Governors Cannot “Turn On” Economic Activity: The Reopening Fallacy

Discussion of “reopening the economy” is too often being presented as a false dichotomy: It’s not a choice between prioritizing the economy versus our public health response—we simply won’t be able to fully restore economic activity and employment without first meaningfully containing the virus. Some governors are now easing their stay-at-home orders and closures of nonessential businesses, but they’re about to learn that you can’t simply will economic activity back. If people still feel unsafe, they won’t go out to restaurants, bars, movie theaters, bowling alleys etc., certainly not at pre-COVID rates. And prematurely reopening may greatly exacerbate this problem and delay eventual economic recovery.

About that fallacy: The government did not “turn off” economic activity with the flip of a switch, and won’t be able to turn economic activity “back on” by abruptly ending statewide closures. Let’s hone in on consumption, far and away the largest chunk of U.S. economic activity. We’re seeing a collapse in personal consumption expenditure that’s being driven by three key factors: Preferences and perceived health risks, disposable (i.e., after-tax) income, and supply constraints. State governors only have partial control over the latter.

First, our preferences and perception of health risks related to economic activity have been markedly altered by the coronavirus—and rightfully so. Consumption of some goods and services now feels (or objectively is) riskier; and some of this consumption can be delayed or forgone, e.g., vacations and travel, elective surgeries, and restaurant meals. A health-related increase in patience will depress present consumption demand (what economists would call a “discount factor shock”). This preference shock may be fairy persistent for many industries; I don’t understand why anyone would get on a cruise anytime soon.

Second, disposable income is taking a big hit, as workers lose jobs, hours, or anticipated pay increases. Uncertainty about future income has surely risen and expectations about future income have surely been revised downward for many households. The CARES Act cushioned some of this decline, but the scale of the response has been inadequate, and disposable income is still going to take a big hit. The major CARES Act income supports for households—unemployment benefits, one-time checks, and food security programs—are estimated to total $592 billion. That may sound like a lot of money, but compared with annualized wages and salaries of $9.4 trillion, it would replace only about 6.3% of labor income for this year. That’s a drop in the bucket when roughly one in five workers have lost their job. The checks have largely gone out, and the Pandemic Unemployment Assistance program was only authorized through July, when the U.S. unemployment rate will surely remain painfully high, in the double digits. If Congress fails to extend and expand such income supports, consumption demand will remain depressed for quite some time.

Third, our ability to consume many goods and services that we enjoy has been curtailed by closures of nonessential businesses. This supply-side shock is the result both of state closures of non-essential businesses (now being eased in some states) as well as business owners’ concerns about either the safety of their employees or the financial viability of operating with fewer costumers. Some businesses will remain closed or operate at significantly diminished capacity even after mandated closures are eased, because we’re in the midst of a pandemic and suffering a huge negative aggregate demand shock.

So easing statewide shutdowns will not reverse widespread job losses. The collapse in air travel and restaurant bookings in March pre-dated stay-at-home orders. Similarly, TheUpshot recently published a piece—based on recent work by economists Raj Chetty, John Friedman, Nathaniel Hendren, and Michael Stepner—underscoring that the collapse in consumer spring, small businesses in operation, and hours worked at small businesses all predated state-wide closures. And now we see that states trying to partially reopen on the early side, such as Alaska, Georgia, and Oklahoma, are not seeing a rapid rebound in economic activity. Go figure. Recommended reading:

Getting the virus under control—with testing, tracing, and eventually a vaccine—remains necessary to getting everyone back to work and promoting everyone’s wellbeing. Prematurely reopening nonessential economic activity, on the other hand, could prove counterproductive, by spreading the virus and increasing perceived health risks associated with economic activity, or prolonging the period of depressed disposable incomes. Related recommended reading on the risks of prematurely reopening, via Vox:

Federal leadership on curtailing the public health risks and adequately cushioning the loss in disposable income remains conspicuously lacking. State governors could really use some more help from the White House and Congress, as could the rest of us.

Update: From Anthony Fauci’s Senate testimony: “Top federal health officials are being pressed during a highly anticipated Senate hearing Tuesday on whether the country is ready to reopen, with Anthony S. Fauci, the nation’s top infectious-disease expert, warning that “consequences could be really serious” if states move too quickly.”

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