of saving lives and stabilizing the economy. According to the sequence of the SIR model, if the severity of the pandemic is widely known among the public, the rational Susceptible group will consciously limit chances of interacting with people and reduce economic activities to lessen the possibility of moving from Susceptible to Infected. The Infected will also voluntarily restrict the intensity of their economic activities, even if these are not restricted by government; because of their health conditions and their intention to avoid moving from Infected to Removal, the balanced result is a shrinking of the entire economic activity. Which economic activities are affected in the process of the pandemicâs spread and to what extent they will be hit by unforeseen shocks are the concerns of most economists (e.g. Barro et al., 2020; Keogh-Brown et al., 2010; Lee and McKibbin, 2004; Ludvigson et al., 2020).
Besides the sudden shutdown of the personnel-intensive economy during the epidemic, which poses direct short- to medium-term impacts on the economy, if the virus hazard goes beyond what is expected, large areas affected by the pandemic might also suffer medium- and long-term adverse consequences.
From the perspective of the health of human capital, Almond (2006) found that the population that were in gestation during the Spanish flu outbreak had a higher proportion of disability, less educational attainment and income, and lower socioeconomic status in adulthood.
McKibbin and Sidorenko (2013) have pointed out the following effects of a pandemic: since death reduces life span and diseases decrease labor efficiency, labor supply is reduced; investment in human capital decreases alongside lower life expectancy; with the increase of business costs, government financial pressure increases; and a persistent epidemic will influence national savings and investment.
Bell and Gersbach (2013) have warned that if there is a lack of adequate protection, a long-term continuous high mortality rate caused by an epidemic will destroy human capital formation and lead to economic paralysis.
However, Young (2005) thought that it is best not to be too pessimistic after a pandemic. Although AIDS and other infectious diseases have a severe impact on the workforce, this mainly affects workers with relatively low levels of education; also such events encourage people to restrict unhealthy behaviors and learn lessons from the crises.
With respect to the COVID-19 global pandemic, although the precise end point was still unclear as of April 2020, the economics community generally believed that the pandemic spread would add a heavy burden to economic society.
According to Barro et al. (2020), with respect to the impact of the COVID-19 pandemic on economic society, it is helpful to take a glimpse at the destructive power of 1918â1920 Spanish flu pandemic. If applying the mortality rate of the Spanish flu pandemic indiscriminately to the current world population, the most pessimistic scenario corresponds to a shocking death toll.1 Barro et al. (2020) also showed that the gross domestic product (GDP) of a typical country would drop 6 percent, private consumption would decrease by 8 percent, and economic downturn would be comparable to the 2008â2009 global financial crisis. Although the transnational flow frequency of the current population is far higher than in the 1920s, this does not lead to faster recession due to a pandemic. Modern public health technology, quarantine conditions, etc. are far better now than they were during the Spanish flu pandemic.
However, a questionnaire survey carried out by Bartik et al. (2020) with American small businesses shows that if the results are extrapolated, the damage caused by the COVID-19 pandemic to the economy is far greater than the effects of the Spanish flu pandemic.
Eichenbaum et al. (2020), in a study of the United States, included individual behavior, adequacy of health facilities, government control of the epidemic, expectations for vaccines and specific medicines, and other factors in the extended SIR model. Considering that channels of pandemic spread consist mainly of contact between people at places of consumption, contact at work, and contact during social activities, and considering that the rate of spread of the pandemic will be affected by the scale of infected populations, it is necessary to implement controls for different spread scenarios and different groups at different stages of pandemic development. According to a simulation of the ideal scenario, in the case of accurate implementation of optimal control measures, peak infection rate of COVID-19 will be 0.9 percent of the total population, mortality rate will be 0.2 percent of the total population, and consumption will decrease by 16.8 percent in the first year after pandemic outbreak. If controls are not implemented, although consumption will only decrease by 7 percent at competitive balance, the peak infection rate and the mortality rate will be up to 4.7 percent and 0.4 percent, respectively. Thus, planning how to save more lives and simultaneously stabilize consumption and other economic activities is a challenge for policymakers.
With the wide spread of the COVID-19 pandemic, personnel-intensive economic sectors have been suffering from the shock of emergency shutdown, and most monetary authorities of developed economies rapidly started implementing monetary policy instruments similar to those used to cope with the 2008â2009 global financial crisis.
Using a âKeynesian supply shockâ model, Guerrieri et al. (2020) pointed out that a negative impact on the supply side might lead to an excessive reaction on the demand side. Loss of output and unemployment caused by lack of demand will be far greater than the loss of output and employment caused by the shock to the supply side itselfâthe economic impact brought by COVID-19 in terms of business, employee turnover, and exit of enterprises has such features. Therefore, Guerrieri thought that conventional fiscal policy does not work as well as easy monetary policy and that the optimal strategy is to close the personnel-intensive sector and provide a large payment guarantee to the affected workers.
Faria-e-Castro (2020) thought that the economic shock brought about by the COVID-19 pandemic would be especially negative, leading to a 20 percent unemployment rate in the United States, and that residents who rely on labor income and bank credit would be affected most severely. Considering the externality of aggregate demand, a sudden shutdown of the personnel-intensive service sector would inevitably transfer the decline in economic activity to the non-service sector and financial sector under the action of general equilibrium logic; increased unemployment would lead to a wave of defaults; and damage to the financial system would aggravate the recession. He simulated the effect of fiscal policies in the US non-service sector based on a nonlinear dynamic random general equilibrium model that included increased government purchase, reduced income tax, increased unemployment insurance, implementation of unconditional transfer payments, and wage payments to service enterprise workers by the government. Faria-e-Castro thought that for residential borrowers experiencing the biggest impact on income, increasing unemployment insurance is the most effective instrument, although savers prefer unconditional transfer payments; if the aim is to stabilize employment in the affected sector, then a financial solution that helps increase also works.