A Macroeconomic Model of Healthcare Saturation, Inequality & the Output-Pandemia Tradeoff

49 Pages Posted: 18 Dec 2020 Last revised: 17 Feb 2021

See all articles by Enrique G. Mendoza

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Eugenio Rojas

Chilean Budget Office

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Jing Zhang

Federal Reserve Bank of Chicago

Date Written: December 14, 2020

Abstract

COVID-19 became a global health emergency when it threatened the catastrophic collapse of health systems as demand for health goods and services and their relative prices surged. Governments responded with lockdowns and increases in transfers. Empirical evidence shows that lockdowns and healthcare saturation contribute to explain the cross-country variation in GDP drops even after controlling for COVID-19 cases and mortality. We explain this output-pandemia tradeoff as resulting from a shock to subsistence health demand that is larger at higher capital utilization in a model with entrepreneurs and workers. The health system moves closer to saturation as the gap between supply and subsistence narrows, which worsens consumption and income inequality. An externality distorts utilization, because firms do not internalize that lower utilization relaxes healthcare saturation. The optimal policy response includes lockdowns and transfers to workers. Quantitatively, strict lockdowns and large transfer hikes can be optimal and yield sizable welfare gains because they prevent a sharp rise in inequality. Welfare and output costs vary in response to small parameter changes or deviations from optimal policies. Weak lockdowns coupled with weak transfers programs are the worst alternative and yet are in line with what several emerging and least developed countries have implemented.

Suggested Citation

Mendoza, Enrique G. and Rojas, Eugenio and Tesar, Linda L. and Zhang, Jing, A Macroeconomic Model of Healthcare Saturation, Inequality & the Output-Pandemia Tradeoff (December 14, 2020). PIER Working Paper No. 20-041, Available at SSRN: https://ssrn.com/abstract=3749401 or http://dx.doi.org/10.2139/ssrn.3749401

Enrique G. Mendoza (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Pennsylvania ( email )

Philadelphia, PA 19104
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HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

Eugenio Rojas

Chilean Budget Office ( email )

Teatinos 120
Santiago
Chile

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-2254 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jing Zhang

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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