Is government policy driving consumer behavior or fear of infection? Austan Goolsbee and Chad Syverson share new research exploring this question, and why it matters for economic policy design.

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TESS VIGELAND: While some states are reopening, others have paused because of rising infection rates. And policymakers continue to grapple with a complex situation.

EDUARDO PORTER: The question is, to what extent are governments driving the economic shutdown?

TESS VIGELAND: This is Pandemic Economics, a podcast about the global impact of COVID-19 from Stitcher and the Becker Friedman Institute for Economics. I’m Tess Vigeland.

EDUARDO PORTER: And I’m Eduardo Porter. We’ve been invited to have this series of conversations with University of Chicago economists.

TESS VIGELAND: In this episode, I talk with Austan Goolsbee and Chad Syverson of the Booth School of Business about their research into the nature of this economic contraction. Their data stretches from a few weeks before states started to lockdown through mid-May as many started opening back up.

Austan, you and Chad study the timing of when people started staying home as the pandemic kind of reared its head here in the United States and what prompted them to do so, whether it was basic fear or government orders. Why does it matter whether and when people locked themselves down versus authorities issuing lockdown orders, when the result is the same either way– a cratered economy?

AUSTAN GOOLSBEE: It matters a ton. Because if you’re going to try to restart the economy, the question of is it going to be as simple as just have the governor go out and say the order is now repealed, everyone can leave their houses? That’s not going to work if the main reason that people stopped going out wasn’t an order from the government, but was instead that they don’t want to catch the virus. And so that’s why we basically just look at the correlation between the orders and the shutdown. And if you just do that, it looks like the shutdown makes a huge difference.

But then we do this thing of compare across a border in the same place in the same week. So the Quad Cities is a metro area on the border between Iowa and Illinois. And Iowa never had a shelter-in-place order, and Illinois did. So if you look at barbers on the Iowa side of the border and on the Illinois side of the border in the same week, if the policy makes a big difference, then you oughta see trips to the barber go way down in Illinois and trips to the barber not go down– or even go up– on the Iowa side.

And they don’t. They go down pretty close to the same amount on both sides. And that matters because it says, the policy is not what’s driving it.

TESS VIGELAND: So Chad, give us a sense of your overall findings here. It sounds like essentially people made the decision on their own that this was a time to issue your own stay-at-home order, and then the government followed that. Is that right?

CHAD SYVERSON: Yes, that is right. If you look at what people are actually doing, you see that by March 15 or so, there is a huge drop in economic activity and the amount people are going to shops. But that’s before almost every state had issued any shelter-in-place order. So it seems pretty clear that folks were already backing off on their shopping behavior before any of these orders were ever put in place.

Another thing you see that suggests that this behavior is driven by concerns about infection rather than policy per se is that we find the amount of reduction in store-going behavior is tied to the number of COVID cases and deaths in a store’s local area. So you see people seem to be responding to the infection more than just the orders themselves.

And one other piece of evidence that’s consistent with that is, later on when some of the states started either letting the shelter-in-place orders expire or repeal them, the boost in economic activity is not particularly big. In fact, it’s about the same size as the modest effect we’re measuring going in. It’s just in reverse, of course.

TESS VIGELAND: Did these findings surprise either of you?

AUSTAN GOOLSBEE: This is Austan. I was definitely surprised to see how much the individual behavior does seem to respond to fear. So the fact that just in your neighborhood part of the metro area the death counts seem to matter for economic activity, I thought that was surprising.

CHAD SYVERSON: I would agree with that. The one other thing I might add that was surprising to me is, when the orders were lifted, that the size of the response was also no bigger than the size of the response going in. I thought you could have told a story where people were sort of pent up for a long time and raring to go to get back out there. And when the orders are lifted, boom, there’s a big wave. But there wasn’t.

TESS VIGELAND: Yeah, I suppose the lesson there is you can’t legislate and force people to go out if they don’t want to.

CHAD SYVERSON: Yeah, that’s right.

TESS VIGELAND: I’m curious about the methodology here. You used cell phone data. Very similar to what a couple of your colleagues used in studying which businesses might be so-called superspreaders where you might have more chance of getting sick. Chad, how did you use that data? What were you looking at?

CHAD SYVERSON: So the data is location data from cell phones. And what it is is effectively a count of the number of people walking into a store over the course of a week. I should be clear here that these people are all anonymous. We just see a count as they come in the door, just have a little clicker on the door. So that’s how we get the counts in any given week. And then we tie that to both policies and the state of the pandemic in the local area.

TESS VIGELAND: Austan, one of your other findings had to do with the impact of stay-at-home orders on what was deemed essential services, essential businesses. And you found really a reallocation of where foot traffic continued and did not. Can you talk a little bit about that?

AUSTAN GOOLSBEE: So we got 2.3 million different businesses. And they span 110 different industries. We went and collected what counted as essential businesses in all different places around the country. And even though the aggregate effect of the policy orders is modest on economic activity by the consumers, it does have a pretty big effect on what we call the diversion of what businesses consumers do go to.

So when they pass these essential business orders, as you might imagine, there’s a collapse of business to any industry that’s a non-essential. And there’s a consequent big increase in traffic to the essential businesses. When they say you cannot dine-in, you see a collapse of visits to restaurants and to bars. And you see an almost identical increase in visits to groceries and non-restaurant food stores, which is fully to be expected.

We’re not losing weight. I mean, we’re still eating. We just gotta buy our food from a different place. And so that diversion is a big impact of the shelter-in-place orders.

And maybe it’s by design. On one hand, economists, whenever we see a big shift in response to a policy, our first reaction is to say, uh oh, it’s a distortion. There’s probably something wrong with that. But if you could get people out of the places where the spread of the disease is most likely, then that’s probably an achievement.

And as we observe in the paper– and it is highly relevant right now– if you disregard the health component and you release the orders, the fact that the number of cases and the death rate has a direct influence on how willing people are to go out to the store, you could repeal the shelter-in-place order thinking you’re helping the economy but reignite the virus and lead to more deaths, which in itself becomes self-defeating. And you could, on that, damage the economy just by reigniting the virus.

TESS VIGELAND: Coming up, Chad and Austan see opportunities in the data they’ve collected for businesses to make sure people feel safe coming back.

EDUARDO PORTER: Stay with us. There’s more Pandemic Economics in just a minute.

TESS VIGELAND: So at first glance, it seems like your data showed that people will do their own thing. They will protect themselves regardless of whether the government says so. So maybe those kinds of orders aren’t necessary. But then we see some of the behavior that’s happened as states are opening up, many of them without a plan or direction. So square that circle for me.

CHAD SYVERSON: We need to talk about the economic concept of externality. And there’s an externality when there’s a pandemic. An externality you can think of here is it’s a cost that you impose on somebody else by engaging in a particular activity.

Well, when you go out and shop and interact with people, you’re taking a chance that you’ll catch the disease. But you’re also potentially infecting that other person. Now, your own protective behavior is about that first thing. It’s about taking steps so that you don’t catch the disease.

On the other hand, you’re also, again, potentially infecting someone else. You’re less apt to take that into account when you go out and engage in activities. So there is a case to be made that people’s self-protection alone, as large as it is that we’re finding, might not be quite enough, that you would still want to dial back activity even beyond what people are doing themselves.

TESS VIGELAND: Austan, when you look at your data– which, again, as we’ve been talking, about seems to indicate that people will act in their own self-interest by and large to keep themselves safe– what does that mean for policy concerns?

AUSTAN GOOLSBEE: Well, I think that it means the virus is the boss, not the governor and not the mayor and not the president. And we can argue all we want about, should we open? Should we not open? At a fundamental level, people have to feel safe. Otherwise none of that policy will work.

Now, let’s say 95% of people were totally rationally fearful and taking precautions on their own to avoid catching the virus. If you have 5% of people that are being completely obnoxious like these people in the YouTube videos shoving their way into stores and purposely coughing in people’s faces and stuff like that, 5% of people trying to wreak havoc can be terrible for the overall spread of the virus, even if most people are being responsible about it. And I think it’s true that people are going to have reactions that are not just what you tell them to do. I think that ought to inform a lot of our discussion of what’s going to be the impact of policy.

TESS VIGELAND: So then what does that mean for businesses at large who are, for the most part, just trying to take their direction and make their decisions based on a lot of policy? So is there any advice, any takeaway, for them from your paper?

CHAD SYVERSON: I would say you might not be able, as a business owner, to do much about people’s– whatever you want to call it– background level of anxiety and concern. But what you can do is make patronizing your own establishment as safe as possible. Again, what we’re finding is the biggest thing determining people’s behavior is concern about contracting the virus. So if you can take steps that make your customers feel like that is less likely, that you’ve got a safer environment for them, you are going to hopefully alleviate some of their concerns and drive some of their commercial activity towards you. And that’s a lever that is in individual business owners’ control.

AUSTAN GOOLSBEE: Look, I think at least two things for just people running a small business. Number one, don’t put all your eggs in counting on the government to save you, even if you are waiting for them to release the orders. You run a bar, and you’re like, we’ve got to get these bar shutdown orders off so that we can come back. Remembering that the government is not going to be able to save you, because the government isn’t the one that really endangered that.

And two, exactly what Chad said, of anything you can do to make clear to people, we will help you not to catch the virus if you come here. We’re not going to put you guys too close to one another. We have good ventilation. We have screens between stalls, whatever it might be.

Our results at least suggest that things you can do to make people feel more comfortable are probably good for business. If we can get control on this virus, then this thing can be temporary. You can see it goes down very rapidly. But you can see it start to come back when people have that comfort level. And so you just got to hold out and keep your fingers crossed that we don’t mess it up.

TESS VIGELAND: Let me take the opportunity with both of you to get a general sense from you of where we are in all this three, four months into this catastrophe. What do you see when you look out at the US economy right now?

CHAD SYVERSON: There’s potential structural changes that are going to happen in the economy because of COVID and the coronavirus. You think about what’s going on with travel and tourism and some other related industries like that. If there are long-run shifts in that behavior, then we’re not going to get back to where we were in January in a couple of months with that stuff. That’s going to take some larger adjustments. And those adjustments will be all the bigger the longer it takes to get a vaccine or very effective therapy. So I think there’s a short- and a long-run thing that matter. And they’re kind of different animals.

TESS VIGELAND: Austan, what do you see?

AUSTAN GOOLSBEE: Well, I might be more optimistic. I think for sure, if we’re on a relatively rapid plan to get a vaccine, that we could get back to something like normal. Sooner but in the immediate term, I 100% see what Chad sees of we’re going to have intense downturn in the GDP growth sense. The GDP numbers are annualized. I wouldn’t be surprised if we got a minus 35% annualized GDP growth rate for the second quarter.

TESS VIGELAND: Woo.

AUSTAN GOOLSBEE: –by far the worst number that anyone has ever seen in the United States. And then even just the sectors that are least affected coming back might put the GDP growth rate in the third quarter at plus 20%, which would be one of the biggest numbers– if not the biggest number– we ever saw. Yet on net for the whole year, that would be minus 35 plus 20. You’d be looking at some annualized rate that was about the worst year for the GDP that we ever saw.

But it would have this V shape, reverse check mark shape, fishhook shape where it went way down. It came back strongly but only part of the way. And then Chad’s structural adjustment would kick in, that would be it was easy to make up 20%. And the remaining 80% is a lot harder to make up.

TESS VIGELAND: So we still have a long way to go.

AUSTAN GOOLSBEE: Yeah, I think we’ve got a long way to go. And look, Tess, I’m surprised that there have not been more stories, that we aren’t paying more attention to the human damage that’s being done on the economic side. The unemployment rate is literally over 13%. And that’s an underestimate.

The actual unemployment rate is probably more like 16%. And that’s like nothing we’ve seen in 100 years. And so I’m surprised more people are not talking about that.

EDUARDO PORTER: So yeah, I think he’s right. In our next episode, I’m going to talk to Bruce Meyer about how well the emergency expansion of the safety net has worked to mitigate the economic shock to millions of families.

BRUCE MEYER: We immediately started sending out these economic impact payments. At the same time, we expanded unemployment insurance to cover the self-employed, those without a work history. The government has really stepped in here in a way that it hasn’t ever in a recession.

TESS VIGELAND: And I’ll talk with Damon Jones about the holes in that net.

DAMON JONES: Households with an undocumented person in the household are not eligible to receive the economic impact payment from the CARES Act. In those households, you can have children who are US citizens who are not eligible because one of their parents doesn’t have a social security number. They work in these frontline jobs. They contribute as much as anyone else. And they are left out of this type of relief.

EDUARDO PORTER: Pandemic Economics is produced by the University of Chicago’s Becker Friedman Institute for Economics. Our producers are Devin Robins and Dana Bialek. Our executive producer is Ellen Horne. Production and original music by Story Mechanics. Pandemic Economics is part of the University of Chicago Podcast Network. I’m Eduardo Porter.

TESS VIGELAND: And I’m Tess Vigeland. Thanks for listening.