We Hit the Brakes. So, What Now?

By Thorsten Koeppl

Thor Koeppl is a Professor of Economics and RBC Fellow at Queen’s University. He also serves as a Scholar and member of the National Council and Monetary Policy Council at the CD Howe Institute. 

Imagine you are driving your car on an alpine road.  You see some rocks starting to fall, a rockslide!  What do you do? Slam on the brakes.  Stop.  You take a deep breath and, after a sigh of relief that you kind of dodged it, you think: So, what’s next? How do I get past that rock slide?

This is where we are at in Canada in our response to the current CoVid-19 pandemic.  We brought the economy pretty much to a full stop.  It is fair to say that this reaction will likely save Canadians being fully engulfed in the rock slide.  We yet do not know how big the benefit will be in terms of lives saved or how large the costs will be on the economic side, but we did the right thing.  Act on the side of caution and hit the brakes.

Soon, hopefully, there comes the time to catch a breath and look forward to see how we can navigate the medium-run fall out from the pandemic.  And this is where economists and the way they tend to think can help us a lot.  After all, economists are “social engineers” that deal with problems where individual behaviour needs to be steered in the right direction to achieve better outcomes for society.

Hence, it is not surprising that there are already many proposals in the economics community on how to go forward once we have started to flatten the curve.  It is useful to emphasize a few ideas that stand out as the most promising ones to limit the economic damage when resuscitating the economy from its comatose state.

First, the distinction between essential and non-essential businesses is, on its own, insufficient.  One needs to add a second dimension: how “infectious” an activity really is.  Why not open up businesses — or allow them to continue operating — that are non-essential, but are likely to cause little damage in terms of how quickly the virus spreads?  Examples, here, might include the electronics repair shop, the lawn company that sends out a team of two to cater to your lawn or the piano instructor that teaches your kid.

We can still limit the spread of the virus with simple measures that have already been introduced for essential businesses like grocery stores or pharmacies.  Limiting the number of customers in a store, screening of employees for symptoms, and having people wear masks, even makeshift ones, are all low-cost actions.  Certainly when compared to needlessly shutting down parts of the economy for an extended period that contribute next to nothing to the reproduction number of CoVid-19.

Second, most people behave appropriately to contain the spread of CoVid-19.  However, there is still a significant number of people that do not follow the rules.  Just look at last weekend’s traffic once the sun came out!  Or your friends that you meet on your walk in the neighbourhood that just came back from their out-of-the-country March break vacation.  These so-called “superspreaders” are and will be a problem, especially in possible, future waves of the pandemic.  Hence, we need stricter enforcement of isolation or stay-at-home rules like in Taiwan or Singapore.

At the same time, we have done a good job protecting the vulnerable.  These efforts clearly need to continue and may have to be expanded through extreme social distancing and possibly new government-sponsored community programs.  One example would be free delivery services from local grocery stores and pharmacies prioritized for this group.

Third, we know that testing will be key and lots of efforts are underway to increase testing.  Through testing and other methods such as tracking data of cases, one can monitor the spread of the virus very effectively as South Korea has shown.  There are many ways how to do this down the road, from screening workers for symptoms to group testing and antibody detection.  But the challenge will be to be sensible about allowing common activities again, especially once the pressure in society mounts to go back to some form of normality in our lives.  One cannot restrict people’s life forever and it will become increasingly more difficult to ensure compliance.

Having two friends over for a glass of wine?  Not much harm there once we have better monitoring.  Starting sports events and rock concerts again? Sorry, not going to happy anytime soon.  Restarting schools and daycares? Very tricky to decide, so maybe play it save.

We have hit a rock slide and soon we will need to navigate around the rocks on the roads.  Otherwise, the economic damage will be massive.  Canada has reacted promptly and appropriately to the threat that CoVid-19 poses.  Now, it is time to think ahead and develop a plan how to hit the restart button.  Bring in the economists!