Why reopening isn't enough to save the economy (data analysis)


EXCERPTS: Brooklyn Heights sits across the East River from Lower Manhattan. It's filled with multimillion-dollar brownstones and — usually — Range Rovers, Teslas and BMWs. These days it's easy to find parking. [...] The place is a ghost town. ... Rich people have stopped going out, destroying millions of jobs. That's one of the key insights of a blockbuster study that was dropped late last week by a gang of economists led by Harvard University's Raj Chetty.

[...] First up, consumer spending. Typically, Chetty said, recessions are driven by a drop in spending on durable goods, like refrigerators, automobiles and computers. This recession is different. It's driven primarily by a decline in spending at restaurants, hotels, bars and other service establishments that require in-person contact. We kinda already knew that. But what the team's data show is that this decline in spending is mostly in rich ZIP codes, whose businesses saw a 70% drop-off in their revenue. That compares with a 30% drop in revenue for businesses in poorer ZIP codes.

Second, jobs. This 70% fall in revenue at businesses in rich ZIP codes led those businesses to lay off nearly 70% of their employees. These employees are mostly low-wage workers. [...] The bottom line, Chetty said in his presentation, is that "reductions in spending by the rich have led to loss in jobs mostly for low-income individuals working in affluent areas."

Third, the government rescue effort. They find it has mostly failed. The $500 billion Paycheck Protection Program, which has given forgivable loans to businesses with fewer than 500 employees, doesn't appear to have done much to save jobs. When the researchers compare the employment trends of businesses with fewer than 500 employees with those with more, the smaller businesses eligible for PPP don't see a relative boost after the program went into effect. [...] Meanwhile, the stimulus checks ... did not have much stimulative effect because the spending mostly flowed to big companies like Amazon and Walmart. The money didn't flow to the rich ZIP code, in-person service businesses most affected by the downturn...

Finally, there are state-permitted reopenings: They don't seem to boost the economy either. [...] "The fundamental reason that people seem to be spending less is not because of state-imposed restrictions," Chetty said. "It's because high-income folks are able to work remotely, are choosing to self-isolate and are being cautious given health concerns. And unless you fundamentally address that concern, I think there's limited capacity to restart the economy."

As long as rich people are scared of the virus, they won't go out and spend money, and workers in the service sector will continue to suffer. Low-income workers — especially those whose jobs focused on providing services in rich urban areas — are in for a period of turbulence. [...] Chetty and his team conclude that the traditional tools of economic policy — tax cuts and spending increases to boost demand — won't save the army of the unemployed. (MORE - details)

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