Measuring the Spanish Flu’s Economic Impact Using Historical Statistics

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 The most direct measure of the economic cost of a pandemic is lost economic activity. The most common aggregate measure of such costs would be the decline in real GDP or industrial production (relative to trend) that is attributable to the pandemic. Researchers have used municipal and regional data as an alternative to try to tease out the loss of economic activity due to the Spanish Flu but with  contradictory results.

The 1918-1919 Spanish Flu preceded modern statistical measures; so we have to work with imperfect and limited data. This study uses historical statistics to assess the impact of the Spanish Flu on economic activity in its day. We examine separately the US, Europe,  and the UK. The data are drawn largely from Historical Statistics of the United States, Millennial edition, from the  Maddison Historical Statistics Data Base (2010 and 2018) and specialized studies. For details, go to my website.

My results are summarized in Figures 1-3.  

Figure 1 shows  that none of the four series suggests a detectable effect of the Spanish Flu on economic activity-- not that there weren’t significant downturns during this period of history, such as in 1914 and 1921.

In their classic study of the US business cycle, Arthur Burns and W.C. Mitchell make no mention of the Spanish Flu (that I could find). They characterize 1918-19 as a mild downturn that was speedily reversed.

America’s entry into World War 1 could confound the above finding of an insignificant economic effect of the Spanish  Flu. In 1917, 719,000 men were in the armed forces. Within a year, that figure rose to almost three million. During the call up, the unemployment rate fell from an average of five percent to  1.4 percent in 1918 and 1919. Another complicating factor is that the US economy was gearing up military production during this period – a form of stimulus of the economy.

To sum up, the best available historical data suggest that, despite its horrendous human capital costs, the Spanish Flu did not affect US economic activity in a significant way.

The European data for the period of the Spanish Flu offer something of  a natural experiment that allows us to  abstract from the effects of World War I: By focusing on non-combatant nations, we can get a somewhat cleaner look at the Spanish flu’s  impact. This does not mean that the war did not affect economic activity in the non-combatant countries, just that its effects were less distortive than in the combatant countries.

Figure 2 shows a clear decline in GDP for European non-combatant countries in 1918, averaging some seven percent. However, the losses of output in non-Spanish-Flu years of 1917 and 1921 were equally large.

For the first quarter of the 20^th century, the Spanish Flu appears to be just one of many economic setbacks for Europe. Much longer time series from Maddison cement the conclusion that 1918-19 does not especially stand out as a significant economic event.

(Figure 2 here)

The United Kingdom was a combatant in World War 1  but did not serve as a battlefield. The Spanish Flu peaked in the UK after the November 1918 armistice, as troops returned home in cramped rail cars and transport ships.

Figure 3 shows 1918 to be a year  of modest or zero GDP growth. As the Spanish Flu made its way into the UK in 1919, the economy went into decline, falling 12 percent according to Maddison and 7 percent according to the Bank of England figures.

The years following the Spanish Flu were difficult ones, with substantial declines in 1920 and 1921. UK growth did not resume until 1922. There is a massive literature on the multiple causes of the UK’s “interwar slump.” Major surveys of this literature do not mention the Spanish Flu as a cause.

(Figure 3 here)

The broad conclusion to be drawn from Figures 1-3 is that, despite its immense demographic damage, the Spanish Flu did not depress economic activity in the US and Europe in a significant fashion. The UK was a possible exception but experts on the UK’s interwar slump blame a number of factors other than the Spanish Flu.

The results of Figures 1-3 should not come as a surprise. For an explanation, go to https://www.realclearmarkets.com/articles/2020/05/05/coronavirus_and_the_great_lockdown_a_non-biological_black_swan_490756.html