Subject: COVID-19 Is Also a Reallocation Shock
I am not going to treat ANYTHING as gospel, because even academics can get things wrong, but this is a really nice paper from UChicago about how the economy MIGHT respond going forward. I do not agree with all of the conclusions, but they have done a good job of digging up both current and past data and presenting it in one place. One argument they make is that these bailouts are only making things worse by delaying the inevitable and preventing quick and efficient reallocation of resources, instead propping up marginal companies and product lines that were doomed to fail anyway. They predict that for every 10 jobs lost there will be 3 new hires and estimate that 42 percent of recent layoffs will result in permanent job loss.
Here are some quotes from the paper I thought were worth passing along but it is overall a good read written at the level of a layperson.
"If we are correct that many of the lost jobs are gone for good, there are important implications for policy. First, policy efforts to preserve all pre-COVID jobsand employment relationships could prove quite costly, if pursued. They are analogous to policies that prop up dying industries and failing firms. These policies are feasible, but the cost is high in terms of resource misallocation and taxpayer burden. Second, there are potentially large benefits of policies and policy reforms that facilitate a speedy reallocation of jobs, workers, and capital to newly productive uses in the wake of the pandemic. Policies that deter or slow factor reallocation are likely to further lengthen the lag of creation behind destruction, slowing the overall recovery from the pandemic, the lockdown, and the pandemic-induced reallocation shock."
"In other words, the PPP creates financial incentives to keep workers engaged in businesses that cannot succeed beyond the duration of government subsidies, and to postpone their redeployment to viable businesses."
"The data analytics firm, Earnest Research, tracked credit card and debit card purchases for nearly six million Americans to assess the impact of the COVID-19 shock on consumer spending. For the week ending 1 April 2020, their data show that spending on airlines, hotels, rental cars, taxis, ride sharing and movie theaters is down 75-95 percent relative to spending in 2019 (Leatherby and Gelles, 2020). Spending on fast food, auto parts, and autos is down 35 percent, and spending on apparel is down 70 percent. At the same time, spending on home improvement, video streaming, gaming, food delivery, meal kits, and online grocers has boomed. The bulk of these spending cuts and shifts will reverse when the pandemic recedes and the lockdown ends, but some aspects of the shift arelikely to persist."
"According to a survey conducted by the National Restaurant Association in late March, 3 percent of restaurant owners and operators have permanently closed in response to COVID-19, and another 11 percent anticipate permanently closing within the next 30 days (Taylor, 2020). Applying these figures to the number of U.S. restaurants yields more than 100,000 permanent restaurant closures in the near-term wake of the COVID-19 shock."
"The results [...] say that firms expect the coronavirus pandemic to lower their sales by 18-19 percent in 2020. This is an enormous negative shock, and it is morethan twice as large as the fall from January to April 2020 in the average one-year sales forecast. Taken together ,the evidence [...] says that firms in the SBU anticipate a huge negative shock to their sales in 2020 followed by a considerable but highly incomplete bounce back by April 2021.
"Even with a vaccine in hand, consumer and business spending won't fully revert to pre-pandemic patterns. Concerns about infectious disease will linger. Millions of households are learning how to purchase almost anything online, and many will stick with it. Business people are learning how to travel less. Much of the shift in spending patterns and business practices will persist."
Source:
https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_202059.pdfFirst author is "an Assistant Professor of Finance at Instituto Tecnolgico Autnomo de Mxico (ITAM) Business School. In June 2019, he obtained his PhD in Economics from Stanford University." Second author is Professor of Economics, Stanford University. Third author is also an Economics Professor.
