Assessing the economic cost of the Lockdown

DISCLAIMER:  This article addresses issues that some may find challenging, even distasteful.  We have no wish to upset or offend any of our readers.  But we feel that the discussion will eventually need to be held, and we hope that our readers will accept this attempt to illuminate it.

As the lockdowns continue to ease and as life begins to return to something more like normality – although it is still a very strange normal in many countries – one simple question will be asked with at first hesitancy, but then we think with growing insistence:  “Was it worth it?” 

For all that some may find this question unpleasant, weighing as it must do health against finance, lives against livelihoods, it is important to say that it is both a legitimate question and a necessary one.  The global economy has received an extraordinary shock:  lives have been disrupted, businesses destroyed and national treasuries depleted on a scale unlike anything seen before outside wartime.  It was also a conscious decision, in almost all countries, to induce this shock through the lockdowns.  And so the question does arise “was this the best response, was it worth it?”

It is ultimately for politicians, and through them society as a whole, to answer this question.  And they will base their decisions on a whole range of factors, not just economics. That is what politicians are for, assessing the really big issues facing society and leading society to the best response.  And unless they do so, we stand little chance of learning from this experience, of handling the next global pandemic (and there will be a next pandemic) any better.  But to answer it properly, the politicians need to know some facts, and one of those is the economic consequences of their decisions.

We will never be able to say with certainty how many lives the lockdowns saved, what the death tolls would have been without them – although one country, Sweden, has gone against consensus and avoided a full lockdown, it is not a big enough control sample to draw any sensible conclusions.  There is even an argument for saying the lockdowns may have ended up not saving but costing lives: lives are not only lost to the disease, they are also lost because of destroyed livelihoods, because of other diseases and conditions not treated, because of increased debt, because of despair.  As we have observed before, when GDPs shrink, then life expectancy generally falls.  

But let us assume that the lockdowns have in fact net saved lives.  And the question is “at what cost, and has it been it worth it?”  As we have observed, we don’t know what would have happened without the lockdown, so we cannot say how many lives have been saved.  But we are slowly getting a clearer idea of the cost side of the balance sheet.  

For a case study, let us consider the United Kingdom, which has endured an average intensity lockdown (not as severe and complete as some, not as lenient as others).  Note though that by doing so, we are not aiming to make a comment on Boris Johnson’s government or its decisions, as it has largely followed the same approach as many other developed countries have used – it is just that it enables us to put some numbers to the question.

In strict monetary terms, the UK might underperform its trend GDP level (ie, what might have been expected absent the pandemic) by perhaps 15% of GDP this year, 10% next and 5% the year after, for a cumulative loss of output of say 30% of GDP overall. (see table below)

There are of course some large assumptions behind these back-of-the-envelope figures, and we make no claim that they are anything other than crude estimates.  Some may find the fall in GDP that we have suggested for 2020 overdone, others will query the shape and pace of the recovery we have posited for 2021-2023 – we are aware that some economists are more pessimistic, see a longer haul before GDP is back on pre-corona trend levels.  But we think the figures are about right for an order of magnitude.  And with 2019 GDP for the UK around £2.3 trillion, they imply that the cumulative financial loss – that is, the money cost to the economy – might be around £700 billion.

And this is not counting the personal costs such as lives disrupted, weddings on hold, relatives not visited or comforted, holidays foregone and so on.  Nor does it count the destruction of social capital and social enterprises; the UK is set to lose a proportion, and in some sectors no doubt quite a significant proportion, of its restaurants, pubs, theatres, travel and tourism industry, sports and social clubs, music venues and music groups, charities, museums, heritage railways and other social ventures, dentists (we are astounded that they have been offered no special support), self-employed craftsmen, growers of plants for gardens, etc etc.

So we think it could well be fair to say that the net cost of rebuilding back to where we were, plus the cost of things foregone and irreplaceable, could be up to £1,000 billion, or one trillion pounds. We repeat, there is a large confidence interval around this figure, but we think the loss will be of this order of magnitude.  

£1 trillion is neither a ludicrous number nor impossibly unaffordable; to put it in perspective the total wealth of everyone in the UK, physical assets plus financial assets plus intangible assets, is well over £10 trillion. But it is still a huge amount.

But the question we posed is, was it worth it?  That depends on how many lives the lockdown has saved, how much of their expected lifespan each person who would have died would have been denied, and how we put a value on this.  There is a precise – if rather harsh-sounding – measure we can use here, called “man-years lost”;  it is used by among others the legal and insurance industries to work out compensation for death.  The exact value of a “man-year” depends on a number of factors, not least the deceased’s earning potential, but very roughly the average figure across the whole population is of the order of £28,000[1], so £1 trillion represents just over 35 million man-years. 

We are now closer to being able to assess whether the UK lockdown has been financially justified.  Again with the proviso that this ignores the emotional side of the equation, if the lockdown has saved more than 35 million man-years, it has economically been worthwhile.

If the illness was affecting mainly children and young people (as Spanish flu did 100 years ago), so that each life lost would be worth perhaps on average 65 man-years, the 35 million man-years would represent a death toll of around 540,000 people, slightly above even the “scare number” that forecasters were quoting as the worst possible casualty rate if the country did not enter lockdown at all.  

In reality, most of the casualties have been either old or very old, and it is unlikely that the average man-year cost of each death is even as high as 10 years.  Let us err on the side of caution and say that the man-year cost of each death that might have occurred absent the lockdown is 10 years, then the UK death toll if there had been no lockdown would have to have been 3.5 million people before the financial numbers come out in favour of the lockdown.

We expect that some people will have stopped reading this article some time ago, considering it distasteful to weigh money against lives.  And certainly no politician can be seen to be so unfeeling and calculating in public, can be seen to worry about financial issues when “lives are at stake”.  Which is why across the world, only the bravest of politicians (or those with very thick skins) are exploring this issue openly. 

But while in public the question is largely taboo, and the mantra that “All human life is priceless” holds sway, in large areas of policy-formulation the question of the monetary value of a life is very much part of regular policy analysis.  And as we said at the start of this essay, that is rightly so, because unless the analysis is done, mistakes and costly sub-optimal solutions will be repeated next time.

And having done the analysis, and even with one final repeat of the caveat that our figures are all estimates, the conclusion is clear:  the individual lives saved by the lockdown are likely to prove to have been dearly bought, and whatever the eventual national verdict on the lockdown, where consideration of the wider social issues will of course be to the fore, from a narrow and purely economic viewpoint it will be challenging to justify the price that everyone in the UK, but especially the poor and the young, will be paying for some years to come.

[1]              A similar measure, used in government for the financial assessment of projects – for example, cost-benefit analysis of the safety elements of road improvements – is VFL, or the Value of a Full Life.  This is currently around £1.8 million, which given an expected remaining lifespan for the average member of the population of say 60 years or so gives much the same valuation to a year of life, ie about £30,000.