The Hidden Cost of Shutting Down: An Analysis of US Policy Response to the COVID-19 Pandemic

Abstract

There was an immense negative impact on the economy from the COVID-19 pandemic, especially regarding increases in unemployment which reached levels not seen since the Great Depression. Within the United States, state and local officials implemented various non-pharmaceutical interventions (NPIs) such as “stay-at-home” orders, school, work and public transportation closures, restrictions on gatherings, etc. to mitigate the spread of the virus; however, these interventions also led to economic disruption. This thesis examines the tradeoffs inherent in policy implementation between health and economic outcomes using a cross-section of states, a stringency index as a measure of the strictness of policies, and unemployment claims as a measure of economic wellbeing. Considering that policy responses differed greatly between red and blue states, it also examines whether the policy tradeoffs differed in states led by Republican governors versus states led by Democrat governors. I find that there was a 3.5% increase in unemployment claims after two weeks for Republican-led states for each additional unit of stringency in policies, while an additional unit in stringency begot a 2.4% increase in unemployment claims after two weeks for Democrat-led states. There was no consistent statistically significant relationship found between policy stringency and new cases in either cohort. This negative finding likely reflects the fact that policy responds endogenously to health conditions, and no good instrument could be found for policy choices at the weekly frequency of the case and claim data.