Social distancing was a crucial policy in halting the spread of COVID-19 in the absence of an effective treatment or vaccine. While knowledge on the effects of social distancing in containing the pandemic is developed, its impacts on the economy are not yet clearly understood. Alexandre Gori Maia (UNICAMP), Letícia Marteleto (UT-Austin), Cristina Rodrigues (FIPE/USP), and Luiz  Gustavo Sereno (UNICAMP) analyzed the trade-offs between health and the economy during the period of social distancing in São Paulo (SP), the state hardest hit by the COVID-19 pandemic in Brazil. The authors found robust evidence for the benefits of social distancing on health indicators, while there was no evidence that municipalities with tougher social distancing performed worse economically.

The study, published in the PLoS One journal (click here for full access), analyzed a sample of 104 municipalities in SP between week 10 (March 1-7) and week 27 (June 28 - July 4) of 2020. These municipalities represented 91% of the total cases in the state. In this period, the social distancing index (a measure of the share of mobile phones at home during the day) ranged from a minimum of 35% (in early March) to a peak of 57% (in late March). 

The authors then evaluated the impacts of social distancing on health and economic indicators. The health indicators are the rate of confirmed cases of COVID-19 and the rate of deaths confirmed with COVID-19 testing (per 100,000 people). The economic indicators are the municipal tax collection revenue and the rate of net employment losses. The empirical strategy combined instrumental variable estimators and spatial panel models to overcome methodological challenges common to policy evaluations. The first challenge is omitted variables: social distancing measures may be associated with unobservable determinants of health and economic indicators, such as social behavior. The second is reverse causality: the risk of contagion may also influence the decision to stay at home. The third challenge for this kind of analysis that we overcome in this study is spatial dependence; that is, the possibility that health and economic outcomes are also affected by neighboring municipalities' outcomes. The research shows that estimates that do not account for these potential endogeneity sources may be largely biased. 

The authors' first contribution was to empirically show that social distancing did have significant benefits for controlling the spread of COVID-19. Although early measures to contain the spread of COVID-19 showed detrimental impacts in the middle term, social distancing's short-term health benefits largely offset the detrimental impacts in the middle-run. In general, nearly 215 lives would have been saved per week for each one percentage point increase in the social distancing index in the analytical sample. The benefits of social distancing on the spread of COVID-19 were particularly meaningful in municipalities with low socioeconomic development levels, i.e., social distancing was more effective in the poorest localities.

Another main contribution of this paper was to show that short-term variations in social distancing at the municipal level had insignificant impacts on the local number of formal jobs or tax revenue. In other words, municipalities with stricter social distancing measures did not necessarily perform worse economically than those with more relaxed social distancing measures. 

Finally, the study also suggested that the efforts to increase social distancing and curb the spread of COVID-19 within municipal borders may have vanished when similar measures were not adopted in neighboring municipalities. The spread of COVID-19 was strongly influenced by cases and deaths with positive COVID-19 testing in neighbor municipalities. This result suggests that measures to contain the spread of COVID-19 are not restricted to municipal borders, in a way that requires that public policies across municipal boundaries. In other words, a regionally coordinated response might be the most appropriate measure to control the spread of COVID-19.