A study of 15 major pandemics in each of which over 100,000 people died, stretching back to the 14th century, shows consistent and significant macroeconomic after-effects persisting for about 40 years.
Real rates of return (adjusted for inflation) were substantially depressed over multiple decades. This was possibly due to depressed investment opportunities; excess capital per unit of surviving labor; and/ or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth.
In contrast real wage growth was elevated, presumably due to a reduced labour force (e.g. the Black Death saw a 25-40% drop in England’s labor force size, 100% increase in real wages, 5-8% decline in rates of return on land).
Researches also controller the data set for the impacts of wars, as these often coincided with plagues (e.g. Spanish Flu / World War I). After wars, real rates of return were substantially elevated. This was possibly due to the burden of raising large sums of debt financing (crowding out effect); higher risk premiums (to compensate for elevated defaults); and/ or due to capital scarcity created by wartime physical capital destruction (e.g. property, equipment and infrastructure).
COVID-19 is likely to be one of the most devastating pandemics in the last 100 years with 0.5-2 million deaths globally. If the trends play out similarly to history, the global economic trajectory will be very different from what was expected in January 2020, with lower real interest rates sustained for decades. That would offer a welcome fiscal space for governments to mitigate the consequences of the pandemic.
The major caveat is that past pandemics occurred in times when virtually no members of society survived to old age, whereas this time the vast majority of deaths (c. 90%) are adults over the age of 70. Due to the interconnected and consumer-centric nature of the modern global economy, combined with likely recurring aggressive suppression strategies, the economic impacts may be closer to those of war than pandemic. This time may be different.
Original Article: https://www.frbsf.org/economic-research/files/wp2020-09.pdf
For interest, we also wanted to show readers Figure 1, depicting the already well documented decline in real interest rates over time, from 10% in medieval times, to 5% at the start of the industrial revolution, to around 0% today. Interest rates were historically more volatile due to fluctuations in harvests and armed conflicts which pre-industrial societies were exposed to a much greater degree than today.
