Even for economists, it’s hard to think of anything other than the current pandemic. That’s because the Covid-19 epidemic is the overwhelmingly dominant factor driving the near-term path of the economy.

Here I’d like to offer a few observations, some of which follow up on previous posts here and at MoneyIllusion.  Eight days ago, I suggested that we should “Watch the islands” (including some quasi-islands that are largely cut off from neighboring countries.) Since that time, the countries I mentioned have seen their active caseloads falls very sharply.  Ten days ago, I made this prediction:

I predict that New Zealand’s plan [total elimination of Covid-19] will work, and I also predict that once it does work the Aussie government will be under strong pressure to copy New Zealand and go for zero.

At the time, Australia had a mitigation goal, not elimination.  Yesterday I saw this interesting claim:

As things turned out, the deCODE screening revealed that the infection was not widespread in Iceland. This was part of the story of how the Icelandic authorities came to realize that the containment measures, expected only to slow the spread, might actually be effective enough to stop it. At the same time, the experts were coming around to the view that the disease was far more deadly than influenza and might need to be suppressed rather than merely slowed down. The result was that Iceland stayed in the containment phase and never moved on to the planned mitigation phase.

It is difficult to tell precisely when the Icelandic authorities switched goals from mitigation to suppression. No official announcement of a change in policy has ever been made. But an interesting reference point is an interview with prime minister Katrín Jakobsdóttir on April 16 where she states that “the goal should be zero infections.”

I had emphasized the fact that places like Iceland and New Zealand were islands, but the article suggests this had little to do with Iceland’s initial success:

Articles on the success of Iceland often point out that the country is an island, like Taiwan, and well-positioned to control its borders. This advantage, however, has played little part in the Icelandic response. While Icelandic travelers from high-risk areas were ordered into quarantine upon their return, no restrictions were placed on foreign visitors to Iceland.

Going forward, however, a policy of zero cases would require strict border controls:

However, as the chief epidemiologist realized that the Icelandic measures seemed to be suppressing the outbreak without creating herd immunity he decided that the only way to prevent a second wave was to stop the virus at the border, recommending as much to the government. Thus, Iceland finally instituted border controls on April 24 with a requirement of two weeks in quarantine for everyone entering Iceland. This was a painful step for a country dependent on tourism, taken with the greatest reluctance after the authorities had reviewed all other possibilities.

This is the painful choice faced by island countries, which are often heavily dependent on tourism.  Sharply curtail the domestic economy through social distancing and continue with tourism, or curtail tourism (at a high cost) and completely eliminate the virus, allowing the domestic economy to revive with no social distancing.

It turns out that a country with only one case is more similar to a country with 300 cases than it is to a country with zero cases.  That’s because one case can quickly turn into 300 cases.  But zero cases cannot (assuming tight border controls.)

It’s also important to look at many countries when evaluating a strategy, as any one country might be affected by unusually good or bad luck.  For instance, image a scenario where we wanted to know if the epidemic will flare up again in China during the next 18 months, as it recently did in Singapore.  If we had 20 Chinas to look at, then even a one-month observation period would give us a lot of information about the likelihood that its control strategy would work in any given “China”.  (Imagine parallel universes.) But we only have one China, and hence we must wait.

In contrast, there are lots of smaller countries with similar patterns to Iceland and New Zealand, including Australia, South Korea, Taiwan, Hong Kong, Faeroe Islands, all of which I cited in my earlier post, and all of which have falling active caseloads.  The fact that all still seem to be doing pretty well is much more informative than if I’d just followed one “model”.

Indeed it might be useful to add in another group of countries that are not islands, but which are seeing a dramatic fall in active caseloads, such as Vietnam, Thailand, Austria, and several others.  Is this luck, or will their caseloads eventually fall close to zero?  The existence of porous land borders makes it seem unlikely they could achieve zero cases, but Vietnam and Thailand benefit from having at least some neighbors that don’t currently have any (reported) community transmission, such as Cambodia and South China.

The Iceland case I cited is also important because it shows that governments don’t really have hard and fast strategies.  They are feeling their way in the dark, and are willing to change course when new information comes in. I suspect that the world will soon divide into two groups, countries willing to live with a significant level of community transmission, and those unwilling to do so.  Each will grope toward what they see as an optimal strategy, given their circumstances.

I expect the US to move toward a reduction in mandates, as I don’t believe they are particularly effective in the current environment.  But I do expect to see the US continue to pursue a policy of social distancing (until there is an effective vaccine), and this will continue to be a heavy drag on the economy.  I suspect Canada will follow the US, whereas Australia will follow New Zealand.

The least impacted places may end up being countries with almost no cases and a large domestic economy, such as Australia and China (and perhaps eventually Japan), but even they will suffer from the drop in international trade.

PS.  Yes, I’m aware of asymptomatic cases.  But even if they comprise 50% of the total, eliminating symptomatic cases will also eliminate asymptomatic cases in short order.

PPS.  I am not making any sort of “one size fits all” policy recommendations in this post.  I’m skeptical of government mandates in the US at this moment, but I wouldn’t rule out the possibility that they could have some benefits in some circumstances, such as extreme hospital overcrowding.  The lockdown probably helped New York during the worst of the epidemic.  I also assume that even if mandates were removed in the US, the private sector would not dramatically change its social distancing policies in the short run.

PPPS.  Obviously, even countries with “zero” cases will have a few inbound infected travelers in quarantine.

PPPPS.  On my first visit to Iceland, I stayed at a hotel called “Anna”.  As I drove up I was worried they’d be sold out, as it had such a spectacular view of the eruption.  In fact, I was the only person there.  Hmmm, I wonder why . . . .

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