A big question that will unfold over the next six months is whether the Ebola outbreak in West Africa will remain a localized medical and economic problem or become a global pandemic.
The experts at the CDC and WHO discount the latter possibility, yet it seems to lurk in the back of the minds of many laypeople. I’ll defer to the experts, but let’s take the opportunity to think about the economics of severe epidemics.
These are classic examples of what economists call an “exogenous shock” — an event or development coming from outside of the system itself that has great effects on an economy. Wars, natural disasters, new technology, demographic events like the baby boom and pandemics all can be exogenous shocks. Indeed, one group of economists believes that such shocks are the primary factor driving the pattern of booms and busts we call the “business cycle.” Edward Prescott, a Nobelist long at the University of Minnesota is a key leader of this group.
Just how does an epidemic affect an economy?
Intuitively, one would think the primary mechanism would be that deaths would reduce the number of people available to work and thus output. Deaths also would reduce the number of consumers, thus cutting demand for goods and services. Which of the two — workers or consumers — declined more would depend on whether the disease in question struck harder at people who were young, old or of prime working age.
Such effects on workers predominated in the most famous epidemic of all time, the Black Death that ravaged Europe and western Asia beginning about 1346. Estimates are that about 40 percent of the population died. Agriculture predominated, and much land reverted from crops to pasture or woodland. With a smaller labor force relative to land and capital, wages rose while land rents fell. Landlords and employers sought, and often got, laws prohibiting wage increases or cuts in customary rent levels. This abuse of political power to increase one’s wealth is an early example of what economists call “rent seeking.” Historians are divided on how effective such laws were in practice. But in any case, the Black Death had enormous effects on the existing economy.
Such effects on a labor force don’t always occur, however — at least not to a measurable extent. The worst pandemic in modern history was the Asian flu of 1918-1920. Among 50 million to 100 million others, it killed my father’s mother. Death estimates vary, with 800,000 often cited for the United States, which had a population of 103 million at the time. And unlike most influenza epidemics, this one struck particularly hard at young adults rather than the old or children.
The death of many young adults must have had an effect on employment and national output, but such declines were offset by surges from full participation in World War I. Combined with military deaths, the epidemic resulted in a total population reduction at the end of 1918 of 60,000 from the year before. This contrasted with annual increases of 1.5 million in the years before.
But this decline in total population was a one-year blip. And the labor force continued to grow apace.
The death of so many people, equivalent to 2.5 million today, many of whom were entering their most productive years, undoubtedly had harsh effects on many households on a micro level. But at the macro level of the nation, any such effects were swallowed up by a broader growth wave in population and output.
That was not necessarily true everywhere. In many parts of the world, government was too primitive to keep good vital statistics, so there are no reliable death numbers.
That is why the wide range of “50 to 100 million” is often cited as the global death toll. There is much evidence that the epidemic was harshest in Central Asia, including what we now know as Uzbekistan and Kazakhstan.
Enormous fractions of the population died, with economic effects similar to that of the Black Death. But few records were kept, and there was no measurement of employment or output.
In most epidemics, disruption of commerce due to government- or self-imposed quarantines, absenteeism from work, reduced shopping for nonessentials and reluctance to transport goods to other cities usually causes a greater reduction in output than illness and death itself.
This is evident in Liberia’s three-day shutdown last week. An economy can catch up from brief pauses, but as such shutdowns, voluntary or mandatory, extend in time, the economic damage rapidly becomes more severe.
Epidemics are classic cases of where a fiscal “stitch in time can save nine.” Ebola has a high death rate but is not transmitted nearly as easily as airborne pathogens like flu. Countries that practice traditional public health measures, like early identification and segregation of cases paired with aggressive contact tracing, have the best chance of limiting the spread.
Nigeria has done well so far. But the human and financial resources needed grow exponentially if the outbreak is allowed to take off.
There has been much grousing about the Obama administration’s decision to send 3,000 troops to build hospitals in West Africa, but the eventual budgetary expense and exposure of U.S. citizens to the disease will be far greater if the epidemic breaks out of that region.
So will disruption of the world economy. The three most affected countries are not particularly key to the global economy.
The wider the disease spreads, the greater the confounding of world trade and output in economically more important nations.
The worst-case scenarios presented in popular books like “The Hot Zone” lead some to believe that we face an apocalyptic situation.
We are not yet at such a point and probably were much closer to danger with SARS or H5N1 flu outbreaks a few years ago. Those were far more transmissible, yet were stopped with good public health responses.
However, history suggests that over long periods of time, just as the Mississippi or Yangtze Rivers eventually will have major course changes and volcanos like Mount Rainier or Mount Vesuvius will erupt again, so too will humanity face a major pandemic. That may be a century from now and it may be next year.
When any of these things do occur, expect the exogenous shock to the economy to be severe.