Coronavirus: is the lockdown worth it?

The longer we are shut up in our homes, the greater the cost – including the cost in lives lost from other causes than Covid-19. At what point does the cure become worse than the disease?

What has happened?

In the wake of the coronavirus pandemic and lockdown, the UK economy appears to be heading for a recession far deeper than the one that followed the 2008 financial crisis – and a bigger contraction than analysts estimated just a couple of weeks ago. In 2009 the economy contracted by 4.2%. By contrast, with the economy grinding to a halt in the second quarter as shops shut and many businesses halted operations, four leading forecasters surveyed by the Financial Times now predict a contraction over the whole of 2020 of between 7% and 8%. That would make it the third-worst recession since 1900.

Won’t it depend on the exit strategy?

There are lots of caveats and unknowns in all the forecasts. With entire swathes of the economy shut down, “traditional forecasting methods become irrelevant”, warns Chiara Zangarelli, an economist at investment bank Nomura. But nevertheless there seems “little doubt” that second-quarter GDP contraction “will be off the scale”, as NatWest’s Michelle Girard puts it. There can be no doubt either that the longer the lockdown persists – and with scant sign of the UK developing plausible exit strategies – the debate over whether the lockdown is “worth it” will become louder.

Worth it in what sense?

Baldly: whether the economic damage wreaked by the lockdown is a price worth paying in terms of lives saved. How many bankrupt firms, or how many millions out of work, are acceptable? And if a lockdown fails to halt the pandemic, but merely contains it ready for a second wave, how long should the lockdown continue if it’s destroying the economy? It will strike some as uncomfortable, or even offensive, to pose such grim questions at the height of a pandemic. Many of this magazine’s readers and contributors have friends or relatives in hospital with Covid-19. The reality, however, is that trade-offs such as these are inevitable and calculating the “value” of a human life saved can be a helpful metric for economists and policymakers. 

What metrics do they use?

If we assigned an infinite value to each human life, spending any amount to protect it would make sense – leading quickly to governments going bankrupt. Instead, economists and policymakers use a metric known as the value of a statistical life (VSL) to assess the viability of different options. It is also common to calculate the value of a statistical life year (VSLY) by dividing the VSL by the remaining years of life expectancy for different ages groups being studied (with the effect of assigning a higher “value” to children, compared with the elderly, for example). The Department for Transport will fund a new road junction if it estimates a projected cost of less than £1.3m for each future life saved, for example. 

What about healthcare?

Although we generally prefer not to talk about it, similar calculations are normal in healthcare. The NHS, as a centralised tax-funded system that’s free at the point of use, can only function on the basis of rationing, since demand is in theory infinite. That rationing sometimes takes the form of queuing and it sometimes takes the form of decision-making based on another key metric, the “quality-adjusted life year” (Qaly) – a metric related to VSLY, but which attempts to take into account the quality of remaining life as well as the quantity. Currently, under guidelines laid down by the National Institute for Health and Care Excellence (a body created, in part, to make these economic choices more explicit than previously), the NHS will fund non-palliative treatment for the seriously ill only if the treatment needed to provide a further year of good-quality life does not exceed £30,000. And in the case of people with potentially terminal illnesses, who could not expect a good quality of life, that £30,000 limit would typically be cut to £15,000 a year.

How do these metrics relate to Covid-19?

Dominic Lawson in The Sunday Times asked an American health economist to do a rough calculation for him. Say the shutdown costs the UK 4% of GDP, whereas no lockdown would have cost about 230,000 extra Covid-19 deaths (a figure based on the Imperial College modelling used by the government). Lawson’s economist estimates that the people saved would need to live on average 15 years to meet the Qaly limit of £30,000 to “justify” the $104bn hit to the economy. Or, assuming the life-quality of the unwell over-seventies is half that of a younger, healthier person, they would need to live on average for another 30 years. The questions then arise: are these plausible scenarios and how many of those dying of Covid-19, most of whom have underlying health conditions, would have been expected to die soon anyway.

So what can we conclude?

Obviously the lockdown is not responsible for the whole economic hit: people would have begun to “socially distance” and cut spending of their own accord. But it is at least germane to ask what the best way of “spending” that $104bn (and most likely more) is in order to save most lives. A crashed economy will also have associated health costs, especially if government revenues are so badly affected that the state’s ability to provide decent healthcare is compromised. For now, of course, there are too many unknowns on which to make confident assertions. Any prediction is only as good as the assumptions it is based on and more than three months after the novel coronavirus emerged in China, the world’s scientists still don’t know how many people can infect others without suffering from symptoms themselves. For now we are all in the hands of the epidemiologists, but the longer this goes on the higher the costs and hence the more we can expect to hear about the dismal calculus of the economists.

Recommended

The coronavirus is scary – but it's irrelevant to your investments
Investment strategy

The coronavirus is scary – but it's irrelevant to your investments

The spread of the coronavirus is causing alarm around the world. And, while it could be a serious short-term threat to human health, it’s not somethin…
24 Jan 2020
Is London’s office market a bargain?
Property

Is London’s office market a bargain?

Private-equity groups are swooping on London’s property companies, which are trading on steep discounts to net asset value.
23 Oct 2020
Big spending government is here to stay – just ask Rishi Sunak
UK Economy

Big spending government is here to stay – just ask Rishi Sunak

Governments around the world are splashing huge amounts of cash as they do “whatever it takes” to prop up their economies. John Stepek looks at where …
23 Oct 2020
Why negative interest rates are a lousy idea
UK Economy

Why negative interest rates are a lousy idea

The Bank of England’s governor says negative interest rates can encourage investment rather than having cash stashed in the bank. But is that really t…
22 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020