key: cord-0799235-batd6ko9
authors: Skinner, Jonathan
title: Comment on “Is there a Trade‐off between Covid‐19 Control and Economic Activity? Implications from the Phillips Curve Debate”
date: 2021-08-20
journal: Asian Economic Policy Review
DOI: 10.1111/aepr.12365
sha: 3fd0dedd03b92c4d002902ac5c584d403d7c817a
doc_id: 799235
cord_uid: batd6ko9

nan

The Covid-19 pandemic has transformed the economic landscape around the world. Countries and local governments have addressed the pandemic in different ways, but the one common tension has been the goal of reducing infections and serious illness or deaths at a minimal cost to economic activity. Quantifying the trade-offs is therefore a critical task for any policies designed to address both short-term and long-term effects of the pandemic. Fukao and Shioji (2022) has risen to the challenge of seeking to estimate these trade-offs by developing a model of infection, recovery, and quarantine to capture the dynamics of disease progression and economic activity. Their innovation is the identification of a short-term trade-off between economic activity and infection rates resembling a classic Phillips curve; by relaxing constraints on economic activity, it is possible to achieve in the short term both relatively low unemployment and low infection rates. But as their "pandemic Taylor rule" suggests, this short-term tradeoff is unlikely to be stable in the longer-term as infection rates rise. The model is calibrated to the daily patterns of infections in Tokyo, New York, and London; the authors find, like the original Phillips curve, that this modified Taylor rule tends to break down.

To maintain simplicity in the model, Fukao and Shioji assume a "reduced form" model in which lower economic activity (Y/Y*) moderates the rate of infection; this includes both government rules and regulations, and individual risk-avoidance behavior. In my comments, I briefly sketch out a model of this risk-avoidance behavior; let (π) represent the risk of becoming severely infected with long-term adverse effects or death. For aggregate supply, the effective (or implicit) wage rate is given by w * ¼ w À f π ð Þ where the implicit wage rate w * is less than the nominal wage because of the perceived utility risk of going to work (as reflected in the function f ). For aggregate demand, the pandemic and the lockdowns increase the implicit price of consuming many goods, such as for restaurant meals or any activity that involves going into the community; in this case the implicit price exceeds the posted price by the disutility of risking one's life to consume the good (g(π)). In addition, the government lockdown policies may simply close down the activity, leading to a shadow tax υ, in which case the implicit price of obtaining the restaurant meal and risking punishment would be considerably higher than the price p received by the firm p * ¼ p þ g π ð Þþυ: Thus, we would expect to see a higher mortality risk π shift both the demand curve and the supply curve to the left, with an unambiguous reduction in output (as captured by the Fukao and Shioji model) but with ambiguous effects on prices.

One might still ask whether government lockdowns and restrictions, or endogenous responses of consumers and workers to infection risk, have had the greatest impact on economic activity? The experience of Scandinavia during 2020 offers an interesting natural experiment. Sweden largely eschewed any restrictions such as closing down indoor activity, while other Scandinavian countries -Finland, Denmark, and Norwayfollowed conventional protocol and imposed significant restrictions. Largely as a consequence, Sweden experienced far higher mortality; in Sweden, 13,000 people died (as of early 2021); while in Norway, about half the size of Sweden, just 700 died (Pickett, 2021 ).

Yet as Sheridan et al. (2020) observed, individual responses to the Covid-19 pandemic in Sweden were comparable to those in nearby countries; the economic slowdown in Sweden (a gross domestic product [GDP] decline in 2020 of 3.1%) slightly exceeded the declines in Finland (2.8%), Denmark (2.7%), and Norway (2.5%) (Ummelas & Rolander, 2021) . These findings highlight the importance of endogenous responses to infection risk; despite the Swedish government laissez-faire approach to infection control, GDP still declined in Sweden by more than in countries with more active policy responses.

It is clear that we are now beginning to make sense of the interaction between infection rates and economic activity across countries and regions, and it is fair to say that many of the findings are puzzling and require further research. Regardless of the further development of models integrating both pandemic and macroeconomic characteristics, Fukao and Shioji (2022) have identified and laid the groundwork for a new Phillips curve approach to thinking about how governments can best respond to the risk of this and future pandemics with minimal loss of life and economic activity.

Is there a trade-off between COVID-19 control and economic activity? Implications from the Phillips curve debate

Sweden's pandemic experiment. The New Yorker

Social distancing laws cause only small losses of economic activity during the COVID-19 pandemic in Scandinavia

Nordic nations make noticeable headway in Covid recovery