Results from a new economic tracker that looks at real-time statistics on consumer spending, jobs, and business revenue suggest that the government’s traditional recovery strategies to reverse the downturn triggered by the pandemic are not having a major impact, because they fail to address the root of the problem — consumer fear of the virus itself.
The findings, summarized in a report published Wednesday by Harvard’s Opportunity Insights group, suggest that the only way to fully revive the economy is to address the virus itself through therapy or a vaccine. And in the meantime, barring some other medical advance or shift in the economy, a more effective approach would be to focus on bolstering the businesses, individuals, and areas most affected, instead of broad-based solutions like direct stimulus payments to all Americans.
“The question is: Are you going to approach this as are we going to stimulate the economy and try to get it back on track with economic policy? Or are we going to look at this as what economists would call social insurance?” said Raj Chetty, William A. Ackman Professor of Public Economics and director of Opportunity Insights, an institute of social scientists and policy analysts who harness big data for policy solutions.
“Those are two fundamentally different views. One view is we’re going to restart the economy and get it back to where it was through economic policy. My instinct is: That’s just not possible, because you can’t make people go out and spend and go out and do what they were doing before if they’re fundamentally just worried about their health. … I think you can take the perspective of: We need to help people who need to feed their families, need to be able to pay rent, need to be able to pay their utility bills, and so forth. We do that through unemployment benefits, through the food stamp program, through things like Medicaid that provides health insurance coverage in these times.”
The Opportunity Insights Economic Tracker uses data from credit card processors, payroll firms, and financial services firms. It is an interactive tool launched in May to help policymakers assess the effects of the downturn in real time and evaluate policy impacts in different geographic regions of the U.S. at a granular level. The tool is open to and free for public use.
In the report, the Opportunity Insights team — which includes Co-Directors Nathaniel Hendren, a Harvard professor of economics, and John Friedman, a professor of economics and international and public affairs at Brown University, along with Michael Stepner, an economist who completed his Ph.D. at MIT last year — highlights the effects the novel coronavirus has had on consumer spending and employment rates, and evaluates the policies intended to stabilize them during the collapse.
U.S. government statistics show almost all of the reduction in the nation’s GDP came from a sharp drop in consumer spending, which accounts for more than two-thirds of the economy. So the group began by studying this drop and analyzing the impacts of those reductions on businesses and workers.
They discovered that high income households accounted for most of the drop in consumer spending and that small businesses in higher-income areas had suffered greater revenue declines and more losses of low-wage workers than their counterparts in less-affluent ZIP codes. In fact, two-thirds of the total drop in credit-card spending between January and the end of May came from households in the top 25 percent of the income distribution, while households in the bottom 25 percent spent at the same levels they had before the crisis.
