The economic costs of reopening too soon

As President Trump and the nation’s governors wrestle with how soon to begin reopening the U.S. economy from its virus-induced shutdown, many analysts argue that a tradeoff exists between our severe economic and public health concerns.

On one side, we have had President Trump and his allies in the business community and on Fox News, stressing the huge economic costs of maintaining the shutdown; on the other side, we have most medical and public health experts, emphasizing the need to allow more time to heal from the virus, and to prevent its potential reemergence. They also stress the need for large-scale “testing and tracing” to successfully reopen, and how hard it will be to implement these practices at scale anytime soon.

There is no question that the shutdown has caused great economic suffering, and we all hope for a timely reopening to start relieving the strain. It is also true that, the longer we remain shut down, the harder the reopening will be. Workers will find their savings more fully depleted, and businesses will have even larger debts to contend with. Many businesses will not survive, or at least will have to change their business models, after a lengthy shutdown, creating permanent job losses for many workers. And more rounds of federal economic relief are needed, both now and again soon, to offset the terrible costs of the shutdown.

Still, a premature economic opening will almost certainly add to these costs and difficulties over time. Why is that?

First, if we reopen while health risks remain, many employees will not feel safe at their workplaces. They will then face a terrible choice: putting their health and lives at risk if they show up for work, or perhaps having to quit or face discharge for not doing so (a choice that many workers in “essential” industries, and especially health care, face right now).

For workers who choose the latter option, they will join the ranks of those permanently displaced from their jobs; and they will have great difficulty becoming reemployed, as the economy remains sluggish for months or years ahead. They will also not qualify for Unemployment Insurance (UI), since workers who quit or are fired from their jobs are not eligible to receive it. Businesses might also have difficulty recruiting new workers with the training and experience to fill these jobs, making it more costly and difficult for them to function as well.

Second, employers in the retail and service sectors will likely find themselves with few customers feeling safe enough to frequent their stores, hair salons, restaurants, bars and movie theaters. These businesses will derive few of the benefits they anticipated from reopening, and might be unable to meet the most minimal costs of staying open, even with fairly skeletal operations.

Third, and by far the greatest risk, is that the virus will once again start quickly spreading, generating larger second or third waves of infections than would otherwise occur. Of course, the human cost of this outcome would be enormous, as we would once again see the numbers of illnesses and deaths associated with the virus rising.

But the economic consequences of such a scenario are terrible as well. Governors will face the unpleasant prospects of shutting down businesses, schools and houses of worship a second time. In fact, on again and off again shutdowns will likely be more disruptive than a single longer one, as everyone will have to manage the transitions back and forth, rather than just once.

In addition, a second round of massive shutdowns will likely mean longer periods of times overall in which businesses are disrupted and the economy suffers. That means more time with high unemployment rates, and greater need for huge federal bailouts. State revenues will shrink for longer, creating more shortfalls that will force them to cut even more services on which the poor and unemployed desperately depend, but which will be necessary as state budgets must be balanced.

And such a likelihood would make future efforts at recovery even more halting and tenuous. Having been burned once before, consumers and workers will be even more reluctant to return to their earlier jobs and spending patterns, and employers will be more reluctant to open and rehire once again.

We all want to see the shutdown end as soon as possible, and we hope for a recovery that will give us relief from the economic pain that has resulted. But it is more sensible for Congress to enact a moderate round of new economic relief now – with more funding for small businesses, hospitals, and hard-hit states – than to encourage a premature opening of the economy, which would be much costlier down the road.

Harry J. Holzer is LaFarge Professor of Public Policy at Georgetown University and a nonresident senior fellow in Economic Studies at Brookings.

Tags Coronavirus Donald Trump Shutdown Unemployment

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