In 1917—on the eve of the deadliest pandemic in human history—French painter Marcel Duchamp played a big joke. Or did he?

The New York Society of Independent Artists’ salon was holding an exhibition. The rules: any artist could (pay to) submit any work of art, and the Society would show it. Duchamp, who was on the board of the organization, had an idea. He took a urinal, signed it “R. Mutt, 1917,” and submitted it, naming the piece “Fountain.”

The board rejected it. Sure, “R. Mutt” had paid the submission fee. And no one said you couldn’t submit a urinal. But, according to the board, it wasn’t art. Or was it?

To believers, “Fountain” was a daring proclamation, a giant leap for art-kind, a “manifestation of the Kantian sublime: A work of art that transcends a form but that is also intelligible, an object that strikes down an idea while allowing it to spring up stronger,” as Village Voice critic Jerry Saltz mused in 2006.

To non-believers, “Fountain” was—and forever will be—just a toilet. This camp, bedfellows of those who laugh when museum-goers start photographing a pair of sunglasses left on the floor of the San Francisco Museum of Art and those who scoff at massive white canvases on the walls of museums and say “I could have done that,” misses one crucial point—you didn’t.

See, whether or not you think “Fountain” is art, you know that you can sign a urinal and call it art. In doing so, Duchamp (and an entire movement of artists) irreversibly changed art and thought itself. You, and I, and everyone since, live—and make choices—in a forever-altered, “post-’Fountain’” intellectual universe. 

The same concept applies to economics.

In a new National Bureau of Economic Research working paper by Julian Kozlowski, Laura Veldkamp, and Venky Venkateswaran, the authors discuss (and roughly quantify) what they call the potential “belief-scarring” effects of COVID-19. The authors define belief-scarring as “a persistent change in beliefs about the probability of an extreme, negative shock to the economy.”

The authors’ argument is built on a simple premise: we don’t actually know when, or how often, massive economic shocks, like pandemics, actually occur. Essentially, in the wake of COVID-19, even if the world develops a new pandemic-proof infrastructure that drastically reduces the potential of something like this happening again, we all might carry the baggage of the belief that it could, and that it will. With this baggage, economic activity would—for the foreseeable future—suffer, as actors forego investment, capital stocks depreciate (unused capital getting old), and firms forego paying debt. 

It’s a whole mess, so what does this mean for economic activity? For one, it helps us understand why ‘reopening’ isn’t a magic bullet for the economy. A novel metric for economic activity is OpenTable’s reservation tracker, which compares restaurant table reservations to the same day the year prior:

Source: OpenTable. Visualized in Excel.

Reservations plummeted in both cities before their respective lockdowns on March 19. In Houston, following Texas’s initial reopening on April 30, which included reduced-capacity in-person eating, diners began a rocky return to restaurants. Texas’s Phase II, which began on May 18, expanded restaurant capacity to 50 percent. New York, which recently reopened outdoor dining, has seen a marginal bump in reservations. Of course, these data have a lot of confounding factors, but one thing is clear: opening to 25 percent capacity didn’t result in an immediate, sustained 25 percent take-up, nor did opening to 50 percent. And now, as cases skyrocket in Texas, dinership is once again plummeting—even without new restrictions. The same decline is occurring across cities experiencing surges in cases.

What does this tell us? For one, even as some politicians refuse to go back on earlier statements or decisions—whether it be about mask-wearing or reopening—people do adapt to new information and perceived risk. So do firms.

New Jersey and New York both (rightly) reneged on earlier plans to reopen indoor dining this week. As reported by News12NJ’s Jim Murdoch, restaurant owners across New Jersey are now stuck with thousands of dollars in ingredients they had stocked up in preparation. Many, Murdoch noted, don’t know if they’ll survive another financial hit.

Say you’re a New Jersey restaurant-owner. You’ve incurred three months of no business. Now, after investing in a reopening that never came, you’ve incurred another major loss. What do you do when the Governor announces in a month from now that dining will be reopening? Surely, even if the actual health climate is less risky, throwing thousands of dollars at ingredients the second time seems a lot riskier than than the first. Many firms, per Kozlowski et. al’s model, would likely forego investment.

This goes beyond dining, and it goes beyond COVID-19. A 2019 paper by economists Ulrike Malmeider (UC Berkeley) and Leslie Sheng Shen (Federal Reserve) found that people who have lived through periods of sustained high unemployment are more persistently more pessimistic about their future financial situations, and they are more frugal than their “unscarred” counterparts throughout their lives—even as their incomes are uncorrelated with past experiences. Another recent paper found evidence of significant economic suppression from the 1918 Influenza Pandemic long after it had ended.

Markets like certainty. Firms like certainty. People like certainty. This year, per the Economic Policy Uncertainty Index—which aggregates newspaper coverage of economic shocks, the likelihood of tax code changes, and a survey of economic forecasters—is by-far the most uncertain year in the metric’s history.

Even after this pandemic is over, people and businesses—Broadway productions, music festivals, conferences, new amusement parks, new restaurants, universities, businesses of any kind at all—will operate with a perceived non-zero chance of having the rug pulled out from under them by a potential pandemic. Remember, before COVID-19, the odds of a pandemic were always non-zero. After COVID-19, when leaders (hopefully) learn their lessons and beef up preventative measures, the odds may be even lower than before. But it won’t feel that way.

The takeaway is this: politicians cannot force the economy open, as people do not want to die, and businesses do not want to lose money. Evidence increasingly shows that economic activity in the US has been constrained by the fear of infection and the virus itself, not lockdown measures. The only way out of this is overwhelming, effective mitigation of the virus itself, and the economic trepidation that results from it. Even then, our economic wounds may remain open long after the last case is closed.

(Cover Image Designed By Eric Krebs)

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