University of Pacific releases report on economic impact of COVID-19 on Northern California

The University of the Pacific has released a 17-page report on the likely economic impact of COVID-19 on Northern California (pdf). Unfortunately, the report is mostly about Northern California.

Folks here in Southern California will have to read between the lines and guesstimate that, yeah, it’s going to be ugly here, too.

After an introduction, the authors of the report, Jeff Michael and Thomas Pogue, state forthrightly that social distancing and staying at home are worth the horrendous economic damage:

When reading frightening economic projections like those in this report, it is natural to wonder if the economic costs of fighting the pandemic through stay‐at‐home orders and social distancing is too great. President Trump has repeatedly said, “We can’t have the cure be worse than the problem.” We do not want anyone to use these estimates as an argument to prematurely ease the social distancing and stay‐at‐home requirements to reopen the economy. In fact, economic cost‐benefit analysis strongly supports the stay‐at‐home, social distancing orders in California and the extension of those policies nationwide.

It is important to note that these estimates of job loss and economic decline are not the cost of stay‐at‐home policies, because the baseline for comparison is not a business‐as‐usual no‐pandemic scenario. To estimate the cost of stay‐at‐home policy, we would have to compare the economic loss if the pandemic were allowed to spread unchecked as schools and businesses tried to remain open in the face of much larger levels of illness and fatalities. While the economic loss under our current stay‐at‐home policies is massive, about 30% of daily economic output according to Moody’s Economy.com, it may not be significantly higher than the economic losses under a no‐policy COVID‐19 scenario.

Well‐established economic tools can also help us estimate the benefits of stay‐at‐home policies, which are widely estimated to prevent 1‐2 million fatalities in the U.S. compared to a scenario with no social distancing policies. The value of a statistical life (VSL) is a risk‐reduction valuation measure based on the observed risk‐reduction choices of individuals in the economy. The VSL has been rigorously estimated and refined over decades and used in cost‐benefit analysis of environmental, public health and safety regulations for air quality, chemicals, highway improvements and more.

Initial estimates of the benefits of reduced coronavirus fatalities from social distancing efforts in the United States can be as high as $20 trillion. A detailed paper from University of Chicago economists using very conservative approaches, including low‐end estimates of averted fatalities and a controversial value of a statistical life that decreases with age, estimates the benefit of social distancing policies at more than $8 trillion. Thus, a conservative estimate of benefits equates to about one‐third of U.S. annual GDP, far exceeding any reasonable estimate of the cost of social distancing policies compared to a no‐action coronavirus scenario.

In this case, strong public health policies are also the best economic policies.

Their statement, regarding the Coronavirus Aid, Relief and Economic Security ( (CARES) Act, is important and should be kept in mind by everyone:

The effectiveness of the CARES act should not be judged by the unemployment rate over the next few months, but by the ability of businesses and households to emerge from the stay‐at‐home period able to reengage in the economy with permanent damage minimized.

Graph of projected statewide unemployment in May 2020 YoY and compared to 2020. Graphic courtesy of University of the Pacific.

Don’t think of the CARES Act as economic stimulus but rather as economic life support to keep lungs and heart pumping until we can get out and do for ourselves again.

None of the individual regions in Northern California examined by the report correspond exactly with regions in Southern California. For example, Napa is expected to get flattened because it is so dependent on tourism. We have a lot of tourism in Southern California — Disneyland! Knott’s! Six Flags! Universal Studios! beaches! mountain resorts! — but we also have quite a bit of manufacturing.

Individual occupational groups may help to illuminate the near future.

According to the report, the hardest hit occupational groups (no surprise) are Personal Care and Service (projected 84% of jobs lost statewide by May), Food Preparation and Serving Related (74% jobs lost), and Arts, Design, Entertainment, Sports, and Media (58% jobs lost).

You may not feel too sympathetic with high-paid athletes and Hollywood types, but consider the plight of your hair stylist, manicurist, and group exercise coach!

By the time restrictions are lifted, my hair is going to be long enough to pull back in a pony tail. My hands are already a wreck. (I confess that I chew my cuticles when anxious. Who’s anxious these days?) I look forward to my next haircut and mani/pedi, and will tip more than generously. But the individual stylists are mostly independent contractors renting stations in spas/salons. If the stylists aren’t paying for their stations (because — no customers!), how are the salons paying their rent? If the salons aren’t paying their rent, how are the building owners paying for upkeep, utilities, and mortgages? If the building owners give the salons a break on the rent, how fast will the owners expect the salons to make up the unpaid rent?

We’ll get through this, but it will get uglier before it gets better, and we all need to pull together.

Stay safe, stay healthy!