The Temporary Tradeoff Between Health Outcomes and Economic Outcomes

March 24, 2020 by Dan Mitchell @ International Liberty

In the past couple of weeks, we’ve discussed a bunch of coronavirus-related issues, ranging from big-picture topics such as the proper role of government and the catastrophic downsides of excessive bureaucracy to more-focused topics such as how gun control puts families at risk, why laws against “price gouging” are misguided, and how government-encouraged debt makes the economy more vulnerable.

The crisis even led me to unveil a new theorem. And I also shared some amusing cartoons in hopes of lightening the mood.

The latest chapter in the coronavirus saga is that people are beginning to question how much economic damage we should be willing to accept in order to get the disease under control.

 

Public health experts argue that isolation and lockdown are critical if we we to “flatten the curve” so that new cases don’t overwhelm the ability of the system to treat patients (thus resulting in unpalatable forms of triage, with older and sicker patients set aside to die so that limited resources can be utilized to save others).

But if the economy is put on hold for several months, the economic damage will be catastrophic. At some point, policy makers won’t have any choice but to relax restrictions on people and businesses.
So how do we assess the costs and benefits of various options?

Eline van den Broek-Altenburg and Adam Atherly, both from the College of Medicine at the University of Vermont, explain the necessary tradeoffs.

While a growing number of people are starting to understand the message of the intuitive picture of “Flattening The Curve”, some health economists are starting to wonder how flat the curve should actually be for the benefits to exceed the costs. …how does the economic cost of the flattening fit into the discussion? …we use publicly available data to calculate the cost effectiveness of the flattening the curve. …When considering the value of a healthcare intervention to inform decision-making, benefits are usually measured in terms of life years gained, with the life years adjusted for the “quality” of the life (using standard formulas) to create a “Quality Adjusted Life Year” or QALY. …interventions in younger populations will typically yield more QALYs than interventions in older populations: because younger people have longer life expectancy. …Heath systems then compare the QALYs gained to the cost and calculate a cost per QALY gained. In the United States, interventions that cost less than $100,000 per QALY gained are often considered “cost effective,” although the precise number is somewhat controversial.

What you just read is the theoretical framework.

The authors then apply the model to the current situation.

…is the current “stay at home” and social isolation-policy, with school closed and businesses shuttered, cost effective using the standard health economics framework? …The years of life-gains are relatively straightforward. …statistics on the people who died of COVID19 in China and Italy are the best source of currently available data. …The average 80-year old in the United States has a life expectancy of about 9 years, suggesting that on average, a death averted will “buy” 9 extra years of life. …If we use diabetes as a reasonable proxy for the many chronic diseases, we would adjust the 9 years down to 7.8 years or QALYs. In other words: the average loss per person of quality-adjusted life years is 7.8. …This implies the pandemic, if unchecked, will lead to a loss of between 1.56 million and 13.26 million QALYs. …What, then, is the cost of the intervention of social distancing? One easy estimate would be to use the cost of the current stimulus bill before congress — 1 trillion dollars. This is likely an underestimate of the true cost, but is a reasonable starting place. …the cost per QALY gained from the current approach to be somewhere between approximately $75,000 and $650,000.

So what’s the bottom line?

Here’s a graphic they prepared.


And here’s their explanation.

…the key variable is the expected number of deaths. A pandemic that is likely to lead to 1.7 million deaths can justify the enormous public costs. However, if the pandemic is in the lower end of the predicted range, then the public funds would have been more valuable if spent elsewhere. …Some claim it is impossible or even unethical in times of a crisis, to think about cost when lives are involved. But in a world of finite resources, it’s necessary to make choices. Why not use a framework that has been defended by governments and scientists for decades?

Richard Rahn, former Chief Economist for the U.S. Chamber of Commerce, is very explicit about the downsides of an economic shutdown for future generations.

Some government officials, politicians and commentators keep saying words to the effect, “we need to spend whatever it takes to stop the coronavirus deaths.” They, of course, do not literally mean the government should spend an infinite amount of money to save a life — because, if they did, we would not let people drive more than five miles an hour in order to save more than 35,000 Americans who die on the roadways each year. …What is missing in this discussion is what American taxpayers and workers in terms of job losses should spend to save each life… Such calculations are necessary for insurance companies to price their products correctly, and for all of those government agencies involved in health and safety to determine both the proper form and degree of regulation. …If we learn that a 35-year-old MD has unexpectedly passed away, we are likely to feel far worse about the tragedy than if we hear her 90-year-old grandfather has died.

That’s Richard’s conceptual framework.
Here are his calculations.

Let’s assume that the low-cost measures will result in 50,000 more deaths (which is almost certainly on the very high-side given the experience of other countries). If we value the average death at…$2,000,000 figure… (which is high, because of the advanced age of most of the coronavirus victims), then policies that cost taxpayers, and the hit to GDP, more than $100 billion are counterproductive. Even if you assume that my figures are off by a magnitude of three, the mitigation policies should not cost more than $300 billion — not trillions.

Jeffrey Polet, a political scientist at Hope College, also explores the adverse consequences of an economic lockdown.

A panicking public will produce bad consequences, and we are already seeing its destructive effects on our economy. …While the elderly and infirm are the most vulnerable populations, small businesses, low wage laborers, and less healthy social institutions are the most likely to succumb to the economic consequences of the reaction to the virus. …The result will be, as we already see, a call for more government programs to aid those made destitute by the government’s reactions. …collective overreacting has profound social, economic, and political effects. …Good leadership neither overreacts nor under-reacts but reacts sensibly. …Calling something a “pandemic” excites public fear, even if the majority of the population is unlikely to be either directly or indirectly harmed. …For many people in this country, the prospect of losing their business or their job is far more frightening and harmful than the prospect of getting infected with the virus. An already insolvent government is hardly in a position to get this economy up and running, particularly if its policies create massive economic dislocations. …One of the appeals of utilitarianism is that it actually provides a functioning calculus, however imperfect in implementation.

I’ll close with the observation that I want to err on the side of public health in the short run, though I confess I’m not even sure what that means in terms of public policy since we not only need to agree on how much a life is worth (an unpleasant number to consider), but also get a handle on how many lives might be at risk (a very speculative number).

The goal of today’s column is simply to point out that the tradeoffs are real and to applaud the people who have the honesty to write about the issue.

In the long run, we should all appreciate the overlooked point that there is no tradeoff between health outcomes and economic outcomes.

That’s because wealthier societies are healthier societies. Here are a couple of chart from an article I wrote for the Journal of Regulation and Social Costs way back in 1992.

I’ve written about this correlation many times, both as a general concept, and also when addressing specific topics such as the adverse impact of President Obama’s anti-growth policies (and I cited one of Obama’s top economic appointees, Cass Sunstein, who explicitly agrees about the link between health and wealth).

P.S. There’s a very amusing Remy video about health-and-wealth tradeoffs at the end of this column.