A lesson from the Spanish Flu: restrictions are tools of fiscal policy

In the midst of enormous uncertainty, governments are now looking for ways to overcome the economic crisis triggered by the coronavirus outbreak. There is uncertainty associated with the disease itself as well as with the measures aiming to mitigate it and their consequences. The ongoing crisis is unique in many ways, but for purposes of comparison, it is interesting to take a look at the pandemic that wreaked havoc in the world a century ago: the Spanish Flu, or the 1918 Great Influenza Pandemic. This article is part of a series of blog posts dealing with the economic impacts of the coronavirus.

Although we are currently only guessing the magnitude of the economic impacts that the coronavirus crisis will have, some kind of an indication can be given by the Spanish Flu, which raged worldwide a century ago. According to present knowledge, the disease was deadlier than COVID-19. Barro, Ursúa and Weng estimate that, on average, the impact of the Spanish flu on GDP was about –6%. According to them, a plausible upper bound for the coronavirus’s effects on GDP could be derived from the economic contraction following the Great Influenza Pandemic.

Although the Spanish Flu had higher mortality than COVID-19, particularly among young people, it should be observed that the global economy is very different today than it was a century ago. Today’s global economy is integrated, and international trade and mobility are now at a completely different level than previously. Long and complicated production chains make the economy more vulnerable to disruptions.

However, the most important difference probably resides in the fact that the service sector accounts today for more than two thirds of production. A hundred years ago, about 40% of employed people worked in the service sector and 25% in agriculture, while the corresponding figures are now 80% and about 1%. It is therefore also possible to think that the coronavirus outbreak could have heavier impacts on the economy than the Spanish Flu. This interpretation differs from that of Barron, Ursúan and Weng.

Will the measures taken to restrict the coronavirus crisis have similar economic impacts as the measures taken during the Spanish Flu?

Although there are essential differences between both the economic structures and the actual diseases, it is also possible to find similarities for instance in the policy measures following the two pandemics. Public authorities restricted the free movement of people a hundred years ago as well by banning large events and closing down shops to prevent the spread of the virus. We may therefore learn some lessons from the crisis caused by the Spanish Flu on how to interpret the consequences of restrictions.

Correia, Luck and Verner studied the economic effects of the Spanish Flu and the related non-pharmaceutical interventions in US cities. They found that the cities with the highest pandemic mortality experienced the highest decrease in employment in the manufacturing industry. The researchers also found that if the restrictions had been imposed sooner and had remained in force longer, the employment rate was higher in the manufacturing industry after the pandemic. The mortality rate was also lower in these cities.

The results could be interpreted in such a manner that, in the short term, governments have to choose between public health and economy, but in the long term, the targets are no longer contradictory.

In other words, the restrictions imposed during the Spanish Flu accelerated the shock caused by the pandemic on the economy but mitigated it later on. An important lesson to be learned might therefore be that restrictions should not be considered only a way of safeguarding public health, but they should also be regarded as tools of fiscal policy.

However, when interpreting the results, it is important to keep in mind that the previous experiences cannot be applied directly to the present situation. In addition to the mortality rate, another essential difference between the two pandemics is the fact that the victims of the Spanish Flu were mainly young and working-age people, whereas the victims of the currently raging pandemic are mainly older people outside the labour force.

Because of these kinds of differences and other elements of uncertainties related to the study, it is of paramount importance to collect rapidly as much information as possible on the ongoing pandemic. A wide knowledge base enables fiscal policy to be built on a more solid foundation to overcome the crisis.