At what point is confinement no longer profitable?
29 de abril de 2020
Introduction

The situation in Spain, especially during the past month, is absolutely dramatic. The Covid-19 pandemic has claimed thousands of lives and caused enormous suffering in many families.

Such a health crisis is always accompanied by a subsequent one, of an economic and political nature, which has repercussions on millions of citizens. Not surprisingly, from January in China, and in late February or early March in the rest of the world, the economy has experienced serious slowdown. The Spanish company, according to data provided by Rafael Doménech and Jorge Sicilia [1], of BBVA Research, would have registered a use of 80% of its total productive capacity in the least severe phase of confinement, and 60% in the most severe (the first half of April), during which only strictly essential businesses were authorised to open. Likewise, the sectors most associated with «social consumption» experienced falls of close to 100% year-on-year in income volume [2]. These consequences of the ‘great confinement’ (in terms of the International Monetary Fund) have had and will continue to have strong impacts on factors such as GDP growth, unemployment, temporary employment, or the deficit and public debt. Impact that recent studies try to estimate.

Starting from a baseline scenario, the World Economic Outlook report [3] predicts a decrease in Spanish GDP of 8% for 2020, and a public deficit around 9.5% of the current one. These estimates are the most optimistic within multiple projected scenarios. Other reports, such as the most recent published by the Bank of Spain [4], foresee a fall in GDP of 13% for this year, which would result in a public deficit of 11%, while the level of public debt would increase to 120%. All this, in turn, will result in serious damage to the labour market. Thus, all reports concur that the unemployment rate will exceed 20% after the health crisis, with a strong destruction of youth employment and an upward trend in the already high rate of temporary employment.

Therefore, once we seem to be flattening the curves of infected and daily deaths due to Covid-19, it would be prudent to carry out a cost-benefit analysis of the confinement and the compensations that it may have generated, with its consequent effects.

Economic science focuses on evaluating the costs and benefits of each situation, finding the optimal or least harmful decision according to the opportunity costs of each scenario. In this scenario, multiple theoretical frameworks and analytical tools allow us to estimate, within certain parameters, the consequences of each public policy. Before studying the trade-offs of the current situation, it should be borne in mind that the relationship between the economy and health is not linear or direct, and therefore, it is extremely complex.

Even so, we have some quantitative instruments to know the economic cost of confinement in human lives, and calculate from there the turning point of the confinement itself. In other words, the moment from which this, in aggregate monetary terms, will no longer have positive effects on Spanish citizens and will instead begin to imply a regressive public policy, the cost of which will exceed social benefit in the form of loss quality of life, unemployment, and deaths due to associated causes. In order to carry out these calculations, although in the philosophical and moral plane we defend that the value of a life is infinite, we must be able to quantify its monetary value. Although this is not ethically correct, in situations such as the current ones the government has to make drastic decisions that affect 47 million people, and as many factors as possible must be taken into account.

How to quantify the value of a life?

The right question would not ask exactly how much monetary value a life amounts to, but how much society is willing to pay to slightly reduce aggregate mortality in exchange for decreasing (sometimes radically) future quality and life expectancy. To carry out these comparisons and introduce them into a restricted optimisation model, with the aim of analysing the aforementioned public policy trade-offs, a tool known as the Value of a Statistical Life (VSL) is used, which roughly represents the monetary value assigned to a marginal reduction in mortality risk.

There are several ways to approach VSL calculation and obtain the data required for it. First, we might base ourselves on revealed preferences; that is, analyse the monetary valuation of the risk associated with various situations through different behaviors and/or individual attitudes. Second, the data could be obtained through surveys of statistically significant population samples. In any case, the most important element is the capacity to evaluate the relative monetary investment (present or deferred) that citizens are willing to make in favour of a marginal reduction in mortality risk. Any such calculation must take into consideration several relevant nuances. The first is to establish a correct relationship between the effects of the economic crisis and mortality, since the correspondence between the two will vary according to the duration of confinement and the de-escalation process. Therefore, the models to estimate the VSL must incorporate a marked temporal axis. Second, it is necessary to realise that the age profile of those who have a higher mortality rate from Covid-19 is completely different from that of people who will suffer associated deaths (for example, from depression) or very serious economic consequences after the health crisis.

Other factors that should be calibrated are the inflation rate and the variation in real income along the time axis defined prior to the study.

The VSL adjustment formula to all the mentioned elements would be the following:

What results do we get for the VSL?

It is very difficult to obtain an exact value for the VSL adjusted for inflation, income and income elasticity over a period of time as short as one month. In addition, the available studies do not yet cover the entire period that we would be interested in or analyse how change due to confinement. In order to be able to calculate the VSL, we must first know how many lives will have been saved directly in Spain through quarantine, a study that corresponds to epidemiologists. Therefore, we will use as a starting point the well-known paper of Imperial College, estimating the number of infections and the impact of non-pharmaceutical interventions on COVID-19 in 11 European countries [5]. This paper estimates that confinement (despite trend statistics from March data only) would have prevented nearly 16,000 deaths until the 31st of that month, which, according to Miguel Almunia [6], who in turn cites the model of Miguel Casares, would have meant saving between 265,000 and 359,000 lives throughout the entire period.

The OECD places the VSL at 2.77 million euros [7], which, multiplied by the total number of deaths avoided through confinement according to the data and trends offered, would give a total value of between 736,700 and 998,000 million of added euros that would have been saved in that period, according to the aforementioned Casares model.

However, if we use the VSL as a valid indicator to set the course and rhythm of certain public policies and decisions, in the case of confinement and de-escalation, we must also bear in mind that there will be a point at which to prolong seclusion will imply a greater cost in present and future lives than those that could be saved.

The total bill of confinement for Spain

Based on the previous method, the VSL for the OECD countries (including Spain) has been established at 2.77 million euros per person. The total cost of confinement can be calculated not only from the decrease in GDP and an increase in public debt, but from the monetary benefit obtained by all the deaths avoided due to this measure.

The data to determine the drop in GDP per capita between the start of the confinement and the month of June have not yet been published officially, so we will rely on a consensus of estimates from Fedea, BBVA Research, and the Rafael del Pino Foundation [8]. According to these three entities, the decrease in GDP in the first quarter of the year would have capped at 4.7%, which would then be reinforced downward with an additional contraction of 13.5% between April and June — an aggregate decrease from January to June of 17.57% of the initial GDP.

To this we must add the increase in public debt that the Spanish economy will suffer. Even if it is a deferred cost, which must be paid by future generations, it will be an additional burden on public accounts that citizens will have to face.

In one of the reports cited, specifically that of BBVA Research, the estimated level of Spanish public debt will be around 120% of GDP, starting from 95.5% at the end of the fourth quarter of 2019. This implies an increase by 24.5%.

Therefore, the damages to the economy of our country due to confinement will be remarkable, at least using the short-term estimates that we have. Adding the fall in GDP of 17.5% between January and June, and the increase in public debt by 24.5 points, we would obtain a total direct cost on citizens of 42% of GDP, without counting the likely increased in the second quarter of the year, which would significantly lower costs. Even so, the estimates on this are still very imprecise and variable.

Assuming all this, in nominal terms, the short-term invoice for confinement would be around 522,797 million euros, if we take the official figure at the end of the fourth quarter of 2019 (1,244,757 million euros) as the base GDP for calculations. 

 Next, we quantify the total benefit, in monetary terms, derived from confinement, which would be equivalent to the added value of the VSL as a result of deaths avoided thanks to social distancing.

There are not many studies that compute the number of deaths prevented through confinement, since the aforementioned Imperial College paper only referred to the month of March. Therefore, we will build on a study by the King Abdullah University of Science in Saudi Arabia, which includes prestigious Spanish researchers such as Carlos Duarte [9]. According to the data they provide, on average, 73,000 lives were saved every two months. Therefore, beginning at the announcement of the state of alarm, on March 14, to the conclusion of the time marked for this study (end of June), confinement would have prevented about 255,500 deaths.

Next, to obtain the added monetary value of the “benefit” that the confinement has generated, we calculate the product of the 2.77 million euros of VSL at the individual level and the nearly 255,500 additional deaths due to Covid-19 that have been prevented: this amounts to 707,735 million euros.

Finally, to calculate the total result of confinement, we apply the following formula:

Therefore, the net benefit in terms of aggregate EVV would be 184,938 million euros, with a cost on citizens of 522,797 million euros. Or in other words, the confinement will have supposed a cost (adding the direct and the deferred) close to 11,140 euros per person.

All this shows that this measure of social distancing may have reached its inflection point, and that any extension beyond the de-escalation process, or a greater paralysis of the Spanish economy, would have clear regressive effects on the country as a whole.

Conclusion

Therefore, the optimal solution is to gradually relax containment measures, so that commercial activity can return with some normality. This is necessary in order to minimise the sharp contraction of GDP in 2020, subsequently saving as many jobs as possible and protecting those most economically disadvantaged by the Covid-19 crisis.


[1] Doménech, R; Sicilia, J, (2020)- “Los desafíos de la economía española para superar el Covid-19”. Expansión, 24 de abril. Retrieved from https://www.expansion.com/opinion/2020/04/24/5ea1d899468aebd6348b459e.html

[2] Diego Bodas et al. (2020), “Medición del comercio minorista con datos con operaciones con tarjeta”. BBVA Research.

[3] FMI (2020), “Perspectivas de la Economía Mundial, abril de 2020”. Retrieved from https://www.imf.org/es/Publications/WEO/Issues/2020/04/14/weo-april-2020

[4] BdE (2020), “Escenarios macroeconómicos de referencia para la economía española tras el Covid-19”.

[5] Imperial College Covid-19 Response Team (2020), “Estimating the number of infections and the impact of non-pharmaceutical interventions on COVID-19 in 11 European countries”.

[6] Almunia, M. (2020), “¿Proteger la salud o la economía? Una terrible disyuntiva.- Nada Es Gratis. Retrieved from https://nadaesgratis.es/admin/proteger-la-salud-o-la-economia-una-terrible-disyuntiva

[7] OECD (2019), Valuing mortality impacts. Retrieved from https://www.oecd.org/environment/tools-evaluation/valuingmortalityimpacts.htm

[8] https://www.abc.es/economia/abci-espana-encara-mayor-caida-desde-posguerra-202004040123_noticia.html

[9] https://cadenaser.com/ser/2020/04/19/ciencia/1587325336_889957.html

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