Mitigating COVID-19 Risks to Sustain Growth

The debate about the economic fallout from the arrival of Covid-19 is increasingly framed as an either/or — sacrificing the economy through mitigation strategies such as social distancing or imperiling millions of lives. We argue that this framing misses the benefits of mitigation for the economy in the long run. Even holding fixed important moral considerations, the planner’s solution to a model of a production economy where households face economic disaster risks point to significant benefits of spending real resources on mitigation. If households’ belief regarding pandemic arrival rates weighs a really bad scenario, such as uncertain vaccine effectiveness and recurrent Covid-19 waves that negatively impact productivity and capital stock, then the optimal solution calls for drastically ramping up mitigation spending to curtail such disaster risk. Mitigation crowds out consumption, investment, and lowers the value of capital in the short run. But it insures sustainable economic growth and delivers higher social welfare in the long run.