The IMF: Voluntary Social Distancing Will Continue Until the Threat From the Virus is Gone


The following piece is a bullet point summary of the IMF's October 2020 WEO.


Commentary

The people don’t need the government to tell them what to do. They will respond to the risks they see and they are more than capable of looking after themselves. The people voluntarily reduced their mobility and interactions before the first lockdowns were announced because they could see for themselves that it was the right thing to do, both from an individual and from a collective health perspective. They feared contracting the virus and passing it on, and they acted appropriately.

The IMF estimates that voluntary social distancing by the people in advanced economies accounted for about half of the total reducing in mobility during the first wave of lockdowns. These effects could be seen more clearly in ‘contact-heavy’ industries like hospitality and retail where business and customers reduced their activity levels in advance of government announcements.

The size of this voluntary effect is proportional to the competence of policymakers. In a perfect world – where the policymakers had successfully prevented the outbreak from reaching the country – then there would have been no economic impact from voluntary social distancing because there would have been no need for a voluntary response from the people. Unfortunately, that didn’t happen. The policymakers were slow to act, and the people had to take matters of public health into their own hands. Eventually, the policymakers caught up and put everyone in a severe lockdown, but by that stage it was too late. The damage had already been done.

There is a cohort in our society that has voluntarily withdrawn and that will not return until the health risk is gone. The higher the perceived health risk, the larger their number will be and the greater the degree to which they will restrict themselves. As long as the virus exists in any meaningful amount, the economy will operate below potential, which means we have a permanent drag on an already weak and unbalanced economy, and that drag will be experienced most keenly by those in contact-heavy industries (hospitality, food, events, musicians, personal carers etc).


You can lock people down, but you can’t force them out again


The big risk to our economy is that more businesses close or become insolvent and their former employees join the long-term unemployed. Economists use the word ‘hysteresis’ to describe the long-term effects of these massive, negative shocks. This process of long-term damage and scarring started in the Summer of 2020 and has continued unabated. Things are bad and getting worse, and there is a tail risk of financial collapse as isolated defaults – which are contagious – become clusters, then becoming a wave that takes out a financial institution. This is a realistic scenario for Ireland in 2021.

The trade-off between restrictions and activity only exists in the short run. Yes, you can increase economic activity a bit by loosening restrictions, but eventually cases will rise and people will voluntarily restrict their activity. Even when policymakers lower their restrictions, the people are unlikely to respond if they still perceive the health risk to be too great. Restrictions and economic activity can work together, but only if the restrictions lead to the elimination or permanent suppression of the health risks. When the health risk is gone, the economic risk will go with it.

Lockdowns work best when they are short, sharp, and strict. There are diminishing marginal returns to restrictions, but extreme restrictions might be necessary to permanently suppress the outbreak. Shorter, sharper lockdowns cause marginally lower economic activity, but are significantly more effective at suppressing the virus.

A lockdown is a cruel policy tool. The fact that it is our default policy tool, demonstrates the lack of research, the lack of creativity, and the lack of problem-solving ability in our leadership and ‘expert’ teams. The IMF made several recommendations to governments and policymakers, but they require research and analysis that is unlikely to be performed by Ireland’s policymakers.


 

Quotes From the Report

If lockdowns were largely responsible for the economic contraction, it would be reasonable to expect a quick economic rebound when they are lifted. But if voluntary social distancing played a predominant role, then economic activity would likely remain subdued until health risks recede.

In fact, the analysis suggests that lockdowns and voluntary social distancing played a near comparable role in driving the economic recession.

The contribution of voluntary distancing in reducing mobility was stronger in advanced economies.

Lifting lockdowns is unlikely to rapidly bring economic activity back to potential if health risks remain. This is true especially if lockdowns are lifted when infections are still relatively high because, in those cases, the impact on mobility appears more modest.

Further tempering the expectations of a quick economic rebound, the analysis documents that easing lockdowns tends to have a positive effect on mobility, but the impact is weaker than that of tightening lockdowns.

These findings suggest that economies will continue to operate below potential while health risks persist, even if lockdowns are lifted.

Policymakers should be wary of removing policy support too quickly and consider ways to protect the most vulnerable and support economic activity consistent with social distancing.

The effectiveness of lockdowns in reducing infections suggests that lockdowns may pave the way to a faster economic recovery if they succeed in containing the epidemic and thus limit the extent of voluntary social distancing.

Meanwhile, policymakers should also pursue alternative ways to contain infections that may involve lower short-term economic costs than lockdowns.

As the understanding of the virus transmission improves, countries may also be able to deploy targeted measures rather than blunt lockdowns.

More stringent lockdowns are associated with lower consumption, investment, industrial production, retail sales, purchasing managers’ indices for the manufacturing and service sectors, and higher unemployment rates.

Countries with higher social capital may not require stringent lockdowns—as people take greater precautions against infecting others—and could also better withstand the economic impact of the crisis.

People tend to reduce mobility because they fear contracting with the virus, independent of lockdowns.

Both lockdowns and voluntary social distancing had a large impact on mobility, playing a roughly similar role in emerging markets. The contribution of voluntary social distancing was smaller in low-income countries and larger in advanced economies.

The impact of lockdowns on mobility is smaller when infections are relatively high. A likely reason is that people feel uncomfortable with resuming mobility when lockdowns are lifted if they still perceive a considerable risk of contracting or spreading the virus. This insight warns against lifting lockdowns prematurely in hope of jump-starting economic activity.

The importance of voluntary social distancing coupled with the modest boost to mobility from easing lockdowns suggest that economies will likely operate below potential as long as health concerns persist.

Given the severity of the downturn, the crisis may have also reduced the level of potential output, thus leading to permanent losses even after the pandemic is over.

Contact-intensive jobs—such as those in the hospitality, personal care, and food sectors—declined before stay-at-home orders, likely because of voluntary social distancing as customers grew wary of infection risks. Job postings in the manufacturing sector—that do not involve personal contacts with customers— instead started to decline closer to the adoption of stay-at-home orders, reflecting the impact of lockdown measures.

The removal of stay-at-home orders has coincided with only a marginal increase in job postings, even in the less-contact-intensive manufacturing sector.

The observation that lockdowns can reduce infections but involve short-term economic costs is often used to argue that lockdowns involve a trade-off between saving lives and protecting livelihoods. This narrative should be reconsidered in light of the earlier findings showing that rising infections can also have severe detrimental effects on economic activity. By bringing infections under control, lockdowns may thus pave the way to a faster economic recovery as people feel more comfortable about resuming normal activities. In other words, the short-term economic costs of lockdowns could be compensated through higher future economic activity, possibly even leading to positive net effects on the economy.

This suggests that lockdowns have marginally weaker negative economic effects as they become more and more stringent. For example, stay-at-home orders may have only a modest negative impact on economic activity if governments have already mandated workplace closures.

Policymakers may want to opt for stringent lockdowns over a shorter period rather than prolonged mild lockdowns. Based on past experience, tighter lockdowns appear indeed to entail only modest additional economic costs while leading to a considerably stronger decline in infections.