The long-run economic consequences of pandemics

The exemplar for the economic impact of a pandemic is the Black Death, which struck Western Europe in the 14th Century and killed somewhere between one third and two thirds of the population. As I discuss in my ECONS102 class, the Black Death had long-run consequences, and has been implicated in a lot of later social change in Europe (such as the Jacquerie rebellion in France [1358], the Peasant Revolt in England [1381], and even the Renaissance). However, that's just the tale of a single pandemic - is there something more general we can expect about the long-run consequences of pandemics?

That seems to be a question with particular relevance right now, and is the topic of this new NBER Working Paper (ungated) by Oscar Jorda (Federal Reserve Bank of San Francisco), Sanjay Singh, and Alan Taylor (both University of California - Davis). They looked at the impact of 15 major pandemic episodes over the period from the Black Death (1347-1352 C.E.) to H1N1 (2009 C.E.) on the real natural interest rate (essentially a moving average of the real interest rate). They hypothesise that pandemics result in:

...transitory downward shocks to the natural rate over such horizons: investment demand is likely to wane, as labor scarcity in the economy suppresses the need for high investment. At the same time, savers may react to the shock with increased saving, either behaviorally as new precautionary motives kick in, or simply to replace lost wealth used up during the peak of the calamity.

And indeed, that is what they find:

Pandemics have effects that last for decades. Following a pandemic, the natural rate of interest declines for decades thereafter, reaching its nadir about 20 years later, with the natural rate about 150 bps [basis points] lower had the pandemic not taken place.

Looking at real wages, they find that:

The response of real wages is almost the mirror image of the response of the natural rate of interest, with its effects being felt over decades... real wages gradually increase until about three decades after the pandemic, where the cumulative deviation in the real wage peaks at about 5%. 

Both results are consistent with earlier work on the economics of the Black Death. Interestingly, the effects for major episodic wars are the opposite - the real natural interest rate increases after periods of war. Their results are also robust to excluding various pandemics, including the Spanish Flu (which, of course, was followed soon after by the Great Depression).

Jorda et al. conclude that:

...if the trends play out similarly in the wake of COVID-19—adjusted to the scale of this pandemic—the global economic trajectory will be very different than was expected only a few weeks ago. If low real interest rates are sustained for decades they will provide welcome fiscal space for governments to mitigate the consequences of the pandemic.

It's difficult to see whether things will play out the same this time. Real (and nominal) interest rates are at all-time lows already (see, for example, the various charts in this paper) - they don't have far to go. Maybe this time really is different?