Horrible trade-offs in a pandemic

Poverty, fiscal space, policy, and welfare

Bibliographic Data

ID11912472
AuthorsRaoul Hausmann (0000-0001-9284-5745, Santa Fe Institute), Ulrich Schetter (0000-0002-7830-7884, corresponding author)
Year2022
Volume153
Pages105819-105819
Publication date2022-02-12
Open AccessYes
TypeARTICLE
VenueWorld Development (JOURNAL)
Journal identifiersISSN: 0305-750X • E-ISSN: 1873-5991
PublisherElsevier BV (PUBLISHER)
DOI10.1016/j.worlddev.2022.105819
OpenAlexW4211193440
LanguageEN
Citations received8
References cited75

We analyze how poverty and a country’s fiscal space impact policy and welfare in times of a pandemic. We introduce a subsistence level of consumption into a tractable heterogeneous agent framework, and use this framework to characterize optimal joint policies of a lockdown and transfer payments. In our model, a more stringent lockdown helps fighting the pandemic, but it also deepens the recession, which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Transfer payments help mitigate this trade-off. We show that, ceteris paribus, the optimal lockdown is stricter in richer countries and the aggregate death burden and welfare losses smaller. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. This is particularly true in societies where a larger fraction of the population is in poverty. We discuss evidence from the literature and provide reduced-form regressions that support the relevance of our main mechanisms. We finally discuss distributional consequences and the political economy of fighting a pandemic

Ceteris paribus · Consumption (sociology · Development economics · Economic growth · Economics · Fiscal policy · Fiscal space · Market economy · Microeconomics · Monetary economics · Population · Poverty · Public economics · Transfer payment · Welfare · COVID-19 epidemiological studies · COVID-19 Pandemic Impacts · Income, Poverty, and Inequality

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