Glittering lights are turned off on the Vegas strip, Broadway stages are silent in New York, Michelin-starred restaurants are serving takeout in Chicago, and across America arenas and stadiums are empty of fans.
Due to social distancing to slow the spread of COVID-19 economic activity is falling at a pace never seen. Economists define a recession as two or more consecutive quarters of negative growth in economic activity. We are in a recession and this will be formally acknowledged at the end of June by the National Bureau of Economic Research.
Away from the ivory towers of economists, as of today in the real world 22 Million Americans filed for unemployment in only four weeks. The value of the stock market has fallen by one third. Over half a million Americans have fallen ill. Over 30,000 Americans have died of COVID-19, and the Institutes for Health Metrics and Evaluation at the University of Washington, with one of the more trusted statistical models, is projecting over 70,000 deaths by the beginning of August. Behind these sobering statistics there is real hardship. I am certain that many readers are feeling financial stress over reduced income, decreased stock market value, as well as considerable uncertainty for you and your family’s health.
Millions of Americans are staying at home meaning that they are not producing or consuming as much as they would in normal times. Many Americans are attempting to work remotely or attend school from home, but millions of Americans in the manufacturing and retail industries cannot work from home. The pork, beef, and chicken processers are warning of severe disruption to the supply chain and some major plants have closed nationwide.
Additionally, productivity while working from home can be impaired by the need to watch children kept home from school, the relative inefficiency of meeting electronically, or simply the stress of a pandemic endangering the health of yourself and your family.
The Value of Saving a Life
With this magnitude of economic disruption why is our nation and the world taking drastic steps of “social distancing” to forestall the spread of COVID-19 and will there be any economic benefit?
As I have testified, in courts in Nevada and around the country, human lives have significant value beyond the value of earnings capacity. For decades economists have studied what we, as a society, actually pay to preserve the ability to lead a normal life. Studies show we value life beyond our ability to work in the range of $5 million or more. The Nevada Supreme Court unanimously accepted testimony on what I call “hedonic damages” in the case of Banks v. Sunrise 120 Nev. 822, 102 P.3d 52.
Economists at the University of Chicago have recently published research on the economic benefits of social distancing and the avoided deaths due to COVID-19. Using data on the value of a statistical life (VSL) which is standard practice in developing federal government regulations, these researchers estimate that avoiding over 1.7 million deaths in the United States is worth nearly $8 Trillion. This calculation confirms the value of life to be in the range of $5 million.
This estimate for the value of lives saved represents both the future earnings capacity of those who would have died but for social distancing measures, as well as the benefits those persons experience from being alive. These benefits ae seen in how we spend our leisure time, spending time with loved ones, and even the good feelings of a hard day’s work.
The Federal government has enacted a $2.2 trillion package of programs to keep the United States economy moving forward. This includes the Paycheck Protection Program (PPP) providing up to two months of payroll to help companies closed by COVID-19 social distancing keep employees away from unemployment. The PPP program has proved so popular that $349 billion in forgivable loans were made in two weeks.
In another attempt to offset the fall in economic activity the Federal government is issuing “stimulus” checks of $1,200 per adult and $500 per child for households under certain income limits. Any household will welcome this “free” money, and for many American households this money can mean the ability to pay for housing or food while work is unavailable due to COVID-19 social distancing. However, will these payments by the Federal government have the result in stimulating economic activity depressed by the response to COVID-19? Perhaps not as intended.
This is not the government’s first attempt at stimulating the consumer sector of the economy with direct payments. Readers may recall stimulus checks paid during previous recessions of 2001 and 2008. Researchers at the University of Michigan studied how households spent their 2008 stimulus checks. Despite a policy intent of increasing consumer spending, only 20 percent of the households studied in 2008 said that their “stimulus” check was used for spending. Nearly half of households instead chose to use the money to pay down debt, while the remaining 30 percent chose to invest or save their stimulus checks.
The 2020 experience with COVID-19 is unique to 2001 and 2008 because many opportunities for consumers to spend are not available. Retail stores selling big ticket items like furniture or appliances are closed. Vacation destinations are turning people away to make sure that local health systems do not become overwhelmed. The effect on consumer spending is certain to be even less in 2020 than what the prior stimulus programs proved.
If only 20 percent (or likely less) of the new stimulus is rapidly spent that would be a policy failure by the federal government. However, as in many public policies one must look at the “unintended” consequences for a full measure of value. For those households able to improve their financial standing through reduced debt or increased savings during times of economic uncertainty the government stimulus the payments are of definite value. Households who chose to pay down debt or increase savings will spend more in the future as a result of their improved financial standing in the present.
It is clear that President Trump and the state governors are in significant tension on when and how to restart the economy. In the coming weeks this tension will play out, but some project that parts of the economy might not open at all this year.
Clearly there is a great deal of uncertainty ahead in the near-term future. It is my hope that you, your families, your businesses, and your community are healthy in the coming months and throughout the year.
Stan V. Smith, Ph.D., is VLM’s Quarterly Economics Columnist and president of Smith Economics Group, Ltd., headquartered in Chicago. Trained at the University of Chicago (one of the world’s pre-eminent institutions for the study of economics and the home of the law and economics movement), Smith has also taught at the university and co-authored the first textbook on the subject of economic damages. A nationally-renowned expert in economics who has testified nationwide in personal injury, wrongful death and commercial damages cases, Smith has assisted thousands of law firms in successful results for both plaintiffs and defendants, including the U.S. Department of Justice. To that end, Smith also developed the first course in forensic economics at DePaul University, and pioneered the concept of “hedonic damages,” testifying about the topic in landmark cases. His work has been featured in the ABA Journal, National Law Journal, and on the front page of the Wall Street Journal. Kyle Lauterhahn is a Senior Economic Analyst at Smith Economics Group in Chicago. Smith Economics Group, Ltd., is located at 1165 N. Clark Street, Suite 600, Chicago, IL, 60610. Dr. Smith may be reached at 312-943-1551, and at Stan@SmithEconomics.com.