Longer-run economic consequences of pandemics

How do major pandemics affect economic activity in the medium to longer term? Is it consistent with what economic theory prescribes? Since these are rare events, historical evidence over many centuries is required. We study rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemics where more than 100,000 people died. In addition, we include major armed conflicts resulting in a similarly large death toll. Significant macroeconomic after-effects of the pandemics persist for about 40 years, with real rates of return substantially depressed. In contrast, we find that wars have no such effect, indeed the opposite. This is consistent with the destruction of capital that happens in wars, but not in pandemics. Using more sparse data, we find real wages somewhat elevated following pandemics. The findings are consistent with pandemics inducing labor scarcity and/or a shift to greater
precautionary savings.

That is a new paper by Òscar Jordà, Sanjay R. Singh, and Alan M. Taylor.  And here is the tweet storm.  It should be noted, of course, that the Spanish flu did not give rise to a comparable economic stagnation.

Via Evan Soltas.


So you’re telling economic interdependence was a bad idea?

No, because without free trade we'd be living in economic Dark Ages.

Pandemics are to free trade like an externality is in economics. For example, Australian settlers brought rabbits to Australia which decimated the landscape (an externality). Does that mean it would have been better if Australians never landed foot in Australia? No, unless you ask the aboriginal peoples there. Australians raised that desolate continent to developed country status (and they haven't had a recession in over 20 years, I wonder if that will change now).

There's unfortunately no way we get out of this without a recession. we were doing so well for so long :(.

I'm reminded of Barbara Tuchman's _A Distant Mirror_ where she estimated that 1/3 of Europe's population died in the Black Death. Owners of land found their assets were worth a lot less; fewer people to till the fields. Owners of labor enjoyed upward pressure on wages.

So was the plague good for laborers? I guess you could claim yes based on the above description -- assuming you were one of the survivors. Not such a good deal if you were one of the 1/3 who died.

IOW beware of simplistic notions of the tradeoff between lives vs the economy. Losing lives also harms the economy -- and the rate of return on capital, according to that paper.

The two shocks examined are both bad. War and pandemics. But in one case their outcome variable, which is apparently something we care about, goes down and in the other case it goes up. Isn’t that proof the outcome variable is NOT something that’s measuring welfare, and if so, why do we care?

Doesn't this describe effects that are mainly to do with distribution (bad for holders of capital, good for wage earners) than actually measuring economic activity?

Presumably the wage effect depends on the disease killing a substantial number of active workers, which may not be the case for the current pandemic.


Right, it also needs to address the effect of pandemics and wars on stocks as well as flows. For example, if a war destroys 90% of your capital, the extra 1% annual return going forward isn't going to help much. Similarly, if someone lose a year of income because of this, earning 1% higher wages for the next 40 won't make that up.

Of course perhaps this pandemic will be extra bad for capital because capital owners are both losing stocks today and will also have lower expected returns in the future. It'll probably be bad for workers too because they'll lose income now and will also have lower future wages since there won't be a meaningful reduction in the working population, but there will be more fiscal burden and regulations that reduce growth going forward.

Helmhurst Hospital in Queens is overflowing with patients:

"Some have died inside the emergency room while waiting for a bed"


The United States of America is now the world leader in confirmed COVID-19 infections. We just leapfrogged over Italy and China for the top spot.


All Trumps' fault.

Trump Virus Authority says, "Obama's fault". That will win Trump re-election provided the virus has not wiped out Trump's base by November. Trump's approval already up and U.S. now with most infections worldwide. A classic "race condition" of approval and infections.

The Dems can nail Trump if and when he says 2 + 2 = 4. Then they can really object!

I look forward to Trump stating that he has a clear understanding of 2+4=4. My understanding is that many people have said he should've been a mathematician after they heard about his PhD-level talents.

mebbe one of these days david brooks.com and the newyorktimes.com
is gonna figure out thatthe president is under-rated

Mycroft, no argument there...Trump deserves all the credit for U.S. with most virus infections worldwide.

sociologists have never understood the difference between
correlation and causality

New York has the most Chinese-Americans and the most Italian-Americans so this is almost like the Italian-speaking Swiss being the most likely to get infected in Switzerland.

This fact undoubtedly explains why the leading per capita number of cases in the U.S. is New Orleans.

These arguments are premature. It's going to take a while for the effect of differing testing levels to balance out so we can see the full resolution of the problem.

Shouldn’t pandemics pre-industrial age economic impact be analyzed differently than post? And with any study like this isn’t there something similar to the ballpark effect in baseball data—circumstances are so different in one time period to another?

Pandemics in other parts of the world should also be analyzed. I get that Europe has the best data, but if the entire data-set is from Europe, then perhaps that does not have so much validity to other parts of the world. People always argue that the Black Death raised wages in Europe, but the Black Death killed a similar percentage of the population in many parts of Asia and the Middle East, yet I've never heard of any impact on wages there, nor did the Black Death seem to create any sort of renaissance there. Similarly, what was the effect of smallpox on the wages of Native Americans?

It seems that, if you don't limit your sample to Europe, the more reasonable conclusion is that plagues (and wars too) are really bad now and also have bad long-term impacts. It's hard to find a consistent silver lining.

That is a fair question, but we don't have the data to answer it.

But the fact that we do have wage and population data for late medieval Europe suggests there was something going on there that made economic recovery and then sustained growth possible.

We have a lot less trustworthy data on it, but the earlier plague pandemic in the 6th century didn't produce a renaissance either-- quite the opposite in fact. One big difference was at the governmental level. In the 14th century central governments were very weak and royal edicts were often ignored while the system of taxation was highly inefficient. In the 6th century the Eastern Roman Empire had a strong, centralized government whose reaction to the pandemic was disastrous: wage and price controls were imposed and enforced and the Emperor actually raised taxes on the survivors with the end in view of taking in the same revenue from a reduced population as the government had enjoyed before. Both of these measures wrecked the economy, something reflected in archaeology by a remarkable paucity of coinage discovered from subsequent decades.

Random suggestion: Could the Catholic church change the date of Easter this year? Maybe delay it by a month?

The date of Easter is fixed - attendance at Mass however will not be considered proper, as of last week. "The Vatican department for liturgy published guidelines on Friday for bishops and priests on the celebration of Holy Week, the Triduum, and Easter liturgies during the coronavirus pandemic.

The document recommends that bishops postpone those liturgies which may be postponed. It also indicates how priests and bishops can offer those celebrations which cannot be moved, such as Easter, in places where public liturgies are suspended. ... The decree orders that, in the places where there are restrictions from civil and Church authorities, the bishop, in agreement with the bishops’ conference, may offer the liturgies of the Easter Triduum in the cathedral, and priests of the diocese may offer the liturgies in their parishes, without the physical presence of the faithful.

“The faithful should be informed of the times of the celebration so that they can prayerfully unite themselves in their homes,” it indicates, adding that live television or internet broadcasts are helpful in this situation." catholicherald.co.uk/vatican-publishes-guidelines-for-easter-celebrations-during-coronavirus/

Not for the first time, Trump and the Catholic Church are having a fundamental disagreement concerning a matter of religion.

Here's what would Bill Gates do:

"It is really tragic that the economic effects of this are very dramatic. Nothing like this has ever happened to the economy in our lifetimes," Gates said. "But money, you know bringing the economy back and doing money, that's more of a reversible thing than bringing people back to life. And so we're going to take the pain in the economic dimension — huge pain — in order to minimize the pain in the disease and death dimension."


I usually like Gates, but that's easier for him to say because he knows where his next meal (and the 10 billion meals after that) are coming from.

He is literally the worst person to deliver that message but his message is still the least worst option we have.

Unemployment benefits under current law could be up to $900 to $1,000 per week. They will even apply to self-employed people but the details are not clear. Government should be focused on getting benefits to people who need them and as quickly as possible, not on pressuring people to get back to work because they might starve otherwise. That mindset just shows the U.S. welfare state is backward and as poorly prepared for any serious challenge or disaster as its public health system is.

A paper Tyler and Alex might like to read:

Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu


Abstract: We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over. Our findings thus indicate that NPIs not only lower mortality; they also mitigate the adverse economic consequences of a pandemic.

I believe virtually all countries have been a tad late to make dealing with this epidemic cheap.

If only those who could enforce nationwide NPIs would read this. It's only from the Fed, what would they know about the economy?......

Odd, the paper makes no mention of the "The Great Leveler", an entire book devoted to longer-run economic consequences. Bias perhaps against FDR's quote on excess income in a time of grave national danger?

FDR's message to congress, April 27, 1942

"In the long run we are all dead."

What about athletes? SARS destroys lung capacity in the long term in survivors. COVID-19 seems to have a similar effect on lungs.

Most of us only use our lungs for breathing, but athletes use them to earn income. I'd expect all kinds of disability are covered by insurance for income loss for athletes but these guys are not exactly financial advisors.

From a fan point of view, it would be interesting to see how teams are left after the virus crisis ends.

I'm pretty sure it would depend on whether they could pass a physical saying that they're healthy enough to play. I'm not sure how diminished lung capacity would be treated.

It's also an open question if pandemics are commonly excluded in these policies. It's certainly possible that they are. Insurers hate taking on risks that are highly correlated across a population and could lead to huge losses from a single event. William Galston's WSJ column this week mentioned that most business interruption insurance policies won't pay out for a pandemic, for example.

I've more commonly heard of teams insuring large guaranteed contracts. You can Google Prince Fielder's situation with the Texas Rangers, where it's widely thought that insurance covered a lot of his salary.

I've occasionally heard of players taking out policies themselves, but that seems to be less typical. Sometimes it's college players who would be high draft picks and therefore want protection against a career-ending injury in a last year of playing in college. I've also sometimes heard of it for younger pro players who are on a relatively low-paying rookie contract and close to free agency.

Pandemics have not caused large asset price declines in the past 100 or so years: https://www.forbes.com/sites/mikepatton/2020/02/28/how-stocks-reacted-during-past-flu-pandemics-and-steps-you-can-take-to-minimize-losses/#65116e0b448d In other words, capital was not "destroyed" as a result. By contrast, financial crises followed by severe economic contractions have "destroyed" capital. The analogy is lost on economists. In Europe, capital was physically destroyed in two major wars, while in America capital was "destroyed" because of the financial crisis in 1929 and a depression. In both cases, wealth inequality fell precipitously along with asset prices; the wealthy owned most of the assets. Europe responded to the destruction of capital by physically rebuilding, while America responded to the "destruction" of capital by doing nothing. Will this pandemic differ from past pandemics, resulting in a "destruction" of capital? If so, how will governments and central banks respond? Will they "rebuild", restoring asset prices and wealth inequality with aggressive fiscal and monetary stimulus? [An aside, recall that income inequality continued at a high level following the 1929 financial crisis, even as wealth inequality collapsed.]

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