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Goolsbee: Cases Back on the Rise Ominous—Noted

Summary:
Somewhat paradoxically, the coronavirus plague turns out not to be a huge supply shock to the American economy. Yes, a great many activities become essentially impossible as too costly—but for the overwhelming majority, they have close substitutes that use essentially the same factors of production in the same proportions: take-out and grocery stores rather than sit-down restaurants; shopping online and delivery by truck rather than shopping in person. And those that do not have close substitutes in terms of contemporaneous substitution have close substitutes in terms of intertemporal substitution. Thus lockdowns had little effect on the overall level of economic activity—it was the rise in savings, and the failure of the government to take steps to ensure that rise in planned

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Somewhat paradoxically, the coronavirus plague turns out not to be a huge supply shock to the American economy. Yes, a great many activities become essentially impossible as too costly—but for the overwhelming majority, they have close substitutes that use essentially the same factors of production in the same proportions: take-out and grocery stores rather than sit-down restaurants; shopping online and delivery by truck rather than shopping in person. And those that do not have close substitutes in terms of contemporaneous substitution have close substitutes in terms of intertemporal substitution.

Thus lockdowns had little effect on the overall level of economic activity—it was the rise in savings, and the failure of the government to take steps to ensure that rise in planned savings was absorbed by greater planned private investment and government investment and consumption. And this strongly suggests that anything that boosts caseloads will, be further raising planned savings, further depress the economy. It makes this week one hell of a moment to have a large, loud indoor gathering in of all places Arizona, I tell you:

Austan Goolsbee: 'The results from March-May https://twitter.com/Austan_Goolsbee/status/1275575900499775488 suggest that the fact that cases are back on the rise is very ominous not just for public health but for the economy. If people get scared again, a lot of activity may start to tank.... Short version: they don't do much. Of the 60% drop in consumer activity, only 7 came from shutdown orders. Fear of the virus is the main thing. The collapse of economic activity in 2020 from COVID-19 has been immense.... We have consumer visits to 2.3m businesses in 110 industries through the crisis. We tracked down the county level shutdown orders and can compare across borders in the same metro area where the policy differs.... Evidence of fear as the driver: 1) more covid deaths in your county drive down economic activity signif[icantly] even including metro-week dummies, 2) people heavily shift visits away from larger/busier stores to smaller/less busy ones in the same industry (and especially if lots of local deaths). We have data up to late May and include some states ending their shutdown orders. The increase in economic activity is just as modest coming out as it was going in. Policy itself isn't the driver. But there is one way policy matters: diversion from one kind of business to another. We have essential/non-essential definition in each place. Non-essential business collapses. Essential business soars. Restaurant/bar orders cause massive hit there but an equally big increase to grocery and food stores.... If people get scared again, a lot of activity may start to tank... #coronavirus #depression #macro #noted #publichealth #2020-06-27

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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