COVID-19, Economic Cost , Outcomes and Beliefs

The Federal Reserve of St Louis has an interesting working paper, “Scarring Body and Mind: The Long-Term Belief-Scarring Effects of COVID-19” , that takes a look at the economic costs and impacts from mitigating bankruptcies and changes in behavior.

The key statements from the paper are :

  • A policy that avoid most permanent separation of workers from capital could generate a much larger benefit than originally thought, that could easily be 180% of annual GDP, in present value.
  • … policies that help prevent depreciation or obsolescence, even if it has only modest immediate effects on output, can have substantial long-run benefits, an order of magnitude larger than the short-run benefit that policy makers typically consider.
  • Take the example of a restaurant, Its kitchen may still be in use but its dining area is unproductive capital , on which it is earning zero return. A key question is then whether that capital is gone for good.
  • What sound policy might avoid is the prospect that, after seeing how fragile our economy is to pandemic, firms will be scarred and will never think about tail risk in the same way again.

As a working paper, the paper is technical but still a thoughtful read in how to frame and quantify the economic and policy decisions in light of COVID-19 and similar long-tail events.

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