Scenario: economic effects

Install and try this scenario here!

The COVID-19 pandemic has severe medical and social consequences. But it has vast economic consequences as well. A recession is expected, and predictions show (link – in Dutch) that it can be way more severe than the banking crisis (2009) recession.

Thus governments are trying to minimize the economic impact of the pandemic and try to minimize the “financial issues” people and companies have. Also, once the pandemic has been dealt with, “restarting” the economy is a big challenge as, among others, people have lost their jobs and economic activity has ceased.

“The economy stands still while financial obligations continue.”

With this scenario we demonstrate the relation between the pandemic, health measures and the economy. This shows the complex and interconnected nature of the situation. With the scenario’s we enable users to explore the model and come to this conclusion themselves.

The scenario

The scenario is based on the economic theory of the circular flow of income. In this theory people work to gain income while providing labour. With this income they can spend money to gain goods or services. This gives businesses revenue in exchange for the labour that they accrue from their workers. This theory fits well with values and needs as people can fulfill some of their needs by performing labour or spending their income.

Figure 1: illustration of the circular flow from https://en.wikipedia.org/wiki/Circular_flow_of_income

The pandemic 1. Makes people sick which prevents them from performing labour and 2. Many governments shut down businesses. This cuts the cycle of income, as illustrated in Figure 2. One economic measure that has been observed is paying the wages of employees of closed businesses in one way or another. In this scenario we explore these three different situations.

Figure 2: cycle of income being cut.

Once the pandemic is dealt with, one way or another, life goes on. The big questions is what happens and how can we influence this. The measures being taken can be lifted. In this scenario we can decide on the timing of the introduction and removal of measures.

The concrete scenarios
  1. No infections
    • Life goes on as normal, no pandemic and no measures from the government.
  2. Infections
    • Infections occur.
    • No measures from the government.
  3. Infections with health measure (close shops)
    • Infections occur
    • Government closes all non-essential shops to prevent spread.
    • Government opens all non-essential shops at moment X.
  4. Infections with health measure (close shops) and economic measure (pay wages)
    • Infections occur.
    • Government closes all non-essential shops to prevent spread.
    • Government pays wages of employees of closed shops.
Analysis
Baseline scenario
  1. No infections: Life goes on as normal, no pandemic and no measures from the government.

In the above graph we can see the normal cycle of people going to work and coming back home every day and going to leisure activities every now and then.

In our simulation children do not have their own capital. Students and retired people are getting money from government, which comes from tax. In the current set-up retired people get less than students, but this can be changed based on data per country or region.

The above three graphs show some economic parameters of the system indicating how the economy is doing. Note: for now we have a very simple closed economy. Thus the graphs above are not reflecting the real economy. They are mainly interesting in comparison with the graphs in the scenarios below.

Economic Scenario: no economic measures

We see that during the pandemic people stay more at home. They still go to shops and essential workers (like teachers, medics, etc.) will still go to work.

The amount of capital slowly goes down as the pandemic continues and people all converge to some kind of minimum still sustainable in the diminished economy.

We see that people keep buying essential products, but the non-essential shops get hurt by the pandemic. Production continues at the workplace, but declines when people start dying.

The total capital diminishes in the system as people die (their money disappears from our simulation).

The economic parameters seem quite close to that of the baseline. So, the economy is not doing very bad, but we can see that the death toll in this scenario is higher than in the following two scenarios where the government intervenes. Thus this government chooses economy over lifes.

Scenario: shop closures
  • Infections with health measure (lockdown and close shops)
    • Infections occur
    • Government orders a lockdown
    • Government closes all non-essential shops to prevent spread.

In this radical scenario the curve of the pandemic is really flattened. Within the time span of our simulation we see that we are still not experiencing many infections and hardly any deaths. Note that lockdown here starts when only one person was infected. So, much earlier than in real life!

People are almost all working at home.

The essential shops seem to be doing well. This can be seen as hoarding behavior of people that want to make sure they have enough essential products and have still money to buy things. They do not buy anything non-essential as those shops are all closed. The non-essential shops do not go bankrupt in the simulation because we did assumed here that they could postpone all fixed costs, like loans, rent, etc. If these fixed costs are taking into account all the non-essential shops will go bankrupt without government intervention.

The velocity of the money flowing through the system decreases due to the lockdown. The total amount of money stays the same as there are hardly any people dying and thus no money disappears.

Scenario: unemployment subsidy
  • Infections with health measure (close shops) and economic measure (pay wages)
    • Infections occur.
    • Government closes all non-essential shops to prevent spread.
    • Government pays wages of employees of closed shops.

We see a bit more people getting infected. This is mainly due to some statistical variance between runs. In a more thorough publication we will use averages of many runs to create these graphs to avoid these small diferences.

As government now subsidizes all people whose company is shut down with the lockdown the average amount of capital increases. The fact that it increases is mainly due to the fact that people cannot spend money on non-essential products and leisure activities (going to cafes, sport events, etc.)

The economic activity is kept up by the government. However, the government reserves are quickly depleting as less tax is coming in and more subsidies are paid. This situation is not sustainable!

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