Coronavirus Pandemic and its Economic and Human Capital Costs in US States

Abstract

In a study published recently in the Journal of Risk and Financial Management, the authors of this book chapter assessed whether policy actions to contain the spread of the COVID-19 disease reduce the spread of the disease and save lives and whether mitigation interventions have detrimental effects on the economic conditions of an average citizen and firm in US states. The authors documented that US states with higher death incidences impose stricter policy restrictions to mitigate the spread of the disease and its severity. While death rates are an important determinant of the severity of state actions, case rates alone do not seem to affect the restrictiveness of the state mitigation measures. The lockdown measures implemented in US states to contain the coronavirus pandemic are effective in alleviating disease severity, but yield significant contraction of the local economy. The main channel of impact for the health and economic consequences of state policy actions is through restricting individual behavior and reducing mobility. Higher testing rates similarly lead to significant reductions in mobility. Health gains from stricter policy actions come primarily through reducing incidences of disease cases rather than disease fatalities. Not all state policy measures yield similar outcomes. Among the social distancing measures, state restrictions, stay home, business closures, and gathering bans are identified to be the only effective mitigating interventions that helped slow down disease cases. As for the incidences of disease deaths, the only state policy measure that was identified to be essential was gathering bans. Importantly, both health conditions and lockdown measures are important for the real economy, albeit with varying degrees of importance. The direct impact of disease environments on economic growth is less apparent in the short-term compared to lockdown measures which have strong adverse effects in the near term. For example, state restrictions result in a 0.46 standard deviation drop in real economic output, whereas the corresponding decreases are 0.37 and 0.40 standard deviations with disease cases and deaths, respectively. Put differently, health conditions as captured by the changes in cases and deaths from the coronavirus disease have a significant negative impact on economic outcomes, but are unlikely to be the major reason for the large immediate losses in the economic output. Instead, the heterogeneity in policymaker responses to the health crisis and the severity of the state lockdowns appear more likely to be the main factor behind state income differences. Deteriorating health conditions, on the other hand, are disruptive to the labor supply, financial health, and economic output. For example, disease severity had a profound effect in increasing state unemployment and the number of personal and business bankruptcies. The authors have also undertaken analyzes to shed light on the relative importance of state policy actions and disease severity in forecasting contractions in real economic activity. Specifically, a machine learning assessment of the relative strength of coronavirus disease severity and state policy measures to predict real local economic contraction outcomes indicates that the disease itself has more predictive utility relative to mandatory social distancing policy measures undertaken by the states to slow down the spread of the disease. When a horse-race is run between state policy measures and disease severity, disease severity outperforms social distancing measures in predicting real economic conditions in most specifications. Thus, the adverse economic impact of lockdowns exceeded the economic damage brought by the disease itself, but health conditions better forecasted economic contraction outcomes. The evaluation of the specific channels through which negative economic outcomes occur either due to disease severity and social policy reveals that the impact of disease severity on the real economy comes primarily through increasing state unemployment and the number of personal and business bankruptcies. Social distancing measures, on the other hand, are significant determinants of the general economic activity level as measured by the state coincident index, as well as business earnings and employment within the US states.