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Sacrificing current consumption of leisure and work generates greater future consumption of leisure and work for everyone

April 20, 2020
By: 
Dr. Amin Mawani
Associate Professor of Accounting and Academic Director of the Health Industry Management Program
Schulich School of Business at York University (Toronto)

Public health officials have been insisting that we need to stay at home and maintain social distancing with people who are not part of our immediate household in order to slow down transmission of the COVID-19 virus within the community. The sooner and the more comprehensively we implement this, the sooner the COVID-19 virus could be defeated. And the sooner our faltering economy and the Canadian stock markets recover, the sooner we can reduce the government bailouts that would otherwise lead to higher deficits that burden our next generations of Canadians. Our economy is otherwise fairly sound, and can withstand a short window (e.g., 14 days) of disruption in both supply (employee absenteeism) and demand (customer absenteeism).

At an extreme, imagine if 100% of Canadians could stay at home for 14 straight days with only our immediate household members and practice social distancing. Then, the virus would have nowhere to go and would eventually die. The COVID-19 virus survives and thrives only by transmitting from one human to another. Each infected person can transmit the virus to an average of three people. In the absence of a vaccine or antiviral therapies, the only means to defeat this virus is by reducing transmission to levels that can be treated by our healthcare system. This is what we mean by flattening the curve. Staying home for 13 days would not be as good as staying home for 14 days, but it would be better than staying home for 12 days.

If 90% of the households stayed home, it would not be as good as 100% of the households staying home, but it would be better than if 80% of the households stayed home. This constitutes the benefit of the herd effect. A recent study from the Institute of Disease Modeling shows that a 75% improvement in social distancing practice could reduce COVID-19 deaths in the Seattle area by over 90%. Starting to stay home today would be much more effective in halting the transmission than starting to stay home starting tomorrow. Each day that we delay in isolating ourselves at home increases the number of Canadians inflicted with the COVID-19 virus, and further reduces our ability to flatten the curve. The later we start isolating ourselves, the longer we would have to isolate.

This sounds like paying down credit card debt with high interest rates that compound rapidly over time. The longer we postpone paying our credit card debt, the longer we have to continue paying for it and the more interest expense we incur. Paying excessively high interest rates for a long period of time can financially cripple households. Conversely, the sooner we isolate ourselves and sacrifice current leisure, social or work commitments, the larger the return we will see in being able to enjoy future leisure, social, and work opportunities. For these opportunities, the effective interest rate at which current consumption sacrifices are rewarded with future consumption abilities is extremely high. Furthermore, the rewards accrue to society at large rather than just to the individual because of the positive herd effect. The health and economic beneficiaries from ending the COVID-19 disruption early could very well be members of our own household. Canadians need to understand the nature of the sacrifice and investment requested by the public health authorities. By implementing their advice right away, it is extremely profitable to ourselves and to society at large in both health and financial terms.

Slowing down or spreading out new infections over time rather than peaking all at once will reduce the burden on our health care system and reduce the fatality rate. Flattening the curve will make the outbreak milder while lasting longer, allowing the burden on the health care system to stay within its capacity limits. The returns in the form of avoiding greater isolation in the future are tremendous. But then so are the returns to paying down credit card debt rapidly, and still some of us don’t do it. The fatality rate from COVID-19 without efforts to flatten the curve will be astronomical. If only we could fully understand the compounding effect of high transmission rates, because the window to fight this war is short.