Covid-19 Will Expose the Ghosts in the U.S. Economy

(Bloomberg Opinion) -- Each stage of the pandemic revives the question of what is coming next, usually in a more disturbing context. The next major event, I am sorry to say, is the disappearance of what I call ghost capital. According to one estimate, about half of small businesses will be out of cash within a month, and many of them will close. The American economy has been living off the inheritance of its pre-Covid-19 past, and that cannot go on forever.

Consider your local restaurants. I live in Northern Virginia, which is scattered with thousands of dining establishments of many different kinds. Many of them are currently open for takeout and delivery but not for sit-down dining. Even when they are allowed to welcome customers back inside, social distancing will mean they can’t serve nearly as many patrons as before.

That’s the supply side. Demand for in-restaurant dining is likely to fall as well, though estimates vary. Since the average small business carries less than a month’s worth of liquid reserves, and the wait for a vaccine is likely to be at least a year, many restaurants will simply be unable to survive the shrinking of the market.

I call these places ghost restaurants because they are still walking around, so to speak, visible to us and listed on Yelp, but not really alive and without much of a future.

In a few months’ time, a significant number of these ghost enterprises will be gone. My drive around Northern Virginia, rather than being rich with culinary choice, will soon become fairly desolate — and the overall economic landscape will indeed be much emptier.

What else in our current capital structure might qualify as “ghost”?

We are still watching TV shows made before the pandemic, but the supply of new material is starting to run thin. South Korea and a few other nations are producing fresh content, but a lot of U.S. television programming is already looking to adapt to the new scarcity of programming content.

My local dry cleaner is still in business, taking advantage of its previous market position. But even once the lockdown is fully lifted, fewer people will be going into work or to formal events. Demand to have suits pressed is way down, and soon enough that will translate into a far fewer dry cleaning shops.

Many shopping malls — and peripheral businesses that rely on mall traffic — also will turn out to be ghost businesses.

If you own a small business, you might be wondering whether you should stick around in a declining sector. But what exactly can you do? You’ve already signed a lease, you have a lot of money invested in equipment, and it is hardly possible to start up a new business in the meantime. So you wait, in the process contributing to an image of diverse commercial activity that does not quite correspond to the long-term picture.

Another less visible effect is that fewer replacement firms and small businesses are on the way. Covid-19 aside, small businesses have a natural life cycle, with many of them disappearing once the owner retires. Such retirements are more likely now (not just because business is bad, but because being out on the floor involves a health risk). But how will new businesses arise to take their place? It is harder to meet new business partners, harder to line up financing, harder to identify qualified assistants and staff — and consumer spending is down, too.

And while an all-but-certain death awaits some businesses, others can look forward to mere stagnation. If you are a 23-year-old entrepreneur, how easy will it be to build up the network of “soft ties” that will help you launch the next phase of your career?

As many marginal businesses are going under, it is quite possible that the public-health situation will improve. Civic spaces will repopulate as commercial ones depopulate, giving urban landscapes a confusing feel. And because there will be fewer businesses to choose from, it will be all the harder for those remaining to enforce social distancing.

Many Americans have been clamoring lately for more freedom, and those desires are understandable. But as they emerge from lockdown, they might well be disappointed to discover that, above all else, what people will be exercising is the freedom to go out of business.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "Big Business: A Love Letter to an American Anti-Hero."

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