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Sunday, January 31, 2021

A rational approach to Covid-19 policies

 

From Carmelo Ferlito

It is unfortunate to observe that despite dealing with Covid-19 for almost a year, most of the policies aiming to fight it are often driven by fear, bad communication and, in some cases, political purposes. This is the case in Malaysia and most other countries.

We need better data analysis and communication to fight the virus and help people make more informed choices, based on a realistic risk assessment.

Two important points are absent from the current debate on Covid-19 responses in Malaysia – the survival rate of 99.6% and the scientific studies which question the efficacy of lockdown policies.

Some of these studies were published by prestigious institutions or journals such as the National Bureau of Economic Research, The Lancet, Frontiers in Public Health, medRxiv and the European Journal of Clinical Investigation.

Such data and studies should be publicised and be accounted for when discussing policies. But this is not the point I want to make here.

Even if we concede that movement control orders (MCOs) do play a role in containing the virus spread, at least in reducing the stress on medical facilities, the policy responses adopted by most of the countries around the world are in conflict with what a sound trade-off analysis would suggest, as explained in a recent paper by Peter Boettke (George Mason University) and Benjamin Powell (Texas Tech University).

One of the main points we can make after one year of data is that age and the presence of co-morbidities play an important role in surviving Covid-19.

For example, in Italy only 0.28% of the Covid-19 related deaths involved subjects below the age of 40, while 85.88% of the deaths were individuals aged 70 and above (61.17% aged 80 and above).

Also in Italy, 67% of the persons who lost their lives because of Covid-19 presented at least three co-morbidities.

Such information – which unfortunately is not publicly available in Malaysia, not to mention clarity on clusters, such as, do we have barber shop clusters – are important not only for individual risk assessment but also for designing policies.

As done by Boettke and Powell, for simplifying the analysis, we can divide the population into the young and healthy working segment and the old and vulnerable retired individuals.

Looking at the effects of the movement restrictions, the first group encounters a very high marginal cost, because the people in this group need to work to earn an income.

By limiting their activities, however, we also create negative externalities (social cost), as in we reduce the national output (making everybody poorer).

On the other hand, if we do not introduce movement restrictions, we increase the health risk for the individuals in the second group.

Negative externalities

When facing movement restrictions, instead, the marginal cost for the second group is much lower, so they can face a higher level of restrictions.

But if greater restrictions are imposed, negative externalities are transferred on the first group, who then have to renounce their earning capacity while at the same time the national income is also being reduced.

It is important to always look at externalities in both directions.

In summary, a small level of restrictions would limit the cost for the young and healthy part of the population, but it would transfer externalities on the elderly in terms of health risk.

On the contrary, harder lockdowns reduce the risk for the elderly but increase the marginal social cost by creating poverty among the working population and reducing the national level of income.

From this analysis, it is clear that a generalised policy of movement restrictions is hardly likely to achieve what is called the social optimum.

A solution should be found to equalise the risk among the different population groups and therefore, the age composition of a certain country plays an important role in choosing the right policy.

Because of the heterogeneity of individual preferences, hence the impossibility for a central planner to rationally take into account a myriad of different evaluations and risk assessments, the best suggestion an economist would give is to leave people free to choose their different actions but at the same time providing updated and as much as possible complete information.

As individuals respond to incentives, activities which are confirmed to be vehicle of transmissions could be discouraged via taxation.

By avoiding generalised lockdowns and, therefore, limiting the need for fiscal policy to compensate for the wealth destruction, more resources would remain available for direct medical interventions, such as increasing ICU beds or hospital capacity, investing in research and so on.

Therefore, a sound trade-off analysis would bring us toward the suggestions brought about by the Great Barrington Declaration, whereby the differentiation between different segments of the population is of primary importance.

With adequate data communication, the vulnerable could be better helped in protecting themselves while the young and healthy could incur a limited number of restrictions and therefore could reduce their individual cost and the cost for society brought about by their eventual inactivity (and contextually progress on the way for herd immunity).

At the same time, resources would remain available for improved healthcare investments.

Carmelo Ferlito is CEO of the Center for Market Education. - FMT

The views expressed are those of the writer and do not necessarily reflect that of MMKtT.

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