Monday, April 27, 2009

Classroom question of the day 

Professor, what's the effect of swine flu on the economy?

I got that this morning, and then had another prof tell me the discussion in his intermediate macro course. There's both a supply and demand effect, but my guess is that the supply effect (through a growth model) is the most frequently used answer to this question. Tyler Cowen links to this NYT article from 2007 in which mortality was greatly reduced by quarantines and public transportation closings. But that disrupts production much like a terrorist attack. In both cases, the estimated impact is relatively low. (Ditto Katrina.)

It does seem though that if the effects of swine flu are widespread, you'd see more capital deepening, meaning that each worker has to become more productive because they have more capital to work with. If labor becomes more scarce, you'd see an increase in wages, and you'd probably some attempt at capital substitution. The Spanish flu story is a reminder that the numbers could get big enough to create these kinds of effects. It takes much longer to rebuild labor than capital that is suddenly destroyed.