The optimal way out of lockdown
As we enter the end of lockdown and a return to whatever normality will await us in the rest of 2020 and 2021, the major controversy is about how fast to lift lockdown restrictions. Many economists and business owners argue that we have to open the economy faster so people can get back to work. Meanwhile, epidemiologists argue that we have to keep the lockdown in place for longer to prevent another acceleration of the pandemic and a massive increase in fatalities in a second wave.
As far as I can tell, there is now the first joined effort by epidemiologists and economists to combine both viewpoints. Unfortunately, it was done in Germany and has only been published in German, so far (for those who do speak German, here is the study). Epidemiologists from the Helmholtz Institute for infectious diseases and economists from the ifo Institute have joint forces to assess the costs of different lockdown and re-opening scenarios.
In a first stage, they ran the epidemiological models for different reproduction numbers R. Under the strict lockdown in place in Germany, R dropped to 0.627 at the end of April, which is what they used as their base case. In the UK and the US, the reproduction number is higher than this because lockdowns were not as strict and/or introduced later. In the UK the reproduction number is currently estimated to be between 0.75 and 1. The goal of the epidemiological model was to calculate the required time in lockdown to get the number of new infections per day down to 300 – a number that was chosen because it could be handled by German health departments to trace and isolate all the contacts a newly infected patient had in the previous days. It also is a number of new infections that roughly equals the number of new infections during a flu season in Germany.
In this first stage, the results are simple. Stricter lockdowns reduce R more and thus need to be kept in place for shorter time periods, while more relaxed lockdown rules keep R higher and thus need to stay in place for longer to get the pandemic under control.
And this is where the economists take over. If the lockdown is stricter, the damage to the economy is bigger and the recovery will take longer because many more people will have lost their jobs and thus not be able to return to their old spending habits after the lockdown. On the other hand, if the lockdown rules are more relaxed, the damage to the economy on any given day is lower, but it lasts longer and thus the total damage to the economy might be bigger in the end.
The chart below shows that there is indeed an optimal lockdown intensity that minimises economic losses. And it is somewhere around a reproduction number of 0.75. In Germany, the economic damage, in this case, is expected to be around 8% of GDP in 2020 and 1.3% of GDP in 2021 (vs. a baseline scenario of Germany growing at trend growth). If the lockdown is too strict, the damage to the economy in 2020 quickly becomes so large that even the shorter lockdown period cannot compensate for it. If the lockdown is more relaxed and R climbs towards 1 the damage in late 2020 and 2021 is much bigger than under the current lockdown simply because restrictions to public life have to remain in place much longer.
Economic damage for different lockdown intensities
Source: Dorn et al. (2020).
The economists also calculate how big the boost to GDP growth would be if the lockdown was lifted more quickly (and hence R allowed to rise towards 1 quickly) and compared it to the expected loss in GDP growth from longer-term restrictions on public life (or a second lockdown in reaction to a second wave). The chart below shows that for a phased transition out of lockdown where R is kept between 0.6 and 0.9, the economic benefits in terms of additional growth surpass the needed extra growth that would lead to the same economic damage as the current situation. However, if the reproduction rate climbs towards 1 (i.e. when lockdown restrictions are loosened too quickly) the added growth is nowhere near as high as the extra costs form a second wave or longer-term restrictions to public life.
The economic boost from easing the lockdown vs. the economic costs of looser restrictions
Source: Dorn et al. (2020).
In summary, when it comes to easing the lockdown, economists and epidemiologists come to a similar conclusion: Don’t open up the economy too fast. A gradual easing of restrictions and continuous monitoring of the reproduction number R as it is done now in Germany and in the UK is exactly the right way forward.