Annual Report 2020 | Federal Reserve Bank of St. Louis

The COVID-19 Economy: How the Pandemic Defined 2020

Reopening the Economy by Realigning Private and Public Interests

An important question is when and how to fully reopen the economy. Carlos Garriga and Guillaume Vandenbroucke bring an economist’s viewpoint to the study of this question. The fact that people do not necessarily consider how they might spread COVID-19 infection to others is an “externality” that introduces a role for government to regulate or coordinate actions. They lay out the balance between benefits and risks of reopening.

By Carlos Garriga and Guillaume Vandenbroucke

Throughout 2020, economists at the Federal Reserve Bank of St. Louis produced a large number of articles and blog posts related to the COVID-19 pandemic. The Bank’s attention to the pandemic is exemplified by the topics covered in these publications and discussed in the pages of this annual report.

Central bankers in general and the St. Louis Fed’s Research Division economists in particular view the world through the lens of economics. Economists will not end the pandemic. Health officials and medical researchers are among those who will. But an economist’s perspective on the pandemic can help with understanding its management—through the study of individuals and how they react to incentives such as prices, policies and risks, including health risks.

Some of the challenges posed by the pandemic are not new; they have been familiar to economists at least since Scottish economist and philosopher Adam Smith originated the invisible hand metaphor in 1776. Smith posited that sometimes a person’s private, or individual, interest is beneficial to the public interest, as if an “invisible hand” were aligning both. But what happens when these interests are not aligned? The COVID-19 health crisis created a challenge that is, essentially, a breakdown of this alignment.

Individual and Public Interests

During a pandemic, individual behavior motivated by self-interest may not be beneficial to society. Someone who is asymptomatic may decide not to practice social distancing, for instance. If that decision results in infections, it imposes costs on society that the individual does not bear directly. In economics, we call this a negative externality. An externality is a cost or benefit imposed on someone or a group of people who had no say in another person’s decision.

Private and public interests are at times misaligned, which is why governments enact regulations—for example, against child labor, pollution and impaired driving. Some limits on certain individual actions can benefit society as a whole.

Regulations on health-related behavior are less common. In normal times, a worker with a cold might choose to work a few hours in the office, which may be beneficial for the worker and the firm but not for co-workers. Government regulations don’t often play much of a role here. But in a pandemic, of course, the stakes are higher and the effects more immediate. Regulations must scale up to the magnitude of the problem: in this case, mask wearing, social distancing, quarantines, and restrictions on travel and gatherings.

But what happens when regulations shift heavily toward the public interest and limit or even thwart private interests? Extreme misalignments can make both public and private efforts much less effective. To counter this, it’s necessary to keep people whole during such times and thereby help to realign public and private interests. This may take several forms: for instance, unemployment insurance payments for workers unable to work or economic relief funds for disrupted businesses and their employees. Other workers, especially in the health care sector, may work longer hours and take on more risk than during normal times. Making them whole may require some form of extra compensation.

The COVID-19 pandemic may end as a result of herd immunity—potentially from a combination of vaccination efforts and post-infection immunity. Until that time, effective regulations can serve to reduce infections, deaths and strains on the health care system. But regulations are effective only if people’s behavior aligns with those regulations. To realign private and public interests, regulations intended to limit the suffering caused by COVID-19 must be counterbalanced with policies that limit the potential suffering caused by the regulations.

Related Resources


Carlos Garriga is senior vice president and director of research. His current research is in the areas of macroeconomics and housing, household finance, monetary economics and asset pricing, and public economics. He has been with the St. Louis Fed since 2007.

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Guillaume Vandenbroucke is an economist and research officer whose research focuses on the relationship between economics and demographic change. He joined the St. Louis Fed in 2014.

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