Wednesday, October 14, 2020

Are We Staying at Home By Choice or Because of Government Rules?

If the government removed all rules about social distancing, limited capacity, and mask-wearing in restaurants, stores, workplaces, entertainment venues from theaters to sports, churches, and other places, would you go back?  How people answer to that question is important to answering a bunch of questions. 

For example, have people been taking these kinds of precautions more because of government restrictions, or because of their own private concerns about health conditions? If government removed the restrictions, how much would people's behavior actually change? If many people are unlikely to change their avoidance behavior for a sustained period of time, then a full economic recovery from the effects of  the recession will be delayed. Moreover, the shape of that economic recovery may require a permanent reallocation of jobs from some sectors to others. 

In the October 2020 World Economic Outlook report from the IMF, Chapter 2 ("Dissecting the Economic Impact") has a discussion of government lockdowns vs. people's voluntary behavior in an international context. The authors write: 

This chapter’s first goal is to shed light on the extent to which the economic contraction was driven by the adoption of government lockdowns instead of by people voluntarily reducing social interactions for fear of contracting or spreading the virus. ... If lockdowns were largely responsible for the economic contraction, it would be reasonable to expect a quick economic rebound when they are lifted. But if voluntary social distancing played a predominant role, then economic activity would likely remain subdued until health risks recede. ...

Regression results show that lockdowns have a considerable negative effect on economic activity. Nonetheless, voluntary social distancing in response to rising COVID-19 infections can also have strong detrimental effects on the economy. In fact, the analysis suggests that lockdowns and voluntary social distancing played a near comparable role in driving the economic recession. The contribution of voluntary distancing in reducing mobility was stronger in advanced economies, where people can work from home more easily and sustain periods of temporary unemployment because of personal savings and government benefits. 

(For the record, when talking about government lockdowns: "The analysis uses a lockdown stringency index that averages several subindicators—school closures, workplace closures, cancellations of public events, restrictions on gatherings, public transportation closures, stay-at-home requirements, restrictions on internal movement, and controls on international travel—provided by the University of Oxford’s Coronavirus Government Response Tracker.")

There's a lot of ongoing research on the subject of lockdowns and personal choices,  and it would be unwise to treat any one study as the last word. That said, one study of the US experience that caught my eye is by Austan Goolsbee and Chad Syverson, "Fear, Lockdown, and Diversion: Comparing Drivers of Pandemic Economic Decline 2020" (Becker Friedman Institute Working Paper, June 18, 2020). From their abstract: 

This paper examines the drivers of the economic slowdown using cellular phone records data on customer visits to more than 2.25 million individual businesses across 110 different industries. Comparing consumer behavior over the crisis within the same commuting zones but across state and county boundaries with different policy regimes suggests that legal shutdown orders account for only a modest share of the massive changes to consumer behavior ... While overall consumer traffic fell by 60 percentage points, legal restrictions explain only 7 percentage points of this. Individual choices were far more important and seem tied to fears of infection. Traffic started dropping before the legal orders were in place; was highly influenced by the number of COVID deaths reported in the county; and showed a clear shift by consumers away from busier, more crowded stores toward smaller, less busy stores in the same industry. States that repealed their shutdown orders saw symmetric, modest recoveries in activity, further supporting the small estimated effect of policy. Although the shutdown orders had little aggregate impact, they did have a significant effect in reallocating consumer activity away from “nonessential” to “essential” businesses and from restaurants and bars toward groceries and other food sellers.
If personal voluntary choices are a big part or even a majority of the adjustment in the shifting patterns of hiring, work, shopping, entertainment, education, and health care--rather than government shutdowns--there are several implications looking ahead. Here are some thoughts from the IMF, based on its overview of the evidence: 

When looking at the recovery path ahead, the importance of voluntary social distancing as a contributing factor to the downturn suggests that lifting lockdowns is unlikely to rapidly bring economic activity back to potential if health risks remain. This is true especially if lockdowns are lifted when infections are still relatively high because, in those cases, the impact on mobility appears more modest. Further tempering the expectations of a quick economic rebound, the analysis documents that easing lockdowns tends to have a positive effect on mobility, but the impact is weaker than that of tightening lockdowns.
These findings suggest that economies will continue to operate below potential while health risks persist, even if lockdowns are lifted. Therefore, policymakers should be wary of removing policy support too quickly and consider ways to protect the most vulnerable and support economic activity consistent with social distancing. These may include measures to reduce contact intensity and make the workplace safer, for example by promoting contactless payments; facilitating a gradual reallocation of resources toward less-contact-intensive sectors; and enhancing work from home, for example, by improving internet connectivity and supporting investment in information technology.
The last point in particular seems worth emphasizing to me. Back in late March and early April, a common view of the pandemic was that it would be over in a few months. As one example of standard wisdom at that time, Ben Bernanke likened the economic effects of a pandemic and a lockdown to a severe snowstorm: that is, everything is disrupted for a time, but then returns to the previous normal. Thus, the early government response to the pandemic was focused on how to support income and job connections to employers for a few months. 

Of course, that view of pandemic-as-snowstorm is now outdated. It now appears that we may end up dealing with COVID-19 for the foreseeable future, From this viewpoint, supporting work and industry configurations as they existed in February 2020 is not a useful approach. Helping those whose lives have been upended by the pandemic is a worthy public policy goal, but thinking about how government can support and speed the economic adjustment to a new configuration may matter just as much. 

Just to be clear, the IMF argument does not claim that government lockdowns are "good" or "bad." Yes, lockdowns do have severe negative economic consequences. But if a lockdown stops the pandemic, then the medium-term economic results can easily be worth it. But as the IMF report says, "lockdowns are more effective in curbing infections if they are introduced early in the stage of a country’s epidemic. The analysis also suggests that lockdowns must be sufficiently stringent to reduce infections significantly." 

The widespread belief back in late March and April the pandemic would be over by, say, July 1 was also a reason that the early steps against the pandemic were relatively mild. At that time, longer and more stringent lockdown didn't seem worth it. We are still arguing up the present about different kinds of COVID-19 tests that can or should be available, and what kind of contact tracing and quarantining should happen when the results are positive. It may be that the key policy choice in a pandemic is whether or when to react very strongly for the first few months in the hope of ending the pandemic at that point and not needing to deal with it for a few years instead. But like all strong preventive actions, they are likely to be unpopular when taken. Even worse from a political point of view, if the strong actions then work, the bad outcomes they prevented will never actually be observed, and so the critics of such actions may never accept that they were needed.