FindingMar 31, 2020

The Economic Cost of Closing Non-essential Businesses

Expected GDP losses for Q2 2020 are massive, but they nonetheless likely understate the true costs to households and businesses, which could reach nearly $10,000 per household per quarter.
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Welfare Effects of Closing Non-essential Businesses

Government officials around the world have ordered businesses shut and families to stay in their homes except for essential activities. This fact estimates the opportunity costs of lockdown relative to a normally functioning economy.

National income accountants have found that adding a nonwork day to the year reduces the year’s real GDP by about 0.1 percent. Adding a nonwork day to a quarter would therefore reduce the quarter’s unadjusted real GDP by about 0.4 percent. Extrapolating from this finding, removing all of the working days from a quarter is 62 or 63 times this, or 25 percent. In other words, if seasonally-adjusted GDP for 2020-Q2 would have been $5.5 trillion at a quarterly rate (see Table), then changing all of that quarter’s working days to the functional equivalent of a weekend or holiday would reduce the quarter’s GDP to $4.2 trillion. Applying the same approach to 2020-Q1, with a lockdown occurring for one-eighth of the quarter, 2020-Q1 real GDP (in 2020-Q2 prices) would be $5.4 trillion. The quarter-over-quarter growth rate of seasonally-adjusted real GDP would, expressed at annual rates, therefore be -10 percent in Q1 and -63 percent in Q2.

Bottom line: Given these and other facts,[1] while even negative 50 percent is an optimistic projection for the annualized growth rate of US GDP in 2020-Q2, (assuming nonessential businesses stay closed over that time), this large figure may understate the true effect, which could total nearly $10,000 per household per quarter.

[1] http://caseymulligan.blogspot.com/2020/03/the-economic-cost-of-shutting-down-non.html