USA

Hoping for a lucky break in the pandemic could cost the US economy dearly

Perspectives annie duke

The latest coronavirus surge is upon us and it's looking more like a tsunami. With public health at risk and the economy hobbling along, we're going to be facing some painful decisions — again. Should governments shut down bars and restaurants? Should schools send kids home to learn remotely? Will some parts of the country have to, as Dr. Anthony Fauci has suggested, hold off on Thanksgiving?

Our track record with these decisions is not great so far. The states hardest hit by the first wave made these decisions too slowly. The ones hit hardest by the second wave repeated the mistake, acting only after they had run out of other options, as local hospitals became overwhelmed and daily deaths set records.

While countries that have kept the virus under control, like China, New Zealand and Australia, have also kept their economies more or less afloat, the United States' economic recovery is sputtering and stalling.

As temperatures plummet and infections rise, will we learn from the past and get it right this time around? Behavioral economics says probably not.

When it comes to painful choices, we act like losing gamblers refusing to quit, hoping for that one big hand that will get us even. We hope that luck will break our way and we can avoid ever having to make the tough choices.

President Trump's own words offer a clear example of this tendency. When he said, "It's going to disappear. One day — it's like a miracle — it will disappear" or, "There's a theory that, in April, when it gets warm — historically, that has been able to kill the virus. So we don't know yet; we're not sure yet," Trump was expressing a hope that good luck might rescue us from ever having to shut parts of the economy down.
This desire to gamble on luck to get us out of a bad spot is one of the key findings of Prospect Theory, developed by Amos Tversky and Nobel Laureate Daniel Kahneman. They found that when people are faced with a sure loss, most are willing to risk losing even more for the chance to avoid it.

Kahneman and Tversky offered people the following type of proposition:

Would you rather accept a sure loss of $750 or an 80% chance of losing $1,000 (and a 20% chance of no loss)?

If you pick the option that gives you a 20% chance to avoid the loss (that comes with an 80% chance of losing $1,000) it will cost you $800 on average, more than the sure loss of $750. But even though it's economically worse, most people will take the gamble, hoping luck will break their way and they'll hit the 20% chance of having to pay nothing at all. Rationally, they should pay the $750, but that comes with the pain of a sure loss, so they're willing to pay the cost of taking the worse bet to avoid that pain.

By delaying painful decisions during the first and second waves, many American politicians have taken a lot of similar gambles that luck will somehow break our way — that the virus will disappear with the warm weather or a miracle cure will appear or an effective and safe vaccine will come ahead of schedule. And just as Kahneman and Tversky found, as a nation we have had to pay the economic price of taking that gamble.

China took aggressive action to control the virus and it has reaped the longer-term economic benefits, avoiding the recession gripping most other countries. By implementing a severe lockdown, China accepted the pain of the certain economic hit in the near term, but largely avoided the accumulating costs that have come with a failure to control the virus. China's economy contracted by 6.8% in the first quarter, but grew 3.2% in the second quarter and 4.9% from July to September. Compare that to 32.9% contraction of the US economy in the second quarter, and the cost of the gamble becomes clear.
Of course, China and the United States were not exactly on an even playing field. China has an authoritarian government which has an advantage over democracies in implementing and enforcing strict mitigation measures. But the economic upside of refusing to take the gamble that the virus will resolve without aggressive action can be seen across democracies as well. New Zealand and Australia have done a much better job containing the virus than the United States has and these countries have seen much smaller economic contractions of 12.2% and 7%, respectively.

If we want the economy to recover more quickly, we have to get the virus under control. We know what to do. Limit the size of gatherings. Keep indoor dining and bars closed. Maybe even delay, cancel or reimagine Thanksgiving. Yes, all these things are painful, but these are decisions we're likely to wish we had made earlier. The longer the United States delays these decisions, the more Americans will pay for the gamble.

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