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Fear affects our behaviour.
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And our behaviour affects the economy,
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both in the short run and in the long run.
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For example, a recent paper by Austan Goolsbee and Chad
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Syverson found that foot traffic to businesses
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fell 60 percentage points earlier this year
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but that legal restrictions accounted
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for only seven percentage points of that.
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The rest was done voluntarily by people
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who wanted to avoid infection.
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And it was strongly correlated to the number
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of coronavirus deaths in the area.
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They were able to look at areas that
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fell within a commuting zone but that
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sat on boundaries with different policies on the shutdown.
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But the effects of fear will last far longer
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because now that folks are going through this pandemic,
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they will assume that the probability of another pandemic
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is higher than beforehand.
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I know that many people in the US, in December or even
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January, didn't think we would see a shutdown like this.
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Julian Kozlowski, Venky Venkateswaran,
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and Laura Veldkamp have created a model
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that looks at the long-term effects of this "behavioural
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scarring," as they call it.
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You can see that the line labelled no learning estimates
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the effect on GDP if people did not change their behaviour
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at all after the pandemic.
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This would assume that people are perfectly rational.
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But we know that's not the case.
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Anecdotally, people who lived through the Great Depression
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saved more and were more thrifty throughout their lives.
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Similarly, there was less trust in large banks
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after the 2008 financial crisis than there had been before.
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So when a large event like this happens,
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people change their behaviour.
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And they do so by becoming less comfortable with taking risks.
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Businesses may be less willing to invest money
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into researching a new product or hiring more people.
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And it happens at all levels.
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A worker who was laid off might be
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less willing to open their own business because that would
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involve taking out a loan.
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And it's hard to make it on your own.
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These are the things that create innovation and growth
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in the economy.
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And an unwillingness to take on the risk that comes with them
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will have a negative impact.
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One way to mitigate the impact, as the paper's authors
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point out, is to enact credible policy that
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mitigates the economic effects.
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I say "credible" because, again, we're
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talking about people's perceptions and the decisions
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that they make based on those perceptions.
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This could mean reducing the number of bankruptcies
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or developing a robust testing and tracing system.
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Counterintuitively, it would mean spending more
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in the short-term, but it would improve the long-term effects
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of fear on the economy.
