Environment, public debt, and epidemics

• Published date: 01 December 2023
• Author: Marion Davin,Mouez Fodha,Thomas Seegmuller
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/jpet.12566

Received: 26 May 2021

|

Accepted: 16 December 2021

DOI: 10.1111/jpet.12566

ORIGINAL ARTICLE

Environment, public debt, and epidemics

Marion Davin

1

|Mouez Fodha

2

|Thomas Seegmuller

3

1

Center for Environmental Economics of

Montpellier, University of Montpellier,

CNRS, INRAE, SupAgro, Montpellier,

France

2

University Paris 1 Panthéon‐Sorbonne

and Paris School of Economics, Paris,

France

3

Aix Marseille School of Economics,

Aix Marseille University, CNRS,

Marseille, France

Correspondence

Marion Davin, Center for Environmental

Economics of Montpellier, University of

Montpellier, CNRS, INRAE, SupAgro,

Montpellier, France.

Email: marion.davin@umontpellier.fr

Funding information

Agence Nationale de la Recherche,

Grant/Award Numbers: ANR‐15‐

CE33‐0001‐01, ANR‐16‐CE03‐0005,

ANR‐17‐EURE‐0020; Excellence

Initiative of Aix‐Marseille University ‐

A*MIDEX

Abstract

We study whether fiscal policies, especially public

debt, can help to curb the macroeconomic and health

consequences of epidemics. Our approach is based

on three main features: we introduce the dynamics of

epidemics in an overlapping generations model to

take into account that old people are more vulner-

able; people are more easily infected when pollution

is high; public spending in health care and public

debt can be used to tackle the effects of epidemics.

We show that fiscal policies can promote con-

vergence to a stable disease‐free steady state. When

public policies are not able to permanently eradicate

the epidemic, public debt, and income transfers

could reduce the number of infected people and in-

crease capital and GDP per capita. As a prerequisite,

pollution intensity should not be too high. Finally,

we define a household subsidy policy that eliminates

income and welfare inequalities between healthy and

infected individuals.

1|INTRODUCTION

The recent Covid‐19 epidemic is one of the most serious threats to health in the last decades. It

has revealed how managing a pandemic to limit health and economic costs is challenging. In a

context in which environmental factors have been found to influence the transmissions of viral

pathogens and the disease emergence, there is a need to well understand the interplay between

the health and economic impacts of epidemics. This is the aim of this paper.

Without restricting our attention to a particular epidemic, we analyze the effects of public

interventions to control the disease, in particular health public spending and fiscal policy with

public debt. We consider fiscal policy and public debt in the discussion as the management of

sanitary crisis usually goes along with extraordinary public measures. The OECD points out the

J Public Econ Theory. 2023;25:1270–1303.wileyonlinelibrary.com/journal/jpet1270

|

© 2022 Wiley Periodicals LLC

sharp increase in public debt expected in the OECD area because of the Covid‐19 crisis.

1

For

other diseases like HIV or malaria, debt relief is frequently mentioned as an instrument to help

endemic countries to control epidemics (Abah, 2020; Snow et al., 2010). This illustrates that

debt management is expected to play a crucial role to try to control or eradicate this type of

disease.

Another important aspect to consider when examining the interplay between epidemics and

economics is the environmental issue. Growing evidence suggests that environmental factors

has an effect on the rate of spread of epidemics. Air pollution, such as CO2 and PM, is a factor

in accelerating virus transmission between humans. Pollution particles behave as vehicles for

virus transport, especially in epidemics where the mode of transmission is mainly via aerosols

(Bourdrel et al., 2021; Domingo & Rovira, 2020; Rohrer et al., 2020). Moreover, there is an

indirect effect of pollution on the rate of propagation, through the consequences of pollution on

the health of individuals, particularly the most fragile. Pollution makes individuals more vul-

nerable and therefore less resistant because they are more immunocompromised.

In line with Augier and Yaly (2013), Chakraborty et al. (2010,2014), Momota et al. (2005),

we develop an overlapping generations (OLG) model with epidemics, that we enriched with an

environmental dimension and the introduction of a government. This model offers the interest

to consider heterogeneity of agents according to their age and is relevant to analyze the role of

public debt. There are three‐period lived households with young inactive agents, working

adults, and old retirees. The dynamics of epidemics are formalized by introducing a susceptible‐

infected‐susceptible (SIS) model, as in Bosi and Desmarchelier (2020), Goenka and Liu

(2012,2020), or Goenka et al. (2014).

In our model, we first consider that the impacts of the epidemic depend on the age of the

person affected: the older agent bears a premature risk of death while the adult agent will be

sick, without fatal consequences, but will have to take time off work. Indeed, empirical studies

show that the mortality of elderly patients is higher than that of young and middle‐aged

patients during epidemics, because of their higher vulnerability. Taking the recent example of

Covid‐19, elderly patients are more likely to progress to severe disease (see Liu et al., 2020;

Williamson et al., 2020) and hence, they are more affected by saturated health's system ca-

pacities entailed by the epidemics. Second, in line with the arguments previously mentioned,

we consider that degradation of the environmental quality increases the rate of contagion of the

epidemic. Finally, health policy consisting in public spending to prevent, detect, control, and

treat quickly the epidemics, contributes to push down the contagion rate. The government

finances its expenditures through taxation of income and production, but also through the

issuance of public debt. In line with Geoffard and Philipson (1997),

2

we assume that health

policy reduces the transmission of the virus but does not allow to have full immunity.

The stable steady state is indeed characterized by the presence of the virus. However, the

government can increase health expenditures to slow down the spread of the virus. Such a

strategy can allow to rule out the endemic steady state and converge to a disease‐free steady

1

According to OECD (2020b), “For the OECD area as a whole, outstanding central government debt is expected to

increase from USD 47 trillion in 2019 to USD 52.7 trillion at the end of 2020. This is USD 3.5 trillion higher than the

pre‐Covid estimate. As a result of both the rapid increase in borrowing needs and the decline in GDP across OECD

economies, the central government marketable debt‐to‐GDP ratio for the OECD area is projected to increase by 13.4

percentage points to around 86% in 2020, the largest increase in a single year since 2007.”

2

Even if public funds are directed towards the development of a vaccine, Geoffard and Philipson (1997) underline the

difficulties for policies to increase demand for vaccine and hence to achieve eradication with vaccine.

DAVIN ET AL.

|

1271

state. These results are conditioned by the pollution intensity of production: the higher the

pollution intensity, the more difficult it is to fight the epidemic. If the public policy is not able to

remove entirely the epidemic, the economy converges towards an endemic steady state. It

could, however, be used to reduce the number of infected people and increase capital per capita

in the long run endemic equilibrium. The complexity of the interactions between fiscal policy

and the fight against epidemics is highlighted. In fact, on the one hand, any increase in public

debt leads to a crowding‐out effect on productive capital. The latter implies a drop in pro-

duction, wages, savings, and tax revenues, which curbs the expected effects of increased public

spending, and reduces the effectiveness of public policy. At the same time, it also slows down

pollution and plays a positive role in the fight against the virus. On the other hand, the increase

in debt allows an increase in public spending, and thus a slowing of the epidemic, which has a

stimulus effect on the economy through the increase in the number of workers, savings, and

capital (crowding‐in effect). The final outcome depends on the relative magnitude of these two

channels. We show that the crowding‐in effect dominates if the rate of pollution emission is not

too high.

At the endemic steady state, there are income inequalities between infected and healthy

people. We show that it is possible to design an appropriate redistribution income policy to

address welfare disparities. This policy consists of a differentiated transfer of income for

workers and the sick. It complements the public policy to combat the virus. We emphasize that

such intervention can be costly for healthy people when public budget for transfers is not

sufficiently important.

Our results underline the importance to maintain a high level of public health spending and

a high public budget for transfer to control an epidemic and address its economic con-

sequences. This implies a sufficient level of public debt. Our conclusions are thus in line with

the proposal of Douglas and Raudla (2020) for the US economy, who argue that the States

should suspend their balanced budget rules and norms, and run deficits in their operating

budgets to maintain services and meet additional obligations due to the pandemic of Covid‐19.

Our paper relates to the large literature interested in the analysis of the interactions be-

tween economics and epidemics. On the one hand, there is important literature characterized

by age specific effect of epidemics (Boucekkine et al., 2009; Boucekkine & Laffargue, 2010;

Fabbri et al., 2021

3

). On the other hand, some models are based on mathematical frameworks

developed by epidemiologists (see Hethcote, 2000, for an interesting survey); they expanded

with the HIV epidemic (see e.g., Geoffard & Philipson, 1997). This literature has obviously been

revived and adapted to the specificities of the Covid‐19 (see e.g., Acemoglu et al., 2021; Alvarez

et al., 2021; Goenka et al., 2021; Gori et al., 2021; Hritonenko et al., 2021). Nonetheless, no

study considers simultaneously the differentiated effects of the consequences of the virus ac-

cording to the age of the infected persons, and the role played by the environment in the spread

and incidence of the virus. Moreover, public actions examined in the literature dealing with

epidemics and economics, such as confinement, social distancing and the speed at which a

vaccine develops, greatly differ from those explored in this paper.

We highlight in this study the direct consequences of public finance on epidemics and vice‐

versa. We show that in the absence of full immunity, health care spending can play a major role

in the fight against the epidemic and public debt can push up GDP per capita. Our paper thus

complements the literature taking into account the costs and benefits of public policies and the

3

This last paper is based on M'Kendrick (1925) setting.

1272

|

DAVIN ET AL.