My Two Cents

Depressions and pandemics

Chris Farrell May 5, 2009

Robert Barro, professor of economics at Harvard University and Jose Ursua, a Ph.D. student in economics at Harvard, have written a fascinating article titled Pandemics and Depressions. It’s published on the editorial page of the Wall Street Journal (which also has a poorly thought through screed by columnist Bret Stephens making fun of the “Swine Flu Hysteria).

In recent articles, Barro has been delving deep into an international database. And even though he has opposed the Administration’s fiscal stimulus package, his work has convinced him the prospect of a depression should be taken seriously. Barro and his student booted up the computer again and looked at the effect of pandemics on economies around the world. They focused in particular on the Great Influenza Epidemic of 1918-1920. Anyone worried about the timing of the swine flu pandemic is right to be concerned that a pandemic could turn a severe recession into a depression.

Our ongoing study of economic disasters for 36 countries since 1870 suggests that this concern is well founded. In this sample, we have isolated 158 depressions — defined as declines in a country’s real per capita gross domestic product (GDP) by at least 10%. The most prominent features of these depressions are wars and financial crises. But the fourth-worst global macroeconomic event since 1870 seems to be the Great Influenza Epidemic of 1918-20. This “health shock” accounts for 13 of the depression events. In contrast, World War II is associated with 25, World War I with 23, and the Great Depression of the early 1930s with 21.

Other, far less severe pandemics in the postwar era had only temporary economic and stock market effects.

For most countries — with Mexico as a likely exception — the swine-flu epidemic of 2009 may turn out not to have greater macroeconomic consequences than the other four post-World War II flu crises. However, we already have substantial depression risks, arguably 20%-30% in the U.S., due to the global financial crisis that began in 2008. The potential for a flu pandemic surely adds to the depression odds, particularly since — like the 1918-20 epidemic — the current strain disproportionately impacts persons of prime working age.

As Max Weber, a founding father of sociology, wrote in “Science as a Vocation”: “Our age is characterized by rationalization and intellectualization, and above all, by the disenchantment of the world.” Thus, the modern thinker relies on “technology and calculation” — even going so far as to use historical data to calculate probabilities of flu pandemics, financial crises and depressions. Weber clearly would have supported this kind of quantitative analysis. Sadly, his own work was cut short at the age of 56 by the Great Influenza Epidemic, of which he died in 1920 in Germany.

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