Creative Destruction

In the normal case of an open economy, new businesses open from time to time. Those new businesses compete with existing businesses, with their creative new ideas destroying old ideas. Broadly speaking, good new ideas prosper, and bad new ideas fail.

In the coronavirus crisis, however, jobs and businesses are being destroyed not because of new and better ideas, but because of the virus. This destruction is caused both because customers choosing to stay home, and because we have imposed a bunch of laws banning customers from some businesses.

New American research shows two important points. Firstly, that there are some new jobs being created (presumably in delivery, security and supermarket retailing) although they pale in comparison to the broader destruction:

We find 3 new hires for every 10 layoffs caused by the shock and estimate that 42 percent of recent layoffs will result in permanent job loss. Our survey evidence aligns well with anecdotal evidence of large pandemic-induced demand increases at some firms, with contemporaneous evidence on gross business formation, and with a sharp pandemic-induced rise in equity return dispersion across firms.

COVID-19 Is Also a Reallocation Shock

In addition to describing the current carnage, they discuss some potential policy responses which echo some previous posts of mine:

After developing the evidence, we consider implications of our evidence for the economic outlook and for policy responses to the pandemic. Unemployment benefit levels that exceed worker earnings, policies that subsidize employee retention, occupational licensing restrictions, and regulatory barriers to business formation will impede reallocation responses to the COVID-19 shock.

COVID-19 Is Also a Reallocation Shock

It is likely that in the post-Corona world, customers will have different preferences. For example, it is difficult to imagine businesses based upon crowding large numbers of people into small and confined spaces (many entertainment like pubs, restaurants, movie theatres) are going to be very attractive in the short-term. However, there is already an interest in new businesses (for example, based around delivery). There’s a real role for Government to smooth the transition, so that we can minimise the harm and job losses, while maximising the benefit of people earning money again.

The full working paper is online here.