Thread by @jsuedekum

Key question for anyone thinking about the economic consequences of #COVID19 :

For how long will the current (almost complete) shutdown of the economy have to last?

Just 1-2 months? 6 months? A year? Even longer?
Nobody knows for sure, but recent studies give some hope. /Thread

Obviously, the longer the shutdown will go on, the deeper the recession, and the harder the design of policies to insure workers and firms.

Also the acceptance in the general public will evaporate over time, because not all agree with it and are willing & able to bear the costs.

Take Germany as an example: schools are closed and are scheduled to re-open on April 19. This closure was controversial, because it keeps many adults away from work.

For now, most people seem to accept it. But this will change if the "exit day" is pushed into the gray future. /3

In this melange, an important study by epidemiologists from Imperial College was released yesterday.

It contains many insights. But two strike me as particularly important.

First, it suggests that mere "mitigation" of #COVIDー19 is simply not enough. /4

imperial.ac.uk/media/imperial…

Doing nothing, or just isolating infected persons and the elderly, will completely screw up the health system and lead to death numbers with seven digits in the US. Mostly, but not only old people.

Those are the numbers that the #justtheflu movement would have to confront /5

As for "suppression strategies", the Imperial study suggests that an economic shutdown with strict social distancing may indeed #FlattenTheCurve, and keep the number of intensive care patients below (or close to) the capacity limit.

However, it also has some bad news... /6

Namely, there can be an unpleasant "rebound effect".

Suppose schools and shops open again, and life goes back to normal. Then, so the study claims, the infection rate will quickly bounce back, because the population has not yet reached herd immunity. /7

Hence, to ultimately beat the virus, the economic shutdown would have to go on until an effective vaccine has been discovered. Which can take a long time.

So this creates a pretty dismal outlook, shared for example by economists like @ojblanchard1 /8

https://twitter.com/ojblanchard1/status/1239933220537368579?s=20

However your economic policy package looks like - the German liquidity bazooka, direct transfers, or even bolder measures where government becomes the "payer of last resort" - sustaining it for more than a year will be ugly and *utterly* expensive. /9

theguardian.com/commentisfree/…

But now the good news: today, a rebuttal to the Imperial study appeared, which argues that its modeling is flawed, and in particular, that it is much too pessimistic regarding the "rebound effects".

When social distancing is switched off ... /10

necsi.edu/review-of-ferg…

...and when new infections are down dramatically, you can more easily trace and monitor all cases, and use excessive testing to actively fight against the rebound.

Apparently the Imperial study neglected this, and relied on a model with too simplistic & adaptive assumptions /11

I'm not an epidemiologist, so ultimately I cannot judge. But here's my humble conclusion as an economist:

We have decided to start social distancing and the economic shutdown. For good reasons, because mere mitigation (#justtheflu) is simply not feasible. /12

But we need a plausible exit scenario from the shutdown. It must stop at some point not too far away, or otherwise I fear major backlashes in society

Apparently, there is some hope that it *can* stop before the vaccine has been found. But this requires action... /13

Governments must use the time to set up an effective infrastructure for tracing, monitoring, and testing that is up and running when exit day comes.

This is, appearently, what South Korea has successfully done and Europe needs to learn from it /14

thediplomat.com/2020/03/lesson…

The current economic shutdown cannot be sustained for an unknown length and with unclear goals. It must be part of an actual strategy.

This is first order. The details of the economic rescue package (loans, transfers, ...) come second. /END