The economic and social damage of lock downs in Australia is starting to get noticed so much that even academic economists are paying attention. After months of resisting actual data, some Australian economists who previously refused to even contemplate the idea that an economic collapse would also cost lives are finally trying their hands at data and have produced cost-benefit analyses for the corona crisis. Unfortunately, it is clearly novel territory for them and they have made basic, yet grave mistakes. Let me dissect their writings.
First off, Richard Holden and Bruce Preston, previously active in that “infamous letter by economists” which Sinclair Davidson rightfully has termed bizarre, tried their hands at a cost-benefit calculation in the Conversation. Their calculation is of great simplicity: they say the economic collapse will cost Australia at least 180 billion AUS and then they look for how much the lives saved by the lock downs would be worth. To do that they use the “statistical value of life” estimate used in some government calculations, ie 5 million dollars. I have used the same number in some of my writings here on Troppo, so though I would argue it is not the most appropriate number, it at least is defensible to say that one thinks it will eventually cost one whole life if GDP is reduced by 5 million.
Then they claim 1% of Australia would have died without the lockdowns, which is around 220,000 Australians. They multiply that 220,000 by 5 million and say the lock downs saved Australia 1.1 trillion dollars. That “estimated benefit” is bigger than their claimed “cost” so they conclude the lock downs are worth it.
They make three big mistakes. One is a rookie mistake, two are less serious but still bad mistakes.
The rookie mistake is that they use the statistical value of life for someone who dies of corona. Yet, the statistical value of life holds for a whole life, ie 80 years of life. By contrast, the corona victims would have expected to live only 3-5 years more. So one should only count 5% of the 5 million as the appropriate value of those years, ie 4 years out of the 80 in a full life. That, after all, is how the statistical value of life estimates are used in government allocation decisions. Holden and Preston seem just not to know this, thus confusing their molehill for a mountain. Using the statistical value of life properly would get them a “saving” of only 45 billion Australian dollars of the lock downs, which is 4 times less than they themselves claim is the economic loss.
So if Richard Holden and Bruce Preston are scientifically honest they should immediately update their own figures and own up to the fact that using their own methodology they themselves now think the economic collapse costs at least 4 times more than the lock downs saved.
They make 2 more mistakes, less serious, but still grave. Another mistake they make is that they essentially assume that the recession is over within a year: they quote the IMF numbers on the 8 trillion US dollars the world economy is expected to lose from now till then end of 2021 and essentially apportion Australia its share of the world economy in that loss (about 1.5%). Yet, that is a mighty strange argument because it would be the only deep recession ever that would not only be over within 18 months, but where the economy would have recovered all of its lost ground as well within 18 months. So not merely is everyone who lost a job then re-employed, but we’ve even caught up with the growth we would have had. The IMF is certainly not predicting that.
A much more realistic economic forecast is to think it will take years to recover lost ground and that we’ll thus have a lower GDP than otherwise long after 2021. Stock markets thus look far further than merely 2021 and have tanked far more than 8 trillion. So a more reasonable market-based estimate of the discounted losses to the world economy over the next 10 years is then 50 trillion. That was already clear 2 months ago. This is just basic macro-economics.
Thus a more reasonable assumption on what happens in this depression mean the economic damage is 6 times higher than these authors say. So not only is the benefit of the lives saved 20 times lower than the figure they use, but the economic damage is probably 6 times higher. These two mistakes together conveniently change the cost-benefit ratio of these authors by a factor of 120.
Their third mistake is to presume a whole 1% of Australians would have died without lock downs. Let me merely suffice to say that 1% deaths due to the corona virus is 40 times higher than the death toll in the US. It is 30 times higher than the death toll in Sweden. It is over a 1,000 times higher than the death toll in India, Indonesia, the whole of Africa, etc. It is hence an outlandish assumption. It might have been reasonable in February 2020 to still buy into these apocalyptic numbers, but no longer. No country, whatever policy they have pursued, has even 1/10th of the number of casualties these authors claim would have happened without the lock downs. And that in a country which only had a few hundred cases anyway before it locked down!
So if you add a factor 10 exaggeration on the death toll avoided by the lock downs, the 3 mistakes by these two authors conveniently change the cost-benefit ratio by a factor of 1200 in the direction of making the lock downs look sensible. I hope they have the honesty to admit this and rectify their position accordingly. It would be even better if they would then also have a look at the many other costs of the lock downs: abused women, the suffering of the lonely, the cancelled hospital services, etc. Yet, to do that properly needs a WELLBY approach, which might be a bit much to ask of them.
Holden and Preston could have done even worse and write a Conversation piece like Neil Bailey, who argued the huge reduction in economic resources will not have any effect on lives at all. It is a somewhat strange argument for an economist to make because it basically says government expenses, including all health services, have no health benefits. One wonders why we even bother to have hospitals then? That truly bizarre assumption allows Neil Bailey to say the economic collapse will not cost any lives via reduced government services. As I have calculated several times now, the economic collapse will cost the equivalent of hundreds of thousands of corona virus victims in Australia alone, and many millions worldwide. At least Preston and Holden are aware of that fact!
In conclusion, I am happy to see more economists finally starting to look at numbers in order to come to statements on costs and benefits of lock downs and other policies. Its where the Conversation should be. Correcting for their rookie mistake in not knowing what the term “statistical value of life” actually stands for, Richard Holden and Bruce Preston have basically concluded the economic damage is at least 6 times higher than a generous estimate of the benefits of the lock downs. Correcting for their further mistakes in applying standard macro-economics and the fatality rates pertaining to this virus, they would have come to the conclusion that the costs of lock downs outweigh the benefits by a factor of 240 in Australia. I hope they have the honesty to own that position from now on.