Economic Activity and the Value of Medical Innovation during a Pandemic

Abstract

We are currently fighting a war against the COVID-19 virus. The war presents an obvious and massive tradeoff between “guns” – activities whose primary purpose is war production – and “butter,” which refers to the normal activities of households and businesses. Without any improvement in our techniques for fighting the war, the sacrifices by households and businesses will be staggering and historically unprecedented. This document enumerates and quantifies the sacrifices, showing why negative 60 percent is an optimistic projection for the annualized growth rate of U.S. GDP in 2020 Q2 if the nonessential businesses were not allowed to operate during that quarter. The lost surplus from market activity, while massive, nonetheless understates the true costs of the sacrifices that households and businesses are making, which I estimate to total almost $15,000 per household per quarter before counting any health costs or monetizing any intrinsic costs of forgone civil liberties. This is why better techniques for fighting the war are incredibly valuable.