How the Effects of the Covid-19 Recession Differed Across Business Sectors and Income Groups

The recession that resulted from the Covid-19 pandemic affected most sectors of the U.S. economy, but some sectors of the economy fared better than others. As a broad generalization, we can say that online retailers, such as Amazon; delivery firms, such as FedEx and DoorDash; many manufacturers, including GM, Tesla, and other automobile firms; and firms, such as Zoom, that facilitate online meetings and lessons, have done well. Again, generalizing broadly, firms that supply a service, particularly if doing so requires in-person contact, have done poorly. Examples are restaurants, movie theaters, hotels, hair salons, and gyms.

The following figure uses data from the Federal Reserve Economic Data (FRED) website (fred.stlouisfed.org) on employment in several business sectors—note that the sectors shown in the figure do not account for all employment in the U.S. economy. For ease of comparison, total employment in each sector in February 2020 has been set equal to 100.

Employment in each sector dropped sharply between February and April as the pandemic began to spread throughout the United States, leading governors and mayors to order many businesses and schools closed. Even in areas where most businesses remained open, many people became reluctant to shop in stores, eat in restaurants, or exercise in gyms. From April to November, there were substantial employment gains in each sector, with employment in all goods-producing industries and employment in manufacturing (a subcategory of goods-producing industries) in November being just 5 percent less than in February. Employment in professional and business services (firms in this sector include legal, accounting, engineering, legal, consulting, and business software firms), rose to about the same level, but employment in all service industries was still 7 percent below its February level and employment in restaurants and bars was 17 percent below its February level.

Raj Chetty of Harvard University and colleagues have created the Opportunity Insights website that brings together data on a number of economic indicators that reflect employment, income, spending, and production in geographic areas down to the county or, for some cities, the ZIP code level. The Opportunity Insights website can be found HERE.

In a paper using these data, Chetty and colleagues find that during the pandemic “spending fell primarily because high-income households started spending much less.… Spending reductions were concentrated in services that require in-person physical interaction, such as hotels and restaurants …. These findings suggest that high-income households reduced spending primarily because of health concerns rather than a reduction in income or wealth, perhaps because they were able to self-isolate more easily than lower-income individuals (e.g., by substituting to remote work).”

As a result, “Small business revenues in the highest-income and highest-rent ZIP codes (e.g., the Upper East Side of Manhattan) fell by more than 65% between March and mid-April, compared with 30% in the least affluent ZIP codes. These reductions in revenue resulted in a much higher rate of small business closure in affluent areas within a given county than in less affluent areas.” As the revenues of small businesses declined, the businesses laid off workers and sometimes reduced the wages of workers they continued to employ. The employees of these small businesses, were typically lower- wage workers. The authors conclude from the data that: “Employment for high- wage workers also rebounded much more quickly: employment levels for workers in the top wage quartile [the top 20 percent of wages] were almost back to pre-COVID levels by the end of May, but remained 20% below baseline for low-wage workers even as of October 2020.”

The paper, which goes into much greater detail than the brief summary just given, can be found HERE.

Statement from the Economic Strategy Group Urging Congress to Provide Additional Spending in Response to the Covid-19 Pandemic

The Economic Strategy Group (ESG) is a program for discussing economic policy issues. On November 19, 2020, the ESG released a statement urging Congress to provide additional funding to deal with the Covid-19 pandemic. Glenn Hubbard joined economists from both political parties in signing the statement. You can read the statement HERE.

Does the U.S. Economy Need Another Government Stimulus Package?

In an opinion column on bloomberg.com, Michael Strain of the American Enterprise Institute argues that Congress should pass another stimulus package to supplement the $1.8 trillion Coronavirus Aid, Relief, and Economic Security Act that Congress passed and President Trump signed into law in March. His proposal would involve an additional $1 trillion in spending.

You can read the column HERE. Note that most bloomberg.com articles require a paid subscription, but you can read several articles per month for free.

9/11/20 Podcast – Authors Glenn Hubbard & Tony O’Brien cover current events, Micro, and Macro! They discuss 9/11, the rising stock market, the challenges facing restaurants, as well as shifts in strategy for the Fed!

Authors Glenn Hubbard and Tony O’Brien continue their weekly discussion about the effects of the Pandemic on the US Economy. They discuss the disconnect between stock market performance and the overall economy. Also, they look at the decision of restaurants to stay open despite struggling to breakeven due to limitations on indoor seating. The Fed’s pivot on the dual-mandate is also discussed as they announce more of their monetary policy focus will be on unemployment rather than inflation.

Over the next several weeks, we will be gearing up this podcast to become an essential listen during your week. Whether your interest is teaching or policy, you will learn from this discussion.

Just search Hubbard O’Brien Economics on Apple iTunes and subscribe!

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9/04/20 Podcast – Authors Glenn Hubbard & Tony O’Brien Welcome Jadrian Wooten of Penn State.

Listen as authors Glenn Hubbard and Tony O’Brien have a wide-ranging discussion with Jadrian Wooten, an economics professor at Penn State University. Jadrian discusses some pedagogical approaches in his online classes, his use of a standing desk in zoom teaching his large classes, as well as the unclear impact of missing college football to the local college economies.

Over the next several weeks, we will be gearing up this podcast to become an essential listen during your week. Whether your interest is teaching or policy, you will learn from this discussion.

Just search Hubbard O’Brien Economics on Apple iTunes and subscribe! Episodes are usually available the next day on Apple iTunes or any other podcast app.

Please listen & share!

8/21/20 Podcast – Authors Glenn Hubbard & Tony O’Brien reflect on the policy effects of the government response and the impact of no events on places like Orlando and college towns.

Authors Glenn Hubbard and Tony O’Brien revisit some of the policy responses to the Pandemic to discuss unemployment payments and other government fiscal responses. They also consider some of the longer-term impacts on business – like supply-chains – and the role that Economics can play in these issues. Glenn and Tony discuss how tourism is impacted in places like Orlando or college towns without college football as an economic engine.

Over the next several weeks, we will be gearing up this podcast to become an essential listen during your week. Whether your interest is teaching or policy, you will learn from this discussion.

Just search Hubbard O’Brien Economics on Apple iTunes and subscribe!

Please listen & share!

We’re back!! 8/12/20 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss the Covid-19 Pandemic effects and responses as we move towards Fall 2020!

Glenn Hubbard and Tony O’Brien talk about the effects of the Covid-19 pandemic as we head into fall classes. They discuss the impact on teaching and learning as well as a fresh look at the impact of government policies over the past few months. The challenges facing the US economy are discussed as well as how the Nike swoosh or V-downturn is now looking somewhat differently in August 2020. We will begin doing WEEKLY podcasts as we head into Fall of 20202. Please look for new episodes at the end of each week and please subscribe to our Podcast feed via your preferred Podcast app – including iTunes Podcasts!

Just search Hubbard O’Brien Economics and subscribe!

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6/19/20 Podcast – Glenn Hubbard & Tony O’Brien Welcome Guest – Prof. Eva Dziadula from the University of Notre Dame!

Glenn Hubbard and Tony O’Brien talk with Eva Dziadula of the University of Notre Dame. In the podcast, they discuss economics, teaching, and the impact of the pandemic on the classroom. Eva discusses teaching Microeconomics in the middle of a pandemic and teaching Immigration in the midst of our national immigration debate.

Also, these podcasts are now on iTunes or your regular podcast feed! Just search Hubbard O’Brien Economics and subscribe!

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6/12/20 Podcast – Glenn Hubbard & Tony O’Brien Welcome Guest – Prof. Kim Holder from the University of West Georgia!

Glenn Hubbard and Tony O’Brien talk with Kim Holder of the University of West Georgia. Kim discusses many best practices in preparing for her fall courses that are so flexible they can easily adapt to in-person, hybrid, or online. Listen to her observations about the delicate nature of discussing COVID-19 in classes this fall as well as her passion for personal financial literacy in the wake of the traumatic event. Both instructors and students will learn from what Kim has to say!

Links for podcast of June 12th, 2020 with Kim Holder of the University of West Georgia:

Pyle Pro Portable PA Speaker Voice Amplifier – Pyle PWMA50B – in Black

https://www.amazon.com/Portable-Speaker-Voice-Amplifier-Built/dp/B005I2YJPM/ref=sr_1_1?dchild=1&keywords=PWMA50_&qid=1591997483&s=musical-instruments&sr=1-1

Economics in One Lesson by Henry Hazlitt

https://www.amazon.com/gp/product/B003XT60KO/ref=dbs_a_def_rwt_hsch_vapi_tkin_p1_i0 or at no charge from the FEE here: https://fee.org/resources/economics-in-one-lesson/

Tyranny Comes Home by Christopher J. Coyne (George Mason University) & Abigail R. Hill (University of Tampa), Stanford University Press, 2018

https://www.amazon.com/Tyranny-Comes-Home-Domestic-Militarism/dp/1503605272

Please listen & share!

COVID-19 Update – Apply the Concept: Can You Catch Covid-19 from Touching a Surface? Taking into Account How People React to Changing Circumstances

Supports:  Econ (Chapter 1, Section 1.3- in All Volumes)

Here’s the key point:   To forecast the effects of a government policy, it’s important for economists to take into account how people will change their behavior in response to the policy.

In forecasting the effects of a government policy, economists take into account how people will respond to the policy.  In general, when people’s circumstances change, including when the government enacts a new policy, people change how they act.  It’s easy to fall into an error if you fail to take into account how people’s actions might change—their behavioral response—as their circumstances change.  Let’s consider two examples.

First consider an example from the Covid-19 pandemic.  In May 2020, the federal Centers for Disease Control and Prevention (CDC) noted that few people were contracting the disease as a result of touching surfaces contaminated by the virus and that most people became ill by breathing in the virus while near an infected person. Some media outlets interpreted the CDC’s announcement as meaning, in the words of one headline: “CDC Now Says Coronavirus Isn’t Easily Spread by Touching Surfaces.” But is this conclusion correct? Consider two scenarios:

Scenario 1: Despite the spread of the coronavirus, people and businesses don’t adjust their behavior. People are unconcerned if they touch a surface, such as a doorknob, that may contain the virus.  After touching a surface, they don’t immediately wash their hands or use hand sanitizer.  No one wears gloves. Businesses don’t make a special effort to clean surfaces.

Scenario 2: Most people react to the spread of the coronavirus by avoiding touching surfaces whenever they can.  If they do touch a surface, they wash their hands or use hand sanitizer. Some people wear gloves. Businesses disinfect surfaces much more frequently than they did before the virus became widespread.

If Scenario 1 accurately described the situation in the United States in May 2020, we could reasonably draw the conclusion contained in the media headline we quoted: You are unlikely to catch Covid-19 by touching a contaminated surface. In fact, of course, Scenario 2 more accurately describes the situation in the United States at that time. As a result, the fact that few people caught the virus from touching a contaminated surface does not allow us to conclude that you are unlikely to catch Covid-19 that way because people adjusted their behavior to make that outcome less likely.

Now consider an economic example.  Suppose that a city decides to tax colas and other sweetened beverages.  If stores in the city are currently selling 100 million ounces of soda and the city imposes a tax of 2 cents per ounce, will it collect $2 million (= $0.02 per ounce × 100,000,000 ounces) in revenue from the tax per year?  We can expect that because of the tax, stores will increase the prices they charge for soda. Those price increases will cause consumers to change their behavior. Some people will buy less soda and, if the city’s suburbs don’t also enact a tax, some people will drive to stores outside the city to buy their soda. As a result, sales of sweetened beverages in the city will fall below 100 million ounces and the city will collect less than $2 million per year from the tax.

In both these cases, we would draw an incorrect conclusion if we failed to take into account the behavioral response of people to changes in their circumstances, whether the change is from the arrival of a new disease or an increase in a tax.  Economist sometimes call the error of failing to take into account the effect of behavioral responses to policy changes the Lucas critique, named after Nobel laureate Robert Lucas of the University of Chicago.

Question: An article in the Seattle Times published in late May 2020 noted that: “Half of new coronavirus infections in Washington [state] are now occurring in people under the age of 40….” Yet an opinion column in the New York Times published in March 2020 near the beginning of the pandemic noted that the coronavirus was disproportionately infecting older people.  Is one of these accounts of which age group is most likely to be infected necessarily incorrect? Briefly explain.

For instructors that would like the solutions to these questions, please email your name, course number, and affiliation to christopher.dejohn@pearson.com and we’ll send along a solutions manual.

Sources: Sandi Doughton, “Half of Newly Diagnosed Coronavirus Cases in Washington Are in People under 40,” Seattle Times, May 28, 2020; and Louise Aronson, “‘Covid-19 Kills Only Old People.’ Only?” New York Times, March 22, 2020.