Saturday November 28, 2020

Comment: Greatest risk to the economy is failing to eliminate Covid-19

The virus debilitates business more than restrictions — if there is even the slightest possibility that it can be extinguished then we must explore the idea in full and without delay

24th October, 2020
Grafton Street this week under level 5 restrictions: there is no guarantee shoppers will return in sufficient numbers when businesses reopen unless they feel safe. Picture: Leah Farrell/RollingNews.ie

In the language of economics, there is a colloquial distinction between risk and uncertainty. Economists use the word ‘risk’ to describe scenarios in which the factors at play can be identified and measured. Betting on a role of the dice is a risk problem, as all potential outcomes are neatly defined. We may not know how the dice will land, but we do know how they could land, and that makes it easier to play the game.

The environment becomes ‘uncertain’ when the outcomes are not so clearly defined, or when they are determined by forces that we cannot observe. We can feel their effects, but we struggle to anticipate their movements, or identify their source. This uncertainty – a fundamental unknowability – clouds our vision and frustrates our decision-making. Games of risk can be exciting, but uncertainty is stressful as it puts us in a fundamentally vulnerable position: how can we protect ourselves from things we barely understand?

These feelings of vulnerability and fear have become endemic in Irish society, as have the self-questioning and doubt that naturally follow. Everyday decisions, like where to shop or whether to take the bus, take on a new significance. Our quotidian concerns about wages and debts become nagging fears about our way of life. We worry that friends or family could catch the disease, or worse: that we might be the ones to give it to them. Yet we still dread the restrictions that would take them away from us.

Fear and doubt are a heavy burden for individuals, as they are for society as a whole. When too many of us are too scared to leave our homes, to take public transport, to go into a shop, or to meet friends for coffee, commercial activity stalls and the economy seizes up.

These micro decisions have found their way into the economic aggregates. In its latest World Economic Outlook, the IMF estimated that about half of the total contraction in economic activity experienced during the lockdown period was due to ‘voluntary social distancing’. The report also suggested that loosening restrictions had a weaker effect on activity than tightening, and that the effect was weaker still when the perceived health risk was higher.

In other words, you can lock people down, but you can’t force them out again.

As long as the virus is a threat, many would sooner withdraw from society, rather than run the risk of infection. Their caution is driven by an innate desire for self-preservation, and that primal instinct will prevail over any government policy. Yes, lockdowns are bad for the economy, but they only tell half the story.

I think this point has been lost on those who frame the issue as a trade-off between public health and the economy. They argue that the risk to the public health has been overstated and therefore that more economic activity can be allowed. There is some truth to their argument, but I question whether their policy would be effective in the long run. Looser restrictions might lead to a temporary economic bounce, but what happens as the virus continues to spread, and infections rise?

If the IMF are right, a sudden loosening of restrictions would lead to a sharp increase in voluntary social distancing. If the outbreak was serious enough, huge swathes of the population could be scared into self-isolation. For an already weakened and lop-sided economy, this could be a knock-out blow. Far from liberating our society, this approach might condemn us to an even deeper decline in living standards.

We should address the effects that public health policies have on both the economy and our society, but our analysis must recognise that the health of the economy is inextricably linked to the spread of the virus. We cannot solve our economic problems until we eliminate the uncertainty in our lives, so any attempts to ‘balance’ health restrictions against economic concerns are self-defeating and bound to fail – on both accounts.

And besides, the risk to our economy is not the next few months of revenue. It would take more than a good quarter to provide financial security to businesses and households in such a volatile environment. Unfortunately, the real threat is much more serious. The economy can muddle through on lower incomes in the short run, but it cannot survive a wave of defaults that takes out viable businesses and threatens our financial system. Yet with every passing day, the likelihood of that outcome increases.

Irish society is paralysed. We can’t plan for the future, yet we can’t live in peace in the present. Uncertainty keeps us trapped in a mindset of fear and doubt. The source of the uncertainty is the virus. When transmission stops, the uncertainty stops. When the uncertainty stops, we can start planning, and investing, and living again.

If there is even the slightest possibility that we can eliminate the virus, we must explore the idea in full and without delay. We wasted time in February and in March because we underestimated both the scale of the risk, and the need to act quickly and decisively. It cost us dearly. Let’s not make the same mistake again.

Dermot Dorgan is an investment risk analyst, and a member of the Independent Scientific Advocacy Group (ISAG)

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