We don’t have enough data to know whether drastic lockdowns are worth the economic damage.
The government response to the coronavirus pandemic has seemed chaotic—underreaction one minute, piling on restrictions the next. It has left many wondering whether anyone is weighing the trade-offs. Do heavy-handed measures carry the benefits to justify the considerable costs? The uncomfortable answer: We don’t know.
The novel coronavirus appears at first to be a problem of risk management. It is a dangerous disease that threatens the lives of our neighbors and loved ones. Our response—increased social distancing, shutting down businesses—is aimed at reducing that risk. But the problem isn’t risk so much as uncertainty.
In 1921, shortly after the 1918 flu pandemic, economist Frank Knight made the distinction between risk and uncertainty. The future is unknowable, but risk is measurable. It can be estimated using data, provided similar situations have happened before. Uncertainty, on the other hand, deals with outcomes we can’t predict or never saw coming.
Risk can be managed. Uncertainty makes it impossible to weigh costs and benefits, such as whether reducing the spread of a virus is worth the cost of an economic shutdown that could last several months. The most responsible course of action is to assume the worst and take the most risk-averse position. Managing uncertainty is expensive: In markets, it means holding cash; in society, it means shutting down.
Allison Schrager is a senior fellow at the Manhattan Institute, author of An Economist Walks Into a Brothel (Random House), and a co-founder of LifeCycle Finance Partners, LLC, a risk advisory firm. Follow her on Twitter here.
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