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Opening up the economy won’t save the economy

Trump and Republican governors can’t make people eat at restaurants.

A customer waits for a takeout order at Kelly’s Irish Times in Washington, DC, on March 24.
Tom Williams/CQ-Roll Call via Getty Images

Politicians hoping to jolt the economy back to life might be in for some disappointment when they discover governors can let businesses reopen but they can’t force people to patronize them.

This week, governors in states like Florida and Georgia are moving to reopen bowling alleys, nail salons, and dine-in restaurants in an effort to get economic life moving again. And an organized campaign by conservative economic interests is underway to lift restrictions faster in more places.

This will be an experiment, of course, but the best available evidence casts doubt on the idea that enough customers will return to make it possible for small businesses to stay viable without additional government assistance.

For example, we know customers began abandoning America’s restaurants before they were ordered closed, that the handful of states that have avoided broad lockdown orders are still feeling economic pain, and that huge swaths of the economy that have not been shut down are nonetheless experiencing a precipitous decline in sales.

This restaurant in Los Angeles is selling groceries to stay afloat during the shelter-in-place order.
Amy Sussman/Getty Images

The problem is a question of fear. Americans fear spreading or contracting infection, so much so that they’ve overwhelmingly participated in social distancing measures. They tell pollsters by wide margins that they fear lifting those restrictions too soon much more so than too late. They’re willing to stay put even if it harms the economy.

They also fear economic hardship. That’s led prudent people, even those left relatively unharmed by the downturn so far, to delay nonessential purchases, like new cars, appliances, clothes, and other goods.

Whatever choices state officials make about opening things up, there’s not going to be a vibrant economy until real steps are taken to address those dual sources of fear.

Restaurant bookings declined before shutdowns

The online reservation booking service OpenTable has thoughtfully provided the public with data on reservation volume in every city where they operate. The conclusion: There are some reckless people, but the typical human being is not that interested in risking her life for a dinner out.

This table shows, day by day, how much reservations and seated walk-ins fell from the day one year before in a range of domestic and global cities. And it demonstrates clearly that bookings were tumbling in all kinds of places before mayors and governors ordered their restaurants closed.

Estimates show a 100 percent decline in seated diners at restaurants in OpenTable’s network by the end of March, year-over-year.
OpenTable

In Atlanta, for example, Mayor Keisha Bottoms announced on March 19 that she would ban in-house dining at noon on the following day. By that time, OpenTable bookings had already fallen by over 90 percent.

This is not purely an American phenomenon. In Ireland, the national restaurant association itself called for a closure order on March 16, citing overcrowding in some pubs. The government swiftly took their advice, but OpenTable bookings in Dublin had already fallen by 71 percent.

When states start to allow restaurants to resume sit-down service, some customers will come back. But it seems many won’t.

The restaurant business is competitive. It operates on low margins, with new restaurants infamously prone to failure. And as with many businesses, the fixed costs of operating a restaurant are relatively high. You need to pay rent and utilities, and you need to cover other overhead like insurance and the interest on loans you took out to get the business started in the first place. Forcing these businesses to stay take-out only indefinitely will force them to close without government help, but letting them reopen for sit-down dining only marginally changes the calculus as long as customers are wary of actually showing up.

I asked a half-dozen restaurant owners from DC to Austin to central Pennsylvania if their businesses could survive the 20-30 percent decline in bookings that OpenTable was showing before the shutdown started. The only one who thought he could owns the building he operates in, giving him lower operating costs than a typical restaurateur. To save the industry, governments need to actually address the virus. Until that time comes we need to put restaurants on life support — simply letting them reopen empty isn’t going to work.

“Reopening” won’t help large sectors of the economy

Beyond restaurants, the Trump administration’s relatively aggressive opening plan will still leave large segments of the economy largely shuttered.

In particular, Trump’s “Phase 1” plan — echoed by Republican governors — calls for white-collar workers to continue working remotely and calls for Americans as a whole to continue avoiding “non-essential” travel. Those are reasonable steps of caution that will continue to take a hammer to the economy. It can’t be fixed by reopening personal service businesses.

Hotel vacancy rates, for example, had already fallen by 25-50 percent as of mid-March while revenue per booked room fell by a third. This isn’t going to recover until people are told it’s safe to travel again. At $218 billion in annual revenue, the hotel industry is nearly triple the size of the combined hair and nail salon industries.

The $171 billion dollar airline industry is not currently shut down and thus can’t be “reopened” by fiat, but passenger volumes have fallen by 95 percent in the US. That’s an enormous loss to a large industry, plus secondary losses to related businesses like airport shops and rental car companies. As of a month ago, taxi companies in New York had lost two-thirds of their customers. And while New York City was unusually hard hit by the virus, it also has by far the lowest car ownership rate of any place in the country and thus the largest share of people who may have no better option than to hop into the back seat of a stranger’s car.

By the same token, the International Air Transport Association’s survey data indicates that just 14 percent of the public say they’re likely to resume flying as soon as restrictions are lifted — with 40 percent of the population saying they’re likely to wait six months or more.

Travel businesses, in other words, are hampered by people’s reasonable fears of infection and aren’t poised to come roaring back the moment restrictions come off.

Similarly, while keeping office workers home wherever possible is sensible, it has inevitable knock-on economic consequences. Downtown lunch spots have no customers if nobody is working downtown. People don’t need to get clothing dry cleaned as frequently if there are no business meetings. And office management companies will shed janitorial staff if there’s nobody to clean up after.

And with large segments of the economy ailing, simple lack of money is going to be an increasingly prominent problem.

People are avoiding big-ticket items

Polling by CNBC in early April shows that 11 percent of Americans say they’ve lost their job during the pandemic and a further 30 percent have lost wages.

This is about to get worse. The Center on Budget and Policy Priorities predicts that state governments are facing a bigger hit to their budget than what we saw during the Great Recession of 2008-2009. Local government data is harder to come by, but it should be roughly in line with what states are seeing. When state and local governments lose revenue, they need to cut spending — furloughing workers or reducing benefits and widening the share of Americans who experience lost income. The same CNBC poll showed that 65 percent of Americans worry that their incomes will fall, and they should be worried.

What people do when their income falls— or when they fear that it might fall — is cut down on big-ticket purchases. They decide to forget about their plan to renovate the kitchen, and they hang on to their existing cars until they become completely unusable rather than upgrading.

This is what we’re seeing right now. New car sales are plummeting even though dealerships are still open to sell cars. Some of this could be the inconvenience or fear of going to a dealership, but dealers are trying hard to offer people good options for contactless home delivery and opportunities to test drive. Financing offers and other deals are excellent right now because inventory is piling up and dealers want to move it.

The problem is that one family’s spending is another family’s income. And while there’s nothing wrong with being prudent, a whole national cycle of prudence is self-defeating. One prudent family doesn’t buy a car, so the salesman doesn’t buy a fridge, so the appliance workers lose shifts. Declaring that we can all risk our lives to go to the movies next weekend doesn’t alter the basic dynamic.

Government help is needed

What proponents of a quick reopening are hoping for is a better economy that works without further stimulus or intervention. That’s just not realistic.

Even plans to “reopen” involve keeping large swaths of the economy on ice. The travel sector isn’t currently shut down but it’s almost completely collapsed anyway. Reopened restaurants and personal services like hair and nail salons won’t get all their customers back as long as the virus is still circulating. Devastation to state and local budgets is already baked into the cake. And many people are losing income and paring back on unnecessary spending, prompting further rounds of lost income.

There’s no way out of this that doesn’t involve curing the dual fears of infection and income loss. The former requires real public health victories, not just vague assurances. And the latter requires much more in the way of financial support for ailing businesses, local governments, and households.