Our Governors Are the Only Way Out of Our Economic Disaster
There is a growing danger that the shutdown of the economy will inflict more harm than the coronavirus if the shutdown is not managed carefully. Unemployment is increasing. The risk of permanent business closures and bankruptcies is rising, and it will be increasingly difficult to avoid a long and painful stagnation, which will include increases in the death rate. It might not be too late to escape this, but it will require an immediate change of policy from governors.
The latest figures from the U.S. Department of Labor show that the unemployment rate on May 21 was 17.2%, the highest ever recorded in the current seasonally adjusted series, exceeding the previous high from May 1975. But this number almost certainly understates the unemployment disaster, because it only takes into account unemployment claims filed up to now.
The news isn’t good. In the April 10 Outlook Survey, economists from the National Association of Business Economists forecast a median projection of 12% unemployment, with a high range of 20%. We’ve long since exceeded the median and are approaching the high range. In the J.D. Power Financial Services Covid-19 Pulse Survey for April 10-12, 25% of people surveyed reported either temporary or permanent loss of employment from the shutdown. The same survey found that over 40% of those responding said their income fell by at least 25%. The J.D. Power survey for May 8-10 finds the same and adds that 28% say the effects of the lockdown on their financial situation are severe or devastating. The effects are particularly concentrated among younger and lower income Americans. Meanwhile, President of the Federal Reserve Bank of St. Louis, James Bullard, has suggested 32% unemployment is possible.
These numbers are alarming, but not surprising. More alarming is the growing likelihood that many of those who are currently unemployed will not have jobs to return to when the shutdown is ended. Small businesses — firms that employ fewer than 500 people — are responsible for almost 50% of employment in America, and they are in grave jeopardy. In a paper for the National Bureau of Economic Research issued in April, economists from the University of Chicago and Harvard reported that of 5,800 small businesses surveyed, 28% doubted they could survive a one month shutdown, and 53% expected they would permanently close if the shutdown were to last four months. In the J.D. Power survey, of those who either worked for or owned a small business, 48% reported the business either temporarily (42%) or permanently (6%) closed. Another 16% reported business remaining open but at risk of closing soon.
These are chilling statistics. They represent real damage being done to real human lives. Rising unemployment and falling incomes lead to increased rates of depression, alcohol and drug abuse, domestic violence, divorce, suicide, stress, heart disease, and mortality rates. Economic costs are human costs. And we should be clear — these are not the effects of COVID-19. These are the effects of shutting down economic activity through Executive Order.
It may well be that quarantine and closure is necessary to prevent a health catastrophe from COVID-19, but it must not be managed as a purely epidemiological decision. Economic disruption also kills. Using St. Louis Fed President James Bullard’s 32% unemployment number, Betsy McCaughey, Ph.D., of the Committee to Reduce Infection Deaths, calculates this would lead to 77,000 early deaths from suicide and drug abuse alone, based on previous experience with unemployment. Using a different methodology, a study from the Well Being Trust and Robert Graham Center predicts 75,000 deaths. Researchers at University College London predict over 33,000 excess deaths in the U.S. from people who missed cancer treatments because of the lockdown. And it is well-established that unemployment raises mortality from heart disease and strokes.
The longer the shutdown lasts, the greater the loss of small (and large) businesses, and the greater the economic and human losses, never mind the loss of our liberty. It’s crucial that this damage be minimized. What can be done? As things stand today, the onus is mostly on the governors, since state legislatures have largely acquiesced to rule by executive order.
- Business restrictions and closures should be as limited in scope and intrusiveness as epidemiologically possible, in order to minimize the real economic damage. Instead of attempting to define “essential” vs. “non-essential,” governors should immediately end restriction on any business or activity that can be done safely. Government planners do not have understanding of the network of supply chains across the economy and cannot identify what are truly essential links. “Safe vs. unsafe” is a more easily identified distinction, since it’s physical. And simply requiring people to conduct activities in a safe manner is enough; there’s no need to specify every activity. Allow individual creativity to find ways to do things safely. This would also respect individual rights, a foundational principle of civilization that has been ignored of late. Among the unsafe, things that can’t possibly be done without violating distancing rules, try to distinguish between more and less essential (and remember, no one’s income is “unessential” to them), but leave safe businesses and activities alone. Everyone knows it makes no epidemiological sense at all to ban online automobile sales, lawn mowing services, sales of seeds and nursery stock, and the like, as was done in Michigan under a previous iteration of the governor’s order. This is simply economically destructive and cruel.
- Closures and restrictions should be lifted as soon as possible. Proposals to lift quarantines on the healthy and get them back to work, while protecting those particularly vulnerable, should be pursued. At the very least, institute the White House’s Phase One guidelines immediately. And move quickly to Phase Two, which gets most businesses opened and back to work.
These are minimal steps, but they could quickly be implemented without great risk. It is essential that our states’ economies be restarted quickly. The longer the delay, the deeper the damage and the longer it will persist. That could become as great a threat to the lives, health, and well-being of Americans as the coronavirus is. In the May 8-10 J.D. Power survey, 42% of respondents feared the worst impact on their personal finances is yet to come. It is imperative that governors open our economies and prove them wrong.
Dr. Charles N. Steele holds the Dettwiler Chair in Economics at Hillsdale College, and chair of the Department of Economics, Business, and Accounting.