The Economics of Pandemics

How pandemics damage economies through illness, fear and lockdowns, what history shows, and why infection is an economic externality.

Pandemics are among the most economically destructive disasters. They can strike every country at once, disrupting work, trade and travel worldwide.

Lessons from history

The 1918 influenza pandemic killed tens of millions of people worldwide. Research by Robert Barro and co-authors estimated that it reduced GDP per person in a typical country by around 6 percent. Earlier pandemics, like the Black Death in the fourteenth century, killed such a large share of Europe’s population that they reshaped economies for generations, including raising wages for surviving workers because labour became scarce.

COVID-19

The COVID-19 pandemic caused the sharpest global economic contraction since the Great Depression. The International Monetary Fund estimated that the world economy shrank by around 3 percent in 2020. Hundreds of millions of jobs were lost or reduced, and the World Bank estimated that the pandemic pushed tens of millions of people into extreme poverty.

Channels of damage

Illness and death reduce the number of people able to work.
Fear: people avoid shops, restaurants and travel voluntarily, even without rules.
Lockdowns and restrictions close businesses and schools.
Supply disruptions as factories and ports shut down.
Lost schooling, which can reduce children’s future earnings.

Infection as an externality

Economists describe infection as an externality. When a person goes out while infectious, they risk passing the disease to others, a cost they do not bear themselves. People therefore take fewer precautions than would be best for society. This is one economic reason for public health measures like vaccination campaigns and testing.

Did lockdowns or fear cause the slowdown?

Research by Austan Goolsbee and Chad Syverson compared neighbouring areas in the United States with and without lockdown orders early in the pandemic. They found that consumer visits to businesses fell sharply in both, and that most of the decline was due to people's own choices to avoid infection rather than legal restrictions. Fear of the virus itself was a major economic force.

Thinking the choice is simply health versus the economy

Many people framed the pandemic as a trade-off between saving lives and saving the economy. But uncontrolled disease also damages the economy, because sick and frightened people work and spend less. Controlling the virus was often a precondition for economic recovery.

Key takeaways

The 1918 flu reduced GDP per person in a typical country by about 6 percent.
The world economy shrank around 3 percent in 2020 due to COVID-19.
Pandemics harm economies through illness, fear, restrictions, supply disruptions and lost schooling.
Infection is an externality, which justifies public health measures.