A two-handed economist offers his take on the impacts of COVID-19. Small businesses remain optimistic.

Tyler Cowen, an economist at George Mason University, writes of Covid-19 in a syndicated column published by The Seattle Times. Cowen’s a highly-respected writer and thinker, and his piece accurately captures the problems of assessing the effects of the virus at this still-early stage.

How bad COVID-19 will be for the U.S. economy is almost impossible to say, since there are few precedents to look to. By considering two extreme scenarios, however, it is possible to get a sense of what the issues are.

We’ll confess that the “two extreme scenarios” framing of the challenge reminded yet again of President Harry Truman’s famous plea:

“Give me a one-handed Economist. All my economists say ‘on hand…’, then ‘but on the other…”

It turns out that the attribution to Truman is suspect, but the point stands.

Cowen’s two extremes capture the range, within which there may be an infinite number of possibilities. 

First, consider the relatively optimistic view: COVID-19 will have effects akin to what economists call a seasonal business cycle — which is to say, it will be over quickly and without much lasting damage.

He likens it to the typical first quarter slowdown after the holiday season. The description sounds much like what we’re beginning to hear about in metro Seattle and other affected regions already.

So if COVID-19 were to hit the economy like a seasonal cycle, it might look as follows: Public events, entertainment and face-to-face services would all dramatically contract, starting sometime this month. Employers in those sectors would cut back on employee hours and lay off some marginal workers. Uber and Lyft rides would plummet. There would be a more general decline of purchasing power, and that in turn would spread the decline to many other sectors.

Still, in this scenario there is also a rapid path back to recovery.

But, it could be much worse.

This less sanguine option might look like this: The Chinese economic slowdown leads to a permanent loss of momentum and a global recession…

The U.S. would be caught up in the general loss of confidence, as well as the contagion from European banks. But that is only the beginning. As schools close to limit the spread of COVID-19, single parents would have to stay home, and the resulting production bottlenecks would plague the U.S. economy…

The problems of missing goods in the supply chain, workplace absenteeism, family-health emergencies and investor uncertainty would compound each other. Any individual act of spending or production, rather than jump-starting further economic activity, would run up against another bottleneck and fade to insignificance. The confidence boost would fail to materialize. Untangling this mess of problems is much harder than just getting people to go back out to dinner and the movies again, and could take years. 

And, he acknowledges the uncertainty.

I don’t think anyone knows which of these scenarios — or the intermediate possibilities — is most likely. That makes an appropriate macroeconomic countercyclical policy hard to design. From an economics standpoint, these are uncharted waters.

On the other hand, NFIB reports small business owners remain optimistic.

Small business owners expressed slightly higher levels of optimism in February with the NFIB Optimism Index moving up 0.2 points to 104.5, a reading among the top 10 percent in the 46-year history of the survey. Those expecting better business conditions increased and job creation and openings improved as well.

And yet, the important qualifier.

“The small business economic expansion continued its historic run in February, as owners remained focused on growing their businesses in this supportive tax and regulatory environment,” said NFIB Chief Economist William Dunkelberg. “February was another historically strong month for the small business economy, but it’s worth noting that nearly all of the survey’s responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. Business is good, but the coronavirus outbreak remains the big unknown.” (Emphasis added).

A very dynamic situation. As we wrote in yesterday’s newsletter, major Washington corporations are acting to mitigate the hardship