An Economist’s Guide to Lockdown

There is lock down and then there is locking down the economy and the two are not the same! This is my attempt to explain the connections between the two.

Lockdown is an extreme form of social distancing – everyone stays at home and therefore is automatically not proximal to the others. The corollary is that by successfully doing so you bring the whole country and therefore the economy to a halt! The goal of this exercise as epidemiologists and other medical professionals will explain is to “flatten the curve.” And this in some ways is the first thing to notice: the name is really about flattening the curve and not eliminating the curve.

To start with – what does this curve measure? It measure how quickly the infection is spreading through the population over time by telling us the number of cases that occur as time moves forward. The goal of flattening (as shown by the grey curve) then is to slow down the rate at which the infection is spreading – reduce the number of people that are getting the infection concurrently. The second thing to note is that the area under the integral or the total shaded area under the two curves could very well be the same; flattening just changes the shape of the curve. Flattening slows down the spread of the infection – it takes more time for the same number of people to get infected. The third fact worth noting is that by slowing down the spread of the infection, we are slowing down the death rate as well, but not getting rid of it – that only a vaccine can do! However, as we shall see under lockdown economics – the outcome of an extreme flattening measure is not obvious, death rates under flattening can be higher, and even the spread of the disease may not be slower.

Peak-load management

A lockdown is essentially an attempt at managing peak load – those of you who have worked in certain industries like power generation should be very familiar with the concept of peak load. The demand for electricity for instance is highest during the day time on weekdays. Everybody is at work and the economy is moving along at full steam. If there would be a 21 day power cut at this time to reduce a side effect – say pollution, it would result in utter pandemonium. In fact, there is a simple way to deal with this issue – it is called peak load pricing – electricity usage is priced higher at the time of peak demand. Unfortunately, we cannot use peak load pricing to deal with a pandemic though private hospitals routinely do that for other things and might also try in this instance if a medical emergency arises. So in some ways flattening the curve is the equivalent of peak load pricing, except that we are using a non-price mechanism to solve the problem. We are trying manage the peak load by reducing the demand for pandemic generated medical care.

How does it help?

(1) The facilitating flattening, the lockdown prevents the medical system which is not equipped to handle a large concurrent outbreak from being overburdened. This is important because once it gets into the hospital system, then there is no difference between the place of cure and those with the skills to cure and the infected. This situation will quickly spin out of control in terms of infections and casualties. Moreover, people already need medical care on a regular basis. It is not like other diseases will go on a holiday to give us a break. Cancer patients, cardiac patients and those with complicated pregnancies will still need to be treated. An overburdened medical system will then have to make choices about where to utilize its scarce resources.

(2) By slowing down the spread, the lockdown gives people time to develop immunity and find a cure. This rather obvious – given time we can fix a problem and we can buy time by flattening the curve.

So it is important to do everything to flatten the curve – because (1) might make the curve steeper than it needs to be and increase the area under the curve, while (2) might actually reduce the area under the curve.

Ceteris paribus

The key thing to keep in mind here is that all of this is true about a lockdown from the epidemiology perspective, that is under ceteris paribus or when everything else is help constant. However once you relax this assumption by allowing for heterogeneity, that is people differ from each other in different dimensions, the results or the outcomes mentioned earlier need not hold. So if we apply the policy of “locking down the economy” to all income groups, there will be differential impacts. This will be the case for different ages and professions as well.

To illustrate my point let me start by examining income differences. Middle class India is probably sitting comfortably at home, following all the Covid-19 news with nothing to fear but their fear itself. The lockdown will not bother them till they start to run out of their food stock or till people start getting laid off due to the long period of economic inactivity. Three weeks is not really cause for concern and in fact they will fully support it hoping that after three weeks we will be able to go back to our old ways. They might miss their essential service providers like domestic help, the barber and the gardener and so on.

The super-rich ensconced in their lofty towers like the Lady of Shallott have nothing to fear either – they are well stocked and probably even have their essential services with them. Their only fear might be the tumbling stock markets and their possible personal vulnerability.

However, the lockdown means dire straits for India’s large informal sector. The end of all interaction and economic activity implies that these people have lost their livelihoods. The whole chain of informal credit based transactions has broken down and will also grind to a stop once the initial inventory in stores is gone. Migrant workers have lost the ability to send money back home. Already pictures of the long lines of workers trudging back home is reminiscent of partition-era movements. In fact, it is not clear how long those working in the informal sector will be able to follow the lockdown directives unless other social safety net measures are put in place all over the country. Similarly, farmers will probably not wait to harvest the wheat crop that is ready for harvesting, and if this requires multiple people then so be it! I understand that this was already in progress in several places.

All of these will have direct and indirect effects. The direct effect is the hunger and deprivation that the informal sector and its dependents will have to put with. Some of them might succumb to hunger before they succumb to the microbe. Indirectly, it will put an already vulnerable population at a much higher risk of infection from Covid-19 and other diseases because of its lower levels of nutrition, health and sanitation. Indirectly, it will also make it difficult for people to follow the rules as time goes by and the economic situation becomes more vulnerable. All this will then put a greater strain on the health care system, and not necessarily because of the corona virus. And I have not even touched on the issue of mental health.

Now let us examine the effect of the lockdown by profession. I am sure the chaiwallah and the rickshawallah are probably dying to get back to work – they do not really care about flattening the curve. Some I am told have even argued that it is not like our lives are so much better without the lockdown – so going back to work is not such a bad option. There is a large segment however, that is able to work from home and therefore would like this situation to continue till the curve really flattens. No profession really wants it to go on forever – it is just a matter of perspective. The chaiwallah is affected immediately, but the IT geek will definitely become a victim if the lockdown persists for six months. Therefore the incentive to support and follow through with the requirements of the lockdown varies by profession since the outcomes are quite different for each profession.

The elderly feel frail and would like the lockdown to continue so that the curve is flattened. The young are full of life, feel themselves to be invincible and would like this shutdown where they are closeted with the parents to end immediately. My ten year old has even written a letter arguing for a longer school day when school reopens! Once again, flattening the curve will work differently for each of these age groups.

Therefore in the final analysis, while it is clear that the lockdown will slow the spread of the virus and will be beneficial to some segments of the society, it is not clear that other sections will not be harmed – especially if it continues. I for one do not yet see the light at the end of the tunnel.

Sudipta Sarangi is a Professor of Economics at Virginia Tech

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Sudipta Sarangi Written by:

Sudipta Sarangi is a Professor of Economics at Virginia Tech, USA

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