Since the beginning of June, more than 70,000 Americans have died from COVID-19, most of them as a result of the new and highly-transmissible delta variant, and nearly all among the unvaccinated. While the human costs of the delta surge are the most egregious, the economic costs of this surge are garnering increasing attention.
Increases in COVID-19 contagion trigger increases in social distancing, lockdown restrictions and supply disruptions that put a damper on economic activity. Indeed, employment growth has already slowed – from 1.1 million new jobs in July to 235,000 in August – and as we show below, the delta variant stands to depress GDP growth as well.
The medical, economic and financial welfare of 211 million vaccinated Americans is thus being threatened by the choices of 74 million eligible but unvaccinated Americans. Economists call such adverse spillovers “negative externalities.” Externalities arise when individuals fail to take into account the effects of their actions on other people.
The failure of private markets to provide appropriate incentives in the face of externalities represents the classic rationale for government regulation. In this case, the relevant regulations are mask and vaccine mandates. These mandates substitute for the incentives to control the COVID-19 virus that are missing in private life, protecting people not only from the health effects of the pandemic, but the economic effects as well.
What kind of economic effects are we talking about? According to a Kaiser Family Foundation analysis, 530,000 COVID-19 hospitalizations of unvaccinated Americans, at an average $20,000 per hospitalization, cost the U.S. health system $5.7 billion. Updating that figure for early September brings that figure closer to $7.2 billion.
But the direct costs of COVID-19 to the health care system are dwarfed by the likely effects of the pandemic on the overall economy. We have developed an econometric model to gauge how the evolution of the COVID-19 pandemic affects economic growth. Using projections for pandemic deaths constructed by the Institute for Health Metrics and Evaluation (IHME), we compared projections for U.S. GDP based on the IHME’s recent forecast of pandemic deaths to GDP projections based on IHME’s forecast released in late June, before the full eruption of the delta variant. The difference between our two GDP forecasts is a rough measure of the economic impact of the delta variant, which is gaining so much traction because of the presence of so many unvaccinated Americans.
The bottom line? The delta variant is projected to claim 120,000 American lives over the second half of this year, and this surge will reduce the annualized rate of GDP growth by one percentage point. Overall, U.S. GDP in 2021 will fall by around $70 billion. This represents a very small share of the United States’s $23 trillion economy, but it nevertheless dwarfs the direct hospitalization costs of the delta surge, and represents an implicit tax of about $210 for every man, women and child in the country.
Anti-vaxxers thus not only endanger their own lives and those of their family, friends and co-workers, but also limit the recovery of spending, production and employment. As noted above, these economic externalities add to the humanitarian rationale for mask and vaccine mandates.
Critics of regulation have long argued that such interventions diminish efficiency and harm economic growth. But whatever the merits of this argument as applied to other rules, mask and vaccine mandates will have just the opposite effect. By constraining the spread of the pandemic and allowing reductions in social distancing, these interventions will boost the economy and reduce the tax being levied on us by anti-vaxxers.
Steven Kamin is a resident scholar at the American Enterprise Institute (AEI), where he studies international macroeconomic and financial issues. John Kearns is a research assistant at the American Enterprise Institute.