Haslam College of Business - Timing Shutdowns Is Key to Minimizing Permanent Economic Damage

To minimize COVID-19 infections and the pandemic’s economic impacts, policy makers must weigh the risks and benefits of mandating and suspending social distancing measures and closing and reopening the economy. A new study looks at how uncertainty affects social distancing policies and examines the degree to which the economic impact is irreversible.

In “Uncertainty, Hysteresis and When to Reopen the Economy,” Charles Sims, associate professor of economics in the University of Tennessee, Knoxville’s Haslam College of Business and faculty fellow at the Howard H. Baker Jr. Center for Public Policy, and David Finnoff, professor of economics at the University of Wyoming, present an economic argument for delaying reopening. The paper is currently under review for publication at an economic journal. 

Sims and Finnoff argue for “flattening the curve”—implementing social distancing regulations before the number of infections sharply increases. While delaying economic shutdown buys decision makers time to gain knowledge about the outbreak’s severity, implementing social distancing and economic closures when case numbers are low is the best way to reduce the chance of exceeding the medical system capacity. Previous research indicates that a patient infected with COVID-19 is three times more likely to die if that threshold has been crossed.

The paper emphasizes the distinction between flattening and “shaving” the curve, in which policy makers wait to mandate social distancing and economic closures until the number of infections nears the medical system capacity. In theory, the shaving approach allows the curve to plateau, then gradually relaxes social distancing rules and reopens the economy as the number of new cases falls, resulting in a smaller secondary peak of infection cases.

The researchers find the curve-shaving strategy unrealistic because it does not reflect how social distancing has played out in real life. People have not adhered strictly to social distancing rules, and rather than reopening economies gradually, governments have ended stay-at-home orders much more abruptly than previous studies assumed. Early reopening causes a second wave of infections that may be worse than expected, necessitating a second round of shutdowns and social distancing.

As mobility restrictions and economic shutdowns affect employment, income and economic expectations, the researchers find that extended periods of social distancing are likely to have irreversible economic impacts. Previous research has shown that since 1900, about half of disaster-related declines in consumption end up being permanent.

“Some businesses will not survive stay-at-home orders and non-essential business closures and will not reopen after these mandates are lifted,” Sims and Finnoff say. “Some workers will not return to the labor force after the economy is reopened.”

The researchers say some deferred consumption losses may be recouped when businesses reopen and employees return to work. For example, workers who have been laid off may defer major purchases, repairing existing vehicles or appliances to save money instead of replacing them. If businesses reopen and people return to work, they may choose to buy a new car or washing machine instead of repairing an older one.

The study shows that economic impacts accumulate while social distancing is in effect. If businesses close permanently or employees never go back to work, the consumption that was deferred will not materialize. In addition, many losses are not categorized as deferrable and cannot be recouped, even after the economy reopens.

“We don’t expect that people will go to movies and restaurants after reopening at a higher rate than normal simply to make up for not going in April and May,” Sims says. 

About half of the consumption losses are deferrable, the researchers say. The longer reopening is delayed, the more permanent those deferred consumption losses become. However, prematurely reopening the economy can also produce irreversible effects because if the number of infections after reopening is higher than predicted, a second round of social distancing and business shutdowns may be needed.

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CONTACT:

Stacy Estep, business writer/publicist, sestep3@utk.edu