How much is the government to blame for the drop in US business revenue?

What role does government play in the pandemic?
What role does government play in the pandemic?
Image: REUTERS/Erin Scott
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A recent US Bureau of Labor Statistics survey on how businesses fared from the start of the pandemic through Sept. 30 provides new context on their experience, and the government’s role within it.

The survey found that while 19% of establishments faced a government-mandated closure, some 56% experienced a drop in demand for their products or services—and 54% of establishments that were not required to close still ended up cutting hours or furloughing workers.

The data suggests that lockdowns are only part of the cause for the economic fallout. But just how big an impact is directly attributable to government-mandated shutdown orders?

“It is large in the sense that it’s unprecedented in modern US economic history,” says John Ricco, an analyst at Penn Wharton Budget Model, a nonpartisan research group providing economic analysis of public policy’s fiscal impact. But when compared to the scope of closures in other countries, he says it is “perhaps small.” He suspects that business closures were more widespread in places like Italy and China than the US.

Emily Thomas, an analyst at the BLS, says there are “no obvious parallels for direct comparison and contextualization. It would be impossible for me to say whether this is a ‘big’ or ‘small’ number.”

Erica Groshen, an economist at Cornell University and a former head of the BLS, says the government’s impact is “fairly small” in terms of the direct effects of mandated closures, but more significant in terms of broader efforts to flatten the curve. “Then you could argue that almost all of it is, but you could also say this is the effect of the pandemic,” she says.

The challenge is disentangling the economic impact of business closures and the phenomenon of dropping demand. If the government mandates that schools are closed and tells non-essential workers to stay at home, but the neighborhood restaurant is still open, would not going to the restaurant be a voluntary move or a decision motivated by the government?

“The largest impact of this comes from changes in behavior, whether mandated or not mandated,” says Groshen. “So you just have a lot of behavioral changes that are appropriate because of the advice people are getting from their leaders and from medical professionals.”

But now, given that the economic recovery is slowing, she suspects people are being more precautious not necessarily “for their health, but for their financial well-being.”

Research from Penn Wharton Budget Model also found that the reduction in overall employment can be attributed largely to businesses taking voluntary or precautionary measures.

Ricco, who was involved in the research, says state and local governments are in “somewhat of a tricky bind” because they are hamstrung by their own budget constraints while facing political pressure to keep businesses open in the absence of a new round of federal relief.

Geography, of course, also plays a factor in how businesses will fare: In the winter, restaurants in the Northeast, for example, will have a harder time providing outdoor dining services versus restaurants in places like Arizona, Florida, or Texas.

It all suggests that the government is not necessarily the economic enemy some have portrayed it to be—and that the recovery will be closely tied to the country’s ability to get the vaccine under control. Meanwhile, Groshen says a combination of federal relief and infrastructure spending would “help to maintain optimism and slow or counteract the recessionary dynamic that [we] would otherwise be heading into.”