In addition to the direct damage it does to human health, COVID-19 is sure to have an enormous economic impact. As we try to prepare for that, let's look at what economists have learned from the damage done by past pandemics, particularly the Spanish flu outbreak of 1918–19.
Begin with Elizabeth Brainerd and Mark V. Siegler's June 2002 paper for the Centre for Economic Policy Research, "The Economic Effects of the 1918 Influenza Epidemic." This comes the closest of all the papers I've read to looking on the bright side: They found "a large and robust positive effect of the influenza epidemic on per capita income growth across states during the 1920s."
No, that doesn't mean the flu was actually good for the economy. That growth, or at least some of it, "likely represents a return to trend rather than a change in trend." Since "flu deaths in 1918 and 1919 among prime-age adults are a significant predictor of business failures in 1919 and 1920," the economy was bound to see "a return to trend after this large temporary shock."
The authors acknowledge limits on their data—for example, they had per capita income only for the 1919–1921 range and then again in 1930, preventing them from being fine-grained about changes along the way through the 1920s. They also made no attempt to disentangle the direct effects of the pandemic from the effects of public health interventions that shuttered businesses. (They do note, sadly, that "even the strictest quarantines proved ineffective in preventing the epidemic in most regions.")
Nor are they able to compare and contrast the effects of different cities' policy responses. Philadelphia went ahead and held a huge parade for returning soldiers (bad idea). St. Louis opted for "closing the schools, shuttering movie theaters and pool halls, and banning all public gatherings." San Francisco ordered people to wear masks in public. Brainerd and Siegler can't offer much granular detail on how such different approaches played out economically. (Another issue they didn't directly discuss, one perhaps less relevant during Spanish flu times then today, has been addressed by other researchers: the effect on parents in the workforce when schools are shut for public health reasons.)
We do get some geographic variation in a 2013 Journal of Health Economics study focusing on Sweden—"The Impact of the 1918 Spanish Flu Epidemic on Economic Performance in Sweden: An Investigation into the Consequences of an Extraordinary Mortality Shock," by Martin Karlsson, Therese Nilsson, and Stefan Pichler. Since the epidemic had widely different effects in different areas of Sweden, the authors are able to compare and contrast its impact within a mostly homogenous population. And since Sweden did not participate in World War I, it's easier not to confound war effects with pandemic effects. (The pandemic did coincide with upheavals in nearby Germany and Russia, and the authors acknowledge that these might have disrupted the Swedish economy as well.)
Their results, they find, were "difficult to reconcile with standard theoretical models." Ordinarily, one would expect an "immediate increase in GDP per capita," due to the more productive capital brought to bear per worker. That didn't happen. They also note "an apparent redistribution between capital and labour"—in capital's favor—"which suggests that the impact of the pandemic goes beyond what standard growth theory would predict."
In any case, the author found that the flu "led to a significant increase in poverty rates." Capital returns fell, unemployment shot up, and Sweden's GDP decreased by "five per cent in a single year." But "the recovery was very quick," they note. "Swedish GDP increased by 8 per cent in 1922 and the country faced steady economic growth for the rest of the decade….Moreover, the 1920s were characterised by fast growth in real wages: in 1930, they were at roughly twice their 1918 level, and not even the sharp downturn of 1921 made them stop growing."
But there were darker long-term effects as well. The "pandemic appears to have had a strong and lasting positive effect on poverty," they write: The "difference in flu mortality would give rise to an increase in poverty by 9.7 per cent." And the generation of children born during the pandemic were more likely to have health problems and lower wages.
A 2007 paper by Thomas A. Garrett of the St. Louis Federal Reserve Bank, "Economic Effects of the 1918 Influenza Pandemic," speculates about the possibilities of a future pandemic: "Researchers at the U.S. Centers for Disease Control and Prevention calculate that deaths in the United States could reach 207,000 and the initial cost to the economy could approach $166 billion, or roughly 1.5 percent of the GDP." The long-run costs would be even higher: "up to 1.9 million dead in the United States and initial economic costs near $200 billion."
Garrett brings up something the Brainerd/Siegler paper sloughed over: Other bad things were also happening to the economy at the end of the 1910s, most especially World War I, which may complicate any direct comparison of then to now.
Given the "almost complete absence of economic data from the era, such as data on income, employment, sales and wages…especially at local levels," Garrett looks for evidence in "newspaper articles printed during the pandemic, with most of the articles appearing in newspapers from…Little Rock, Ark., and Memphis, Tenn." Between that and the evidence in earlier economic studies, he finds a level of geographic variation in the disease's effects that is unlikely in our far more interconnected nation a century later.
Cities, unsurprisingly, had "higher mortality rates than rural areas of the states." Little Rock saw general merchant business declines of 40 percent, and even the retail grocery business reduced by one-third. A specific department store reported a more than 50 percent cut in daily income, but at least it was still operating. Though there was a flu-related "increase in demand for beds, mattresses and springs," the city's businesses were "losing $10,000 a day on average ($133,500 in 2006 dollars). This is actual loss, not a decrease in business that may be covered by an increase in sales when the quarantine order is over."
The Memphis Street Railway reported that 124 of its 400 employees were too sick to work on one day. A depopulated telephone company begged the public to make fewer unnecessary calls. Coal mine operators reported a 50 percent cut in production, with some mining camps forced to shut down from raging infections. Garrett explains the possibility of a post-pandemic increase in wage and income growth on "a greater increase in capital per worker, and thus output per worker"—which might not work out exactly the same way from a starting point of 2020 rather than 1920.
He also notes that the "fact that males aged 18 to 40 were the hardest hit by the influenza had serious economic consequences for the families that had lost their primary breadwinner." (Needless to say, "loss of prime working-age employees also had economic consequences for businesses.") And "cohorts in utero during the 1918 pandemic had reduced educational attainment, higher rates of physical disability and lower income."
Yet most of 1918 pandemic's effects "were short-term," Garrett concludes. "Many businesses, especially those in the service and entertainment industries, suffered double-digit losses in revenue. Other businesses that specialized in health care products experienced an increase in revenues. Some academic research suggests that the 1918 influenza pandemic caused a shortage of labor that resulted in higher wages (at least temporarily) for workers, though no reasonable argument can be made that this benefit outweighed the costs from the tremendous loss of life and overall economic activity."
Garrett's grim conclusion: "Given our highly mobile and connected society, any future influenza pandemic is likely to be more severe in its reach, and perhaps in its virulence, than the 1918 influenza despite improvements in health care over the past 90 years….Unfortunately, a 2005 report suggests that the United States is not prepared for an influenza pandemic. Although federal, state and local governments in the United States have started to focus on preparedness in recent years, it is fair to say that progress has been slow, especially at local levels of government."