Virus Killing Off Mom and Pop…

…stores, that is. This article in the Atlantic sounds the real alarm for a free, self-reliant society. I suppose the alternative is for everyone to line up in a queue several million long to get those few jobs at Amazon and Google. An uncompetitive, ‘managed’ economy is one run by oligarchs and served by serfs.

Ultimately, this means a less competitive American economy. New companies and small businesses drive net job growth in the U.S. They generate more productivity growth than bigger and established businesses. The great small-business die-off will fuel industry consolidation, which will both depress wages for workers and increase prices for consumers. More inequality, more sclerosis, and a smaller GDP: These are some of the legacies the coronavirus pandemic is leaving.

The Small-Business Die-Off Is Here

theatlantic.com/ideas/archive/2020/05/bridge-post-pandemic-world-already-collapsing/611089/

Annie Lowrey Staff writer at The Atlantic, May 4, 2020

Outside of Boston, a marketing company is struggling to figure out how to cover its bills. In Indiana, a dance studio is waiting on three emergency-loan applications. In Baltimore, a deli is closed and desperate for help.

The government is engaged in an unprecedented effort to save such companies as pandemic-related shutdowns stretch into the spring. But Washington’s policies are too complicated, too small, and too slow for many firms: Across the United States, millions of small businesses are struggling, and millions are failing. The great small-business die-off is here, and it will change the landscape of American commerce, auguring slower growth and less innovation in the future.

Small businesses went into this recession more fragile than their larger cousins: Before the crisis hit, half of them had less than two weeks’ worth of cash on hand, making it impossible to cover rent, insurance, utilities, and payroll through any kind of sustained downturn. And the coronavirus downturn has indeed been shocking and sustained: Data from credit-card processors suggest that roughly 30 percent of small businesses have shut down during the pandemic. Transaction volumes, a decent-enough proxy for sales, show even bigger dips: Travel agencies are down 98 percent, photography studios 88 percent, day-care centers 75 percent, and advertising agencies 60 percent.

This deep freeze has posed a singular policy challenge: The government has never before been tasked with figuring out how to put a majority of the country’s businesses on life support. “We know how to support the financial system. It goes all the way back to Walter Bagehot,” Satyam Khanna, of the Institute for Corporate Governance and Finance at NYU’s School of Law, told me, referring to the 19th-century British thinker. “There’s a playbook to follow. What we don’t know how to do, or had no idea how to do, is provide direct support to your local coffee shop at scale.”

Congress and the Trump administration came up with a $350 billion plan to provide forgivable loans to small businesses, now amplified by a second tranche of $320 billion. The Small Business Administration’s Economic Injury Disaster Loan initiative provides small grants to small firms; its Paycheck Protection Program has small firms apply to retail banks and credit unions for loans of up to $10 million, intended for expenses such as rent, insurance, utilities, and wages. The PPP loans become grants, provided that employers retain their employees and spend 75 percent of the money on payroll.

Since it went live in early April, this rescue effort has been beset with implementation problems. Banks were unclear on what information to collect and were overwhelmed with applications. Small businesses had difficulty figuring out where to put in their paperwork, and what was available to them to begin with. Millions of massage therapists and cupcake makers and furniture companies were left adrift. A survey by the National Federation of Independent Business showed that four in five applicants to the two emergency programs were unsure whether they would receive help when the first tranche of money ran out.

Even successful applicants describe the process as a mess. Jackie LaVana owns a marketing firm in the Boston area. “It’s small but mighty,” she told me. “Me at my kitchen table,” plus a team of subcontractors who help her create online advertising campaigns. “I was having my best year ever” before the coronavirus pandemic, she said. But her company has since taken a 25 percent hit to revenue, if not higher.

LaVana watched the congressional rescue process closely and spent hours on text and email threads, talking with friends in the accounting and legal trades and with other small-business owners. Everyone had questions. What version of the program did they need? Who would even let them apply? Did they qualify? Would they meet the requirements? “It was complete confusion,” LaVana told me.

The Village Bank in Wayland, Massachusetts, where LaVana’s company has an account, initially said it could process her application, then told her it could not help her, because her company did not have a commercial loan. Other financial institutions told her that she needed an account with them to apply, or did not respond to her queries. She had finally managed to move forward with a small bank in western Massachusetts, before her own bank got back to her and said it would, in fact, be able to help.

The money would be enough to “keep the lights on,” she told me. One of the worst facets of the crisis, she feels, is that so many small businesses in her community are ailing together, and so many have not received help: “This is spiraling,” she said. “My ability to run my business allows my home day-care [provider] to get paid, and they’re also seeking a disaster loan. I want to support the businesses that sustain me, but I feel like I need support to do that.”

The problems with the relief package run far deeper than a flubbed rollout. For one, banks have been prioritizing applications from bigger clients; some have even developed “concierge treatment” options for wealthy firms. Even after some congressional fixes, the small-business plan, in that way, has helped big small businesses over small small businesses, and established small businesses over new small businesses, as the approval of loans to brand-name companies such as Shake Shack, Ruth’s Chris, the Los Angeles Lakers, Potbelly, and others has demonstrated. (Under public pressure, these companies have returned the funding.) Much of the help has gone to the companies that need it the least, among them firms with employee counts just under the SBA caps, franchises of major chains, and publicly traded firms, which are by definition able to raise money from investors. As structured by the federal government, “it was inherently regressive,” Khanna said.

Indeed, loans of $1 million or more soaked up half of the initial $350 billion allocated by Congress. Whiter, less populated states got more loan money per capita, with Vermont, North Dakota, and Minnesota overrepresented and Nevada, Florida, and California underrepresented. Researchers found no evidence that money went to the places and industries hit hardest, as measured by business closures and declines in hours worked. The accommodation- and food-services sector accounted for two in three jobs lost, but received just 9 percent of federal aid dollars.   

The program is generating inequality in other ways too. One of the businesses that has applied but not yet received aid belongs to Jessica Yang’s parents, who sell sandwiches and groceries at a deli in Baltimore. The shop has closed, unable to make a takeout-and-delivery model work with no notice: The deli had no online presence before the shutdown, and services such as DoorDash and Uber Eats charge such large commissions that it would “never break even on an order,” Yang told me. The SBA was its only hope. “I heard that we would hear back in three to five days,” she said. “My parents keep calling me and asking if I’d heard anything. Then we read in the news that the program reached its limit. I wonder if that has anything to do with it. Maybe there’s just no money to go around.”

Yang said that her parents’ ages and backgrounds complicated the application process: Her father is in his 60s; her mother is in her 50s and does not speak English fluently. “For first-generation Koreans, how are they getting accurate information?” Yang asked. “I don’t want people like my parents to miss out on these opportunities because the process of applying is complicated.”

They are, and it is. Although the government is not collecting or releasing data on the racial makeup of SBA-aid recipients—leaving think tanks and advocacy groups to fill in the gaps—the Center for Responsible Lending has estimated that 95 percent of black-owned businesses, 91 percent of Latino-owned businesses, 91 percent of businesses owned by Native Hawaiians or Pacific Islanders, and 75 percent of Asian-owned businesses have “close to no chance” of getting an emergency loan through a mainstream financial institution. Even with congressional tweaks, the program is amplifying existing racial disparities.

In other ways, the SBA programs are too little, too late. John Lettieri of the Economic Innovation Group, a Washington, D.C.–based research and advocacy organization, explained to me, “If you have a short-duration crisis that causes a lack of liquidity across small businesses, followed by a quick return to normal, PPP is going to help a lot of businesses. But does that sound like what we’re facing? Not to me.”

Among the issues that EIG and other advocates are pointing to: The program is not big enough, because businesses likely require an estimated $1 trillion in relief. The maximum loan size, at $10 million, is too small for many firms to cover payroll and other expenses. The program disadvantages companies with high overhead costs, such as businesses that need to pay rent in expensive cities. It requires employers to keep workers on the books, when many would financially benefit from being laid off and receiving enhanced unemployment-insurance payments. Finally, its timetable is far too short, given that formal shelter-in-place orders are expected to last for months, and the consumer economy is expected to remain weak for a year at minimum.

Facing mounting bills and absent revenue, many businesses are closing permanently, rather than drifting further and further into insolvency. “When responding to something like this, you’re not just dealing with dollars and cents. You’re dealing with toxic and pervasive fear and uncertainty,” Lettieri told me. “I can’t take for granted that Congress will extend this program, and that I’ll have a business worth running in three months. I’m going to burn through the cash I have in pocket, so why not cut losses now?” Surveys indicate that one in four small businesses does not expect to survive; an additional one-third are uncertain of their potential to withstand the cataclysm.

The short-term effects of this disaster are clear: When businesses liquidate, they lay off workers, who spend less in their local economies, making other businesses weaker, necessitating further layoffs. Business failures thus act as an accelerant in a downturn, making temporary damage permanent. This is a central reason why many economists do not expect a sharp, V-shaped rebound to the current recession, but a long, slow, U-shaped recovery.

But the decimation of American small businesses will inflict more insidious, long-lasting harm too. “We are seeing a complete wipeout of a cohort of entrepreneurs and young firms,” Lettieri said. “And there’s nothing coming up behind them.” The pandemic will mean the triumph of franchise chains over mom-and-pop shops, of C-suite executives over entrepreneurs working in their basements. It will mean town centers filled with banks and 24-hour pharmacies rather than bookstores and nail salons and takeout counters. It will also mean fewer start-ups competing with incumbents.

Ultimately, this means a less competitive American economy. New companies and small businesses drive net job growth in the U.S. They generate more productivity growth than bigger and established businesses. The great small-business die-off will fuel industry consolidation, which will both depress wages for workers and increase prices for consumers. More inequality, more sclerosis, and a smaller GDP: These are some of the legacies the coronavirus pandemic is leaving.

Social Behavior and the Coronavirus Pandemic

If you’re like me and follow the mainstream as well as social media, you’ve likely been inundated with information about the coronavirus pandemic, with many different data interpretations and conflicting claims based on these interpretations. The simple graphic below, called “flattening the curve,” seems to be the dominant visual for explaining the current public healthcare issues and provides a good starting point.

Flattening the curve.

The graph was created by disease specialists at the CDC and has been spread widely by medical professionals, government officials, and non-government agencies. It visually represents the logic behind the political response to the crisis and the strategy to slow the spread of the virus. This is critical to managing the capacity limitations of healthcare resources like hospitals, drug therapies, and healthcare personnel. However, it is a theoretical model based on exponential pandemic dynamics; it is not a graph of actual empirical data. It is meant to educate, not report.

Unfortunately, the graph has been adopted by public media as a projection of “likely” real-time scenarios under various assumptions, focusing completely on the rose-colored part of the graph. According to this worst-case scenario, without strict adherence to isolation protocols the coronavirus is projected to spread exponentially through the population, placing an impossible burden on healthcare resources. The problem is that the empirical data so far does not seem to be supporting this worst-case scenario.

Let’s not get derailed here: the virus outbreak is a serious public health threat and a deadly threat to the elderly and immune-compromised. Our policies should foremost target the security of these groups. In this respect, the model is valuable and instructive, but not so much for actual health outcomes to the majority of the population. From the macro point of view, we have little idea how many of those people infected will require medical intervention and how extensive that intervention might be. In other words, infection rates may not impact health care capacity as depicted here. We also have little feel for how high or low that spike might be, or the magnitude of the y-axis – is it thousands, millions, or billions? 20%, 50% or 90%? Many media interpretations of existing data choose a scale that looks like we’re shooting up to the top of that rosy peak when we are really barely past the initial stage way, way down near the floor of the x-axis (see next graph). The projections repeatedly fail to project for interventions and behavior changes.

Where are we?

Also, as we discover more and more people have contracted the virus yet show no serious symptoms, we are missing any projection of herd immunity. Immunity gradually reduces the ability of the virus to find new hosts within the existing population so it gradually dies out.

What is valuable about the meme is the implication for how the public should adapt social behavior now to reduce the transmission rate of the contagion. Physical or social distancing is at this time imperative. Essentially this is less about biology and more about social behavior informed by biology. It strikes me that most of our media information is overly focused on very uncertain medical data given credibility by concerned medical experts. The problem is that the experts are shrouded in uncertainty and thus must err on the side of extreme caution. In hindsight most of this speculation will likely turn out to be fictional. But the effect will be real, and this takes us back to social behavior.

Some reports opine that this coronavirus is just a bad flu. If one is looking at medical data, I would tend to agree. But looking at social behavior, I would obviously disagree. What is driving social behavior, which will be measured in political policies and economic results, relates to the nature of this pandemic, not the pathogen itself. The coronavirus strikes at the heart of our instinctual behavior in the face of existential threats.

The real problem we face is that 1) the threat is invisible, 2) seems to be highly transmissible and somewhat random, 3) offers no preventive therapy (vaccine) or 4) sure treatment options or cures. Thus, 5) we feel little sense of control over what might be a serious existential threat. What this combination of characteristics does is incite a strong psychological reaction to uncertainty, risk, and potential loss, leading to exaggerated reactions to very low probabilities.

We know from behavioral science that the survival instinct causes behavior to respond to these contextual parameters. Humans, like all sentient beings, are risk and loss averse. Loss pertains to the nature of the threat, such as will I lose my job, or my savings and pension, or the ultimate existential threat: will I get sick and die? Risk is a probability function of the uncertainty of that loss. As the threat level rises (reported death counts and mortality rates) people become more fearful. Then, as uncertainty blankets us like a fog, the anxiety level rises. This survival response is perfectly rational for any organism trying to stay alive.

The important thing to note is that when the probability of loss increases and the consequence becomes more serious, people tend to become risk-seeking. In other words, faced with a likely existential threat, people take more behavioral risks than would be rational in the absence of that threat. We see this in those apocalyptic movies, when widespread hysteria and panic leads to chaos and deadly conflict, where more people die from the chaos than from the threat.

Individual behavior is compounded by irrational social behavior. An example is the panic buying of paper products, where some people, pressed to explain their behavior, have only offered the justification that everybody else was hoarding paper, so they were too. This suggests that what may not be categorically much different than a bad flu medically has the potential to turn into a global social and economic crisis.

So why is this reaction to coronavirus different than the Asian bird flu, Ebola, SARS, MERS or H1N1? The coronavirus seems to have a much higher and faster transmission rate than these previous pathogens and thus it has spread world-wide much faster. This is likely because it is highly asymptomatic while it is contagious and spreading. It also may be far more benign. But we don’t know why it is asymptomatic in some people and severely life-threatening for others. This uncertainty and randomness heighten our fear of the threat.  

There is something else going on with the present pandemic that is aggravating the crisis. Because the virus has easily spread rather quickly, our global information media has gone into overdrive, especially social media. We know that social media is mostly driven by emotional reactions to uncertain facts, what we now call fake news. The sad reality is that the traditional print and broadcast media have also had to succumb to sensationalism and emotions in order to stay in business. Remember the editor’s dictum: If it bleeds, it leads. This presents the danger of reporting one random healthy young person who dies of COVID-19 complications instead of the thousands of others who contract the virus and seem unaffected. Our media, willingly or unwillingly, by focusing on infection and death counts taken out of context may be contributing to the social psychological effects driving this pandemic crisis. Worst-case scenarios painted by the medical experts and spread by the media are doing the same.

I suspect officials may sincerely believe projecting the worst-case scenario is necessary to “scare people straight” to get them to change behavior. But social behavior indicates that fear can become more viral than the virus, increasing the threats to social stability, safety, and security.

If one doubts this, imagine what would happen if a vaccine or cure were discovered tomorrow. Most of the world would return to normal the next day, not because the pathogen was eradicated any more than the seasonal flu, but because our fear would disappear.