The one great reason for economic optimism during this pandemic is that once public health concerns are addressed, the economy could quickly return to something like pre-crisis levels.
After all, if there were a safe way to return to normal behavior, restaurants could fill up, planes could begin flying, and millions of workers could return to their posts. But even if that happens in the coming months, the United States will still be facing waves of second- and third-order economic effects that could last years.
Although every recession is different and much depends on the details of how the federal government responds, there are some warnings from the last recession.
In the 2008 downturn, bank failures didn’t peak until 2010, causing a shortage of credit to businesses even once the economy was comfortably expanding. State and local governments, after experiencing a collapse of revenue, didn’t stop slashing jobs until early 2013.
In this downturn, there is the looming collapse of many small businesses; potential losses in the commercial real estate sectors; a crisis in the funding of state and local governments that will most likely take years to play out; and a collapse of energy prices that could slow capital investment.
These factors could hold back the economy even if there’s a sharp rebound in employment as business life and public health return to normal.
In any given quarter, that may net out to G.D.P. growth or contraction. But the end result may be less a sharp V-shaped recovery or gradual U-shaped cycle and more a very gradual return to health, like the Nike “swoosh” logo or something more like a tilde (~), the wavy punctuation mark.
The potential for thousands, or even millions, of smaller businesses to close permanently stands out as a potential multiyear headwind to the economy. In a survey by the Society for Human Resource Management, half of small business owners expected to be out of business within six months. If anything close to that failure rate were to materialize, it could take months or years for their workers to find new jobs.
When businesses go under in normal times, or even in a typical recession, it can be part of a restorative process that keeps the economy dynamic — shifting workers and other resources toward the highest-productivity purposes.
But a widespread shuttering of companies that had perfectly viable businesses as of February of this year is something else.
A business is also a set of relationships: between skilled labor and suppliers; physical assets like equipment and intellectual assets like a brand name; and employees and their base of regular customers. If a company fails because of the pandemic, another company may ultimately emerge to fulfill its economic role, but it could take years to rebuild that complex web.
“I love the pizza place two blocks away,” said Erik Hurst, an economist at the…