From the University of Chicago’s Becker Friedman Institute – named for Milton Friedman and Gary Becker, two of the university’s 30 Nobel laureates in economics – comes this warning: Recovery from the pandemic’s economic damage will be protracted and perhaps made more so by some of Congress’ intendedly ameliorative measures.
In their report “COVID-19 Is Also a Reallocation Shock,” Jose Maria Barrero, Nick Bloom and Steven J. Davis estimate “that 42% of recent pandemic-induced layoffs will result in permanent job loss.” And the authors say “creation responses to major reallocation shocks lag the destruction responses” – in consumer behavior and business practices – “by a year or more.”
Disruption-triggered behavioral changes are producing some surges of hiring (e.g., by Amazon, Walmart, Dominos, Papa John’s, Facebook and Lowe’s, the home-improvement chain). Some of today’s shift to online shopping and to telemedicine will endure. But these positive developments are dwarfed by negative ones. For example, a late-March survey showed that 3% of restaurants had permanently closed and another 11% anticipated doing so within 30 days. This indicates 100,000 near-term closings, with large knock-on effects for associated sectors. Also, airlines, hotels and resorts will find that Zoom is convincing many people that much business travel is dispensable.
The report notes that labor incomes and business profits are “severely depressed,” uncertainty is “extraordinarily elevated,” and aggregate demand has collapsed, as have expectations. Also, “pandemic-induced demand shifts and continuing concerns about infectious disease will undercut the production value of certain forms of capital such as large-scale entertainment venues, high-density retail facilities, and restaurants with closely packed patrons.” Much non-COVID-19 research at universities, government laboratories and commercial facilities has been suspended, and research-and-development investments, powerful drivers of productivity, “are highly sensitive to uncertainty.”
Barrero, Bloom and Davis recall the auto industry’s experience after the 1973 oil shock. Demand for small, fuel-efficient cars increased, and that for large cars plummeted. Many workers laid off from making the latter needed to, but would not, relocate to make the former. The authors also note “the emergence of 335 new infectious diseases in human populations from 1940 to 2004, with a rising incidence over time,” because of, among other things, urbanization and the democratization of air travel and international tourism.
And now come some unintended, but not unpredictable, effects of government policies intended to be palliative. The BFI report says that policies designed “to preserve all pre-COVID jobs and employment relationships could prove quite costly” because they “are analogous to policies that prop up dying industries and failing firms.” These policies exact a high cost in resource misallocation and taxpayer burden.
In contrast, there would be “potentially large benefits” from policies “that facilitate a speedy reallocation of jobs, workers, and capital to newly productive uses.” Slowing this will prolong the “reallocation shock.”
The authors note that a loan from the Paycheck Protection Program is forgivable if the recipient company “reopens within eight weeks and rehires its former employees.” They cite a Wall Street Journal report of how a cleaning company is experiencing this requirement in the context of Congress’ provision of $600 in supplemental unemployment benefits: The owner doubts that he can reopen in eight weeks, and estimates that he would have to give some employees raises of up to 40% to compete with the new unemployment entitlement.
The report says: Suppose a restaurant can generate only $5,000 a week in revenues during the pandemic, but at a cost of $10,000 in labor, food and utilities. If the owner closed during the crisis, he would save $5,000 a week, and employees could seek more productive employment, or collect unemployment benefits and devote time to supervising children whose schools have closed. However, with a forgivable loan of, say, $64,000, the owner can reap $3,000 per week for eight weeks, with taxpayers funding money-losing operations.
Current policy is an incentive to delay, for private profit, a socially rational reallocation of labor and capital. This might keep both engaged in businesses that cannot survive beyond the end of government subsidies, which creates powerful pressure for extending the subsidies.
In any society, at any time, the status quo has many constituencies; in democratic societies, the status quo has government on its side. Today, the status quo BC – before COVID – is a still-fresh memory tantalizing the nation because an ocean of pain has inundated millions who made no mistakes. Government’s challenge is to not make matters worse by trying to restore conditions that numerous new behaviors will preclude.