The false choice between Lockdowns and the Economy

Countries without lockdowns are in a state of economic free fall too

Graphic courtesy by Wall Street Journal

By guest author Mike Bird from Wall Street Journal

As many Western nations begin their second month under some form of lockdown, many are publicly debating the bleak, utilitarian question of whether such strict measures cause more economic damage than their public-health benefits merit.

But it is clear from international business surveys released over the past week that this is actually something of a false choice: Even major countries without significant lockdowns are experiencing their worst economic conditions since the 2008-09 financial crisis.

Until the past week or so, which came after the survey ended, Japan was the large, advanced economy least affected by the coronavirus outbreak. Even so, its services sector, less exposed to overseas demand than manufacturers, was absolutely hammered in March. Japan’s service sector purchasing managers index recorded a sharper slowdown than even during the 2011 earthquake and tsunami.

Caption courtesy by Wall Street Journal

Schools are closed in Japan but there are no travel restrictions in place. The government has called on people to work from home and not visit bars and nightclubs, but not compelled adherence with threats of fines or imprisonment as in some other jurisdictions.

But even without a strict lockdown, the disruption to economic activity is hard to understate: major events have beencanceled, consumption delayed, and existing business plans severely disrupted even by voluntary efforts to avoid contracting the virus.

Singapore, where the public health response to the coronavirus was initially hailed as a model, has been hit hard too. The country’s overall PMI reading fell to 33.3 in March, the lowest in its eight-year history.

Of course, Singapore, Japan and the U.S. are very different economies and started off in very different positions. Japanese consumption is less robust, and gets hit hard by economic shocks. Singapore’s export-focused economy means it is far more affected by conditions overseas.

But the fact that a variety of economies with a variety of outbreaks and a variety of policies to counteract them are all experiencing extremely sharp downturns casts some doubt on the argument that the economic cost of severe shutdowns outweighs their public-health benefits.

Not locking down may have negative economic consequences too. A paper published by Federal Reserve and Massachusetts Institute of Technology economists at the end of March illustrates that during the 1918 flu pandemic in the U.S., cities with stricter lockdowns actually seemed to emerge with less-severe economic consequences.

That’s in part because lockdowns solve coordination problems: The alternative to an enforced lockdown could be millions of people independently trying to prevent themselves becoming infected by restricting their social contact and economic activity for far longer periods. The analogy of the 1918 pandemic to today’s events is imperfect, but it’s worth at least considering whether lifting lockdowns too soon might have worse, not better economic outcomes.

It is clear that no major economy is working in anything like an ordinary manner right now, regardless of its structure or the size of the local outbreak. The debate about when and how to lift the strictest lockdown measures will continue, but the idea that the trade off is between that and economic normalcy has very little foundation.