The Long-Term Belief-Scarring Effects of COVID-19

The largest economic cost of the COVID-19 pandemic could arise from changes in behavior long after the immediate health crisis is resolved. A potential source of such a long-lived change is scarring of beliefs, a persistent change in the perceived probability of an extreme, negative shock in the future. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We find that the long-run costs for the U.S. economy from this channel is many times higher than the estimates of the short-run losses in output. This suggests that, even if a vaccine cures everyone in a year, the Covid-19 crisis will leave its mark on the US economy for many years to come.

That is from a new NBER working paper by Julian Kozlowski, Laura Veldkamp, and Venky Venkateswaran.

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Sounds like the appropriate numbers to use in such a serious study.

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Long-term changes in behavior and also law is the big unknown, but I am hopeful that beliefs will cause us to adopt better low-cost hygiene habits like mask wearing when sick and no handshakes instead of anything that might have a more dramatic impact on the economy. After SARS I, people in Hong Kong didn’t stop traveling, taking the subway, and going to restaurants—they just wore masks more and stopped sharing utensils. And the Spanish Flu is barely even remembered today despite a far higher death toll.

We can barely get Americans to care that there is currently a pandemic going on.

How are we supposed to have permanent change if they’ll barely move an inch to change behavior during the actual pandemic.

Chalk this one up to elite academics way too removed from the actuality on the street....

Well, America is a big country. A lot of Americans aren’t taking the pandemic seriously but also a lot are taking it very seriously, even I’d argue too seriously. A lot of Americans have been self-isolating at home for months. I haven’t been to a restaurant since March, mostly because I can’t get my partner or any friends to go with me.

And that is the real problem, instead of a reasonable perspective, the extremes dominate discussions.

Mandate masks to go outside all the time forever. Create a ministry of mask to 'disappear' anyone not following those rules. Create concentration camps to retrain those who do not comply. Yeah! That should work. Oh yeah, ignore the fact that masks don't work.

Nothing like a demonstration of that fact. Most places in Europe where masks are required only require them indoors or on public transportation. That there are people in America believing that you must be legally required to wear a mask outdoors shows the extremes - as does the reaction.

The strange thing about baldly stating masks don't work is the faith of the entire medical profession that they do, in fact, work. Which explains why they wear them during a pandemic involving an airborne contagious virus.

Are you claiming that medical workers only wear homemade cloth masks and no other PPE in contagious environments???

I believe that the reason that some governors and mayors mandate mask wearing outdoor is exactly because that is where they can most easily flex their power to force you to wear the mask. It isn't about protecting you or anyone else from covid-19 it is about their power and their ability to demonstrate that they have that power.

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We I have growing up the normal was wash your hands, be polite and don't cough or sneeze on others, and there is no need to get up close to people (in the words of my politically incorrect mum "we are not Italians you know". I'm a little bit shocked that the NEW normal is really the old normal that we forgot. I think it was about the same time that it became acceptable to wear pjs in public pretending that they are real pants.

Of course there’s a principled distinction between wearing a mask and wearing pajama pants. A mask is intended to prevent you from spreading a contagious illness, and to make others comfortable. Sweatpants make the wearer comfortable, old-fashioned prudes uncomfortable, but don’t affect anyone else’s health. Grow up.

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People use to get sick leave so they did not come to work sick and schools use to sent sick kids home and now they give awards for perfect attendance.

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Asia has some kind of pandemic every few years and they aren't scared or scarred. Has the US become a nation of snowflakes?

nobody in our city is running around with their hair on fire (or setting fires) everbody is managing pretty well all things considered as they used to say on npr when it was a news source & not mostly propaganda. are people actually panicking in your area or is the great "fear" mostly a media construct?

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The Americans who get their news from the major networks and the big city newspapers are in an information desert. All they know is based on fear and misinformation- the breathless claims of “spiking cases”, reporting the numerator (new cases) while omitting the denominator (new tests). A big part of the problem is bias, but the inability to understand numbers is a contributing factor.

I see it reported that Cuomo has a high approval rating. But has the media pointed out his stupid policies that have jacked up the death too in NY?

As I said in a previous post, the key to a successful pandemic is having a brother working for CNN.

Don't believe anything you read in the corporate Media. Nothing, including the ands and ifs.

25 years ago the idea of "spinning" a pandemic wouldn't even have occurred to the media.
we blame marshal media is the message macluhan (a canadian)
and j.the penguin nadler

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We spend nearly 20% of GDP on medical care to extended life expectancy beyond three score and ten because we are snowflakes and do not want to die. Given this evidence why would anyone think we are not.

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Beware of social studies that invent new, totally unnecessary terms ("scarring of beliefs")

Also, "The largest economic cost of the COVID-19 pandemic" is the stunningly reckless stimulus spending by Congress/Trump & the stunningly reckless Dollar debasement by Fed/Powell Digital-Dollar Printing-Press

+1. The stimulus seems sacred and unquestionable, but we are going to be paying for it for a long time. I saw that personal incomes and savings rates had record jumps to record highs during the pandemic. Clearly the stimulus on the whole wasn’t being used for survival but a huge chunk of it just went into savings and buying stocks. Apparently the IRS also sent billions to dead people and isn’t going to try to claw it back.

This is unpopular to say but there should have been a much smaller and more targeted stimulus to only people who might not have otherwise been able to afford food and shelter.

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I don't have time to read the whole paper or fully understand their methodology, but skimming, I didn't see any mention of positive shocks, just negative ones. I'm I misreading? Do their conclusions hold if there are only negative tail events?

What if the end result of COVID is a healthcare deregulation similar to airline deregulation in the late 70s and healthcare costs drop? What if Trump gets COVID during his second administration and the Pence administration passes entitlement reform and balances the budget? It seems like there are still some promising technologies in the energy and healthcare sectors that could dramatically improve lives, no?

Are thousands of medical related products that don't work as promised, paid for by taxpayers (in the future), a great benefit of COVID-19 deregulation?

Eg, the majority of SARS-COV2 antibody are so inaccurate they are at best worthless, but maybe dangerous to both individual and public health. Thus their emergency approval has been withdrawn.

Selling snake oil, especially when government is paying is highly profitable. But when competing with science which can't provide definitive answers and solutions, those with money make selling snake oil, and pangolin scales, rhino horn, and more, very profitable.

But hey, so what if selling pangolin for their scales spreads deadly airborne disease, it's getting rid of regulations that matters. We need to deregulation so we can have "wet markets" in the US to catch up with China on opening up medical cures to address the diseases wet markets spread.

Great point! Regulation that prevents all bad societal outcomes even with extreme time lags and increased cost of production, isn’t such a bad thing!!

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+1. It shouldn't be hard to find positive externalities from this. For example, if working from home becomes common, transportation costs, commercial real estate expenses and CO2 emissions will drop. Less driving means fewer car-related deaths and lower transportation costs. We've been told that the low savings rate is a 'crisis', and the pandemic may drive up savings rates.

The high price of real estate has been mostly driven by increased demand in places with fixed supply. If Covid-19 breaks the requirement to be geographically located where you work, housing will spread out and the use of real estate and land will become more efficient and costs to live and have a good job will fall.

Education could be transformed by this, and that transformation could easily be a huge positive. Maybe we'll get the student loan problem under control, and reform the seriously out of whack education system.

With more people needing tools for working at home, we could see major new investments in VR, automated local shipping, and other technologies that create whole new industries.

The future is a random walk, and wholly unpredictable. Covid could crash the economy - or act as a catalyst that drives a new era of technical and economic improvement. We'll know which one it was after we live through it, and until then any number of 'studies' purporting to predict the future will not change that.

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Perhaps, but weren't predictions of a Great Recession hangover more pessimistic than reality?

(To argue with myself a bit, I sometimes do see the rise of populism as a reaction to the Great Recession.)

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This is true. I'm a lawyer, so the most immediate consequences from covid I have noticed is the huge drop in work for many law firms. I had a discussion this morning with a referral source (she called to refer a project) about how that's affected lawyer fees: counter-intuitively, they've gone up! Why? Because the volume of work has gone down. In larger law firms, fees are based on what's required to fund the firm: partners are expected to bring in a sufficient amount of fees to pay for overhead, including lawyers' salaries. What my referral source (not a lawyer) said she expects is a lot of unemployed lawyers in these firms. It's to my benefit: she was referring the project to me because she expected the fee from the large firm that was supposed to handle the project to be over the top because their volume of work has dropped. It's experiences like this that might convince me that Cowen's friend Scott Sumner is right: we are living in bizarro world.

>huge drop in work for many law firms.

Thank you -- it's nice to hear good news on this blog occasionally. 80% of what law firms do can safely be dropped.

As for Tyler: we're in Month 4 of the Election Year Virus, with four more months to go. Keep spreading the pessimism, Ty!

Even if you have to resort to absurdities like "scarring of beliefs." Dear God, man.

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That makes sense, businesses are dropping non-essential work so the work that still needs to get done is essential so vendors have a lot more pricing power.

It makes no sense at all. Demand goes down so the suppliers are able to charge more because they would like to cover their fixed costs and previous salaries? How does that make any sense?

Demand for non-essential work has gone down while demand for essential work has stayed the same. So a higher percentage of work is now in the essential category, which can command a higher price. The supplier’s desire to cover fixed costs is not the reason.

Why does the percentage of essential work matter? Presumably there's the same amount of essential work (whatever that means) as before and now there's less non-essential work.

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Rent seeking is difficult when there isn't excess fat to skim off the top. Who would have thunk?

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Part of me wonders if the author thinks it will have negative consequences if small business have 6 months cash on hand versus the typical two or three months.

We are in phase 3 of the reopening in our province. A slight uptick in cases, but nothing alarming. But businesses opening up are not doing well. High costs and low customer counts. Friends and customers that I've known for years have that dark look of fear in their eyes.

We are having difficulty in getting some manufactured components. Stock is running down, and manufacturers are having trouble getting product out in a timely way; lots of manufacturing in Canada is in Quebec, which shut down for more than a month.

Government cash is bending things in perverse ways. People are putting off decisions and workers are not eager to show up.

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Without General Secretary Bounnhang Vorachith, there would be no New Laos.

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This paper could have been written in 2010. And then covid comes along and blows that away when we least expected it. The likelihood that this is the worst thing that will happen over the next 50 years is probably less than 50%.

+1 perspective

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This paper could have been written in 1946, when it was conventional wisdom among economists that the combination of millions of returning servicemen coupled with the sudden elimination of billions in war spending would crash the economy.

By economic principle they had a much better case in 1946 for a cratering economy than these authors do today - and they were still hopelessly wrong. Because knowing lots of math does does not make you a fortune teller, no matter how much your industry might wish it to be so, or how much money and power people are willing to give you to predict the future for them.

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a persistent change in the perceived probability of an extreme, negative shock in the future.

Isn't that correct? There seems to be a sever shock ever 10 years. Dot com bust/9/11, the financial crisis and now this. How many more times does it have to happen before we restructure to the economy to deal with these regularly scheduled crises?

I can't think of any finance crisis after FDR until after Reagan which produced the S&L crisis in the 80s that hit the US over several years starting in Texas spreading outward, finally addressed by TARP I by Bush I, then the international crisis spread over several years in the 90s starting in Mexico than generally to Asia, with Clinton/Summers forcing the Wall Street investment banks do the bailout privately (angering Paulson), followed by the crisis of the 00s with Treasury Secretary Paulson demanding government blank check bailout TARP II, and then Trump ensuring another financial crisis by trying and substantially succeeding in ramping up all debt to levels barely serviceable during high employment, boom economy such that a small drop in revenue would result in widespread default, bailed out by the biggest blank check government bailout in world history.

I was born into a world where debt was almost a moral failing, and then watched as conservatives who defined debt as a moral failing promoted debt to fund consumption as a moral virtue everytime conservatives won control of government. And conservatives used their corporate power to sell debt funded consumption as a virtue.

At least debt funded consumption was anti-Keynes, so I guess that's why conservatives love unsustainable debt.

"I can't think of any finance crisis after FDR until after Reagan which produced the S&L crisis in the 80s"

Yes, the 1970's were a model for a sound economy. Double-digit inflation and low growth were nothing compared to Reagan's S&L 'crisis'.

Amazing the kinds of mental flips and twists a person can go through to maintain their epistemic closure.

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>a persistent change in the perceived probability of an extreme, negative shock in the future.

My intuition says that the biggest predictable effect would be an increase savings rate and (maybe) a move toward 'prepper-ism.' It's not obvious that that would either would be a bad thing long term (paradox of thrift notwithstanding).

When this was just in China, I recognized that there might be a China-toUS supply chain hit, and bought a couple of things. The impact on the US domestic supply chain and product availability I didn’t see coming, or the job losses.

I suspect people who have been confined to their houses for 12 weeks with their kids, or who have lost their jobs, may indeed decide a deeper pantry and a bigger emergency fund are a good idea.

People who lived through the depression had their world views changed. I think you will see some of that, particularly if this is still an active problem 6 months from now.

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Tyler, I don't understand why you have chosen this particular NBER wp of the long list of new working papers published today. The list includes 35 papers:

https://www.nber.org/new.html

There are 11 papers about Covid-19. Your choice refers to a sort of simulating analysis that has been questioned because of the assumptions needed to get results, as well as heavy reliance on unreliable data to measure poorly-defined variables. The paper's two-paragraph conclusion (p.31) explains the limits of that analysis.

Other NBER WPS have attempted to explain the economic consequences of the pandemic and the responses to it. Frankly, I don't understand your choice.

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Not unlike the scarring effect of the 1930s. Both my parents were teenagers during that time but my mother was in bone dry southern Prairies and my father in the urban city of Winnipeg. My mum was horribly scarred - took every opportunity that came her way to get out of tiny town SK but also was extremely frugal. Even through she was left a well off widow when my father died after 48 years of marriage she still insisted on having her hair done at a beauty school rather then spend $20 extra dollars at a real salon. My father less scarred because his father was in a job that continued throughout the depression, and his mum ran a boarding house, but he didn't take anything for granted - not quite the money hoarder as my mum, but it was still there.

I and my older siblings went through the 16 - 18% mortgage rates of the 1980s and we just hunkered down and focused on paying off the mortgage rather than having extras - like dinners out or vacations.

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It will be about as impactful as 9/11 and the financial crisis. That is to say: not all that much in the medium term.

Most importantly, governments will be able to impose travel restrictions when it matters. Which was politically impossible in February 2020.

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Question from mid-stream: why do our media tyrants continue to bellow about "social distancing"?

Why do our media tyrants and buffoons not simply refer to "distancing"?

Ad hoc hypothesis: our media barons, tyrants, and buffoons really ARE just that committed to and captive of "sociological advocacy", "weaponized sociology", and "prescriptive sociology".

Obligatory sociology, mandatory sociology, and compulsory sociology have infected our entire media culture and now dominate discourse in typically uncritical American fashion.

We can surely hope that fashionable sociological imperatives for thought and discourse will be among the deserving beliefs wearing long-lasting scars deeper than any smallpox infection could leave.

The sociological perspectives dictated by our corrupt, corrupting, and irresponsible US media establishment are not much more and not much less than sociopathic agitprop writ large and run amok. Our media tyrants seem both unable and unwilling to cull hysteria, disinformation, and misinformation (galore, all over internet content across most platforms most Americans commonly work with) from clear and concise information: may "the willing suspension of belief" in sociology-flavored media pabulum be among the chief consequences in the long term, perhaps possibly maybe before the next plague pandemic shows up in the next few years. (If coronavirus is proving this disruptive, just think what an awful global pandemic of a fresh new strain of pneumonic plague could unleash or of something completely different but eminently lethal.)

Because no one is asking for additional distance between household members. It's not China.

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From a strategic perspective, COVID is not very significant. The US has about 2.8 million deaths per year, 180,000 just from accidents. COVID deaths are mostly among the old, i.e. least productive.

Most of the impact is from the shutdown, and a hysterical media that has hype this for their own purposes. A bit more stoicism would not go amiss.

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“ This suggests that, even if a vaccine cures everyone in a year, the Covid-19 crisis will leave its mark on the US economy for many years to come.”

Biology test - what’s completely wrong about this statement? (Yes, that’s a FAIL in high school biology)

Not cure? Immunise? Same difference.

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People only actually get scarred by traumatic experiences. This was not that, at all, for all but a very very small number of people. Not enough to stick. In a year it'll be forgotten. This is not at all to say the effects will not be endless.

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Any Economists brave enough to write a paper on the economic effects of the recent rioting?

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This suggests that, even if a vaccine cures everyone in a year

How does anyone know that will actually happen?

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The entire cohort of scientists who claimed to be "epidemiologists" completely lost the respect and the potential respect of the vast majority of people.

Not "lost a little respect" but "completely lost respect." They lied, and they lied again, and then they claimed they were right to lie.

That is kind of a big deal, going forward.

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Black swan has no precedence. Hence we get no deja vu, for closure. We never get to say,'OK, now I get it'; until we get another one, milder hopefully.

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