US Congressional Budget Office reports on the potential impacts of an influenza pandemic

The US Congressional Budget Office (CBO) has written a paper which explores the short and long term macro impacts of an influenza pandemic on the United States economy. Entitled ‘A Potential Influenza Pandemic: Possible Macroeconomic Effects and Policy Issues’, the assessment concludes that a pandemic involving a highly virulent flu strain could produce a short-run impact on the worldwide economy similar in depth and duration to that of an average postwar recession in the United States.

In the paper CBO also describes the current state of preparedness for addressing a possible pandemic and options for increasing the US’s preparedness.

The paper sets out the following impacts (published verbatim):

Short-Term Effects
The most immediate impact of a pandemic would be a surge in demand for medical services. During a severe pandemic, hospitals, clinics, and doctors’ offices would probably be overwhelmed, and surveillance (keeping track of where the disease was and where it was going) would be difficult. Health care workers would be exposed to the disease, resulting in further strains on the health care system’s capacity, as some workers became sick and others stayed home to care for family members or to avoid becoming ill. Care for nonacute health problems would be sharply curtailed.

As the pandemic progressed, international travel would dramatically decline, as people avoided avian flu “hotspots” and governments restricted travel. It seems unlikely that domestic and international air travel would cease completely, but as a point of reference, at the peak of the SARS outbreak in April 2003, airline passenger arrivals in Hong Kong had declined by nearly two-thirds relative to their levels in March.

In all likelihood, people would quarantine themselves and their families by staying at home more. Nonessential activities that required social contact would be sharply cut, which would lead to significant declines in retail trade. People would avoid public places, such as shopping malls, community centers, places of worship, and public transit. Attendance at theaters, sporting events, museums, and restaurants would decline.

It seems likely that many schools would close, and even if they did not, attendance would fall dramatically as parents kept their children at home. In either event, large-scale school closings would lead to a spike in workplace absences because parents would stay home to care for their children even if they were not sick.

The general slowdown in economic activity would reduce gross domestic product (GDP). Business confidence would be dented, the supply of labor would be restricted (owing to illness, mortality, and absenteeism spurred by fear of contracting the disease), supply chains would be strained as transportation systems were disrupted, and arrears and default rates on consumer and business debt would probably rise somewhat.

It seems quite likely that the stock market would fall initially and then rebound later, as it did in Hong Kong during the SARS episode.

Of course, economic activity would slow, but it would not halt completely.

Experience with such catastrophes as natural disasters and terrorist attacks has demonstrated the ability of people to cope with and adapt to extremely difficult circumstances.

Moreover, the advances in technology of recent years would allow many companies, especially those in service industries, to conduct business via electronic communications, which would permit their employees to work from home. And to the degree that shipping companies were operating, on-line purchases could offset some of the decline in retail trade.

The actions of governments could influence the effects of a pandemic on the economy.

Attempts to quarantine people would probably amplify the reductions in trade, travel, and tourism. However, government actions could also help mitigate economic impacts. Effective global surveillance and prompt identification of the pandemic strain by government agencies—along with quarantine and social isolation—could provide the opportunity for manufacturers to develop a vaccine to lessen the human and economic costs of a pandemic during its latter stages.

Long-term effects
The most important long-term impact of a pandemic is the reduction that would persist in the population and in the labor force after overall demand in the economy returned to normal. The effects of that drop in the population would depend, in part, on the characteristics of the outbreak. If, for example, mortality was concentrated among the very young and the very old, then a pandemic would have relatively small effects on the subsequent growth of GDP. By contrast, if the disease struck workers who were in their prime working years more heavily, then the effects on GDP growth during the years following the pandemic would be more significant. However, predictions of the size and direction of those effects are ambiguous. Under standard assumptions, for example, a one-time reduction in the labor force would raise the ratio of capital to labor and lower the rate of return to capital, thus slowing the pace of capital accumulation and GDP growth for many years. However, under other types of analyses that include the influence of human capital, reduction in the labor supply would encourage investment in human capital, which would tend to speed the growth of per capita output during the transition period, when the economy was recovering from the shock.

How big a reduction in the U.S. labor force would a severe pandemic produce? In 2004, the labor force totaled 147.4 million people. Under the assumption of an attack rate of 30 percent and a case fatality rate of 2.5 percent—the same assumptions applied to the population as a whole—a severe pandemic would cause the deaths of more than 1 million labor force participants, or about 0.75 percent of the labor force.

Since growth in the labor force averaged 1.6 percent during the 1948-2005 period, losing 0.75 percent of the labor force would be equivalent to a pause of one-half year in the growth of the work force. Under the assumptions for infection and mortality associated with the mild-pandemic scenario—an attack rate of 25 percent and a fatality rate of just over 0.1 percent—the number of workers killed would be 50,000, or 0.03 percent of the labor force.

There is little evidence available to use to determine which theoretical prediction best describes the long-term impact of an influenza pandemic.

Read the complete report at http://www.cbo.gov/ftpdocs/69xx/doc6946/12-08-BirdFlu.pdf

•Date: 16th Dec 2005 • Region: US • Type: Article •Topic: BC general
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