Covid-19 has forced epidemiology and economics to become intertwined as never before.
Governments across the world are facing the same conundrum: When and how to ease lockdown restrictions and reboot their comatose economies whilst keeping a lid on the rate of infection.
In making these difficult judgements, scientists are currently in the ascendancy, providing politicians with both the frameworks for making decisions as well as the legitimacy for imposing (and lifting) restrictions.
Witness the elevation of the U.K.'s Scientific Advisory Group for Emergencies — or SAGE — into almost canonical status. However, the economics profession — currently relegated to a subsidiary role — must play a more prominent and active part in the next phase.
Already, a multidisciplinary group led by my colleagues Richard Layard and Gus O'Donnell has proposed a framework for deciding when to lift the lockdown by measuring different components of wellbeing over time. They have concluded that the point of inflection, when the net benefits of releasing the lockdown become positive, is around mid-June. But their analysis does not focus on how to remove the restrictions.
In order to help calibrate the re-opening strategy, it may be helpful to repurpose the Phillips Curve, which traditionally plots the inverse relationship between inflation and unemployment. In macroeconomic policy, there is an important further distinction between the short-term trade-off between price stability and economic activity and the non-accelerating inflation rate of unemployment — or NAIRU — which represents the level of unemployment beyond which inflation is expected to rise. This is a vertical line, otherwise known as the long-run Phillips Curve, identified by Nobel Prize winning economist Edmund Phelps.
In present circumstances we should replace inflation with the reproduction rate of the virus — the now famous "R" in epidemiological models. The logic for this substitution is evident from the U.K. government's own pre-conditions for ending the lockdown and the critical importance of the fifth and final test: avoiding a second wave. This overriding objective can only be achieved if R is kept below 1. A reproduction rate above 1 leads to another cycle of exponential transmission requiring suppression once again, with the curve of unemployment bending back on itself as the economy shuts down — perhaps appropriately in the shape of a boomerang.
The higher the level of R the longer the required shutdown and economic impact. So the new NAIRU is the "non-accelerating infection rate of unemployment." It defines the capacity at which the economy can safely operate whilst we are living with Covid.
When the government eventually lifts the current lockdown, it will be conducting a discovery process to determine the level of economic activity consistent with keeping R below 1. Without any prior model, this new equilibrium can only be calibrated in real time through a test, learn and adapt process, which is why any easing must be gradual and phased — to allow sufficient time for the reproduction rate to be tracked through both testing and hospital admissions.
This conceptual model also provides some practical insights. First, the starting point for R when we first lift restrictions provides an important buffer, or tolerance, for navigating the gradual resumption of activity. Any miscalculation would literally boomerang back.
Secondly, we require an urgent debate about the principles for re-opening. In particular, should the government encourage a specific mix of economic activity through top-down direction, prioritizing specific sectors, or allow the market freedom to operate within a framework of public health standards. This issue matters because we are not solving for a single equilibrium but facing multiple equilibria which would keep R below 1. Any number of combinations of economic activity could be consistent with the new NAIRU. In a Covid constrained economy this may require a hybrid approach to policy making which blends an element of planned economy with market forces to achieve the best possible multiplier effects for society.
And third, and perhaps most importantly, the shape and position of the curve will change over time — both with evolving epidemiology and also measures designed to suppress R while operating the economy below 1. It is here that tracking, testing and contact tracing becomes mission critical. It will shift the curve to the left and allow the economy to operate at a higher level of activity consistent with the new Covid NAIRU.
As we tackle the next set of challenges and uncertainties from the pandemic, our decision makers must continue to "follow the science" but also draw on valuable insights from all the social sciences, not least economics. Ultimately, the coronavirus will be beaten not just by science but by human ingenuity and adaptability.
—Lord Jitesh Gadhia is a member of the U.K.'s House of Lords and a former senior managing director at the Blackstone Group.