A ‘return to normal’? Maybe never
Two studies suggest pandemic will scar U.S. for many years to come
Two new working papers present complementary data showing that the coronavirus pandemic will leave a deep psychological scar on the nation for years to come.
The first, led by Julian Kozlowski of the Federal Reserve Bank of St. Louis, finds that the experience of the coronavirus and ensuing recession could make people and businesses less likely to resume their previous spending and investment patterns, which would have an extended stunting effect on economic growth.
The second, led by Cevat Giray Aksoy of the European Bank for Reconstruction and Development, finds that people who endure a pandemic in young adulthood tend to be more distrustful of government institutions for the rest of their lives, an outcome that makes it more difficult for governments to effectively respond to future pandemics.
Taken together, the studies bolster a view increasingly voiced by experts: There may never be a “return to normal.” Rather, the ill effects of the pandemic will resonate long after an effective coronavirus treatment is discovered.
The first paper, by Kozlowski and his colleagues, investigates the likelihood of a COVID-19 “scarring effect,” or a “persistent change in beliefs about the probability of an extreme, negative shock to the economy.” Severe economic events such as the Great Recession have caused individuals, institutions and businesses to permanently change behavior. Experiencing one recession, for instance, makes people sensitive to the possibility of another.
The authors construct a complicated economic model to quantify how this scarring process may work in the context of the current crisis, incorporating data on the economic damage to date, the likely spread of the virus in the future, and how policy responses have altered those parameters.
They concluded that the bulk of the economic damage will not come from short-term impacts, such as job losses and business closures, but rather from long-term effects. If the pandemic costs the U.S. economy between 6 and 9 percent of gross domestic product in 2020, for instance, the authors expect the long-term losses from behavioral changes, such as reduced business investment and lower consumer spending, to be between five and six times as large.
As with other research examining the effects of the pandemic on fertility, these economic losses would be permanent. “Even if a vaccine cures everyone in a year, the COVID-19 crisis will leave its mark on the US economy for many years to come,” the authors wrote.
Similarly lasting effects are visible in the realm of politics in the second paper. Aksoy and his colleagues combine a global database of epidemics since 1970 with country-level Gallup survey data on trust in institutions. Their primary research question: How does the experience of an infectious-disease outbreak in a person’s young adulthood shape their trust in institutions later in life?
The findings are substantial: “An individual with the highest exposure to an epidemic (relative to zero exposure) is 7.2 percentage points less likely to have confidence in the honesty of elections; 5.1 percentage points less likely to have confidence in the national government; and 6.2 percentage points less likely to approve the performance of the political leader,” the authors wrote.
The general population averages for those values hover around 50 percent, so that represents more than a 10 percent reduction in trust.
“Citizens expect democratic governments to be responsive to their health concerns,” study co-author Orkun Saka wrote in an email, “and where the public-sector response is not sufficient to head off the epidemic, they revise their views in unfavorable ways.”