Tag: economy

The economy and coronavirus pandemic were two of the top issues for voters in the 2020 election, according to exit poll surveys. Notably, 52% of voters said controlling the pandemic was more important, even if it hurts the economy. But what if we didn’t have to choose?

In communities where masks were mandated, consumer spending increased by 5% on average, showing that a safety rule can stimulate economic growth as well, according to a new study from the Olin Business School.

Researchers found the effect was greatest among non-essential businesses, including those in the retail and entertainment industries—such as restaurants and bars—that were hit hard by the pandemic.


“The findings exceeded our expectations and show that we can have a strong economy with strong, commonsense public-health measures. Mask mandates are a win-win,” said Raphael Thomadsen, professor of marketing and study co-author.

Thomadsen, along with Olin’s Song YaoNan Zhao and Chong Bo Wang, analyzed the impact of social distancing and mask mandates on both the spread of COVID-19 and consumer spending. They used cellphone location data to track the degree of social distancing in nearly every county in the U.S. and compared that with community voting patterns, coronavirus infection rates and consumer spending rates.

The researchers found social distancing has a large impact on reducing COVID-19 spread, while the evidence on mask mandates is mixed. But while social distancing reduces consumer spending, mask mandates has the opposite effect. They also found that social distancing decreased in communities with mask mandates, magnifying the positive effect on spending.

Feeling safer to spend


“Preventive measures such as social distancing and facial masks should be considered as pro-business,” said Yao, associate professor of marketing. “When people feel safer to spend, or more importantly, when the pandemic is kept at bay, the economy is more likely to have a quick recovery. Not to mention the lives that will be saved.”

Perhaps not surprising given the political lines drawn over masks, they also observed that political affiliation had a significant impact on social distancing. Even after controlling for local characteristics such as the population density, income and other demographics, counties that voted for President Donald Trump in 2016 engaged in significantly less social distancing than counties that voted for Hillary Clinton.

“If the entire country had followed low levels of social distancing seen in Trump-supporting areas, we estimate there would have been 83,000 more American deaths from COVID to date, which represents a 36% increase over the current death count of 225,000 Americans,” Thomadsen said.

They estimate the tradeoff would have been a relatively small boost in the economy. Consumer spending dropped $605.5 billion from April to the end of July, compared with the same time last year. The country would have recovered $55.4 billion, or approximately 9%, had all counties remained as open as the most pro-Trump areas.To put it in more dramatic terms, Thomadsen said this means that opening up is only a reasonable policy if one values lost lives at roughly $670,000 each or less. This value was determined by dividing the hypothetical $55.4 billion boost to the economy by the 83,000 lives lost in this scenario.

“The calls to open up the economy come with huge costs of COVID spread and only modest benefits of increased economic activity,” Thomadsen said. “Opening the economy before getting the virus under control only makes sense if you put a very low value on life.”

As the world learned in 2008, a global financial crisis can happen when economists least expect (or predict) it. But according to Gary Gorton, finance professor at Yale’s School of Management, it will happen again. He estimates the next crisis will come in 10 to 15 years. Gorton shared his analysis of the 2008 financial crisis at an event sponsored by the Wells Fargo Advisors Center for Finance and Accounting Research at Olin, Aug. 16.

Gorton will address the Finance Theory Group Summer School, meeting at Olin this week, at 9 a.m., Friday, Aug. 18, in Emerson Auditorium, Knight Hall. His topic will be: “The Private Money View of Financial Crises.”

Gorton’s 2010 book, Misunderstanding Financial Crises, Why We Don’t See Them Coming, provides historical context for understanding the 2008 financial crisis and why economists and policy makers need to recognize that crises are inevitable and inherent to our financial system. To those who thought that a crisis could not happen again in the US after the Great Depression, Gorton is blunt: “That economists did not think such a crisis could happen in the United States was an intellectual failure.”

Unlike the 1929 crash with bank runs like the scene in the Frank Capra film, “It’s A Wonderful Life,” the causes of the 2008 crisis were less visible. Cloaked in electronic trading, complex financial ‘innovations’, and unregulated derivative securities trading within the Shadow Banking system, Gorton said economists were blind to what was really happening in the financial markets.

Gorton points to the lack of data available from financial institutions as a major handicap for economists and policy makers who need to track activity to more accurately understand the markets and see signs of crisis before it’s too late. Gorton calls for a new information infrastructure to be built by the Office of Financial Research established under the Dodd-Frank legislation. He argues collecting and sharing data would help regulators as well as economists to more accurately measure risk and liquidity in the markets.

Gary Gorton and Rich Ryffel, Olin Senior Lecturer in Finance

Gary B. Gorton is The Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management, which he joined in August 2008. Prior to joining Yale, he was the Robert Morris Professor of Banking and Finance at The Wharton School of the University of Pennsylvania, where he taught from 1983 to 2008. Dr. Gorton has done research in many areas of finance and economics, including both theoretical and empirical work. He is the author of Slapped by the Invisible Hand: The Panic of 2007 (Oxford University Press) and Misunderstanding Financial Crises (Oxford University Press).

Dr. Gorton has consulted for the U.S. Board of Governors of the Federal Reserve System, various U.S. Federal Reserve Banks, the Bank of England, the Bank of Japan, and the Central Bank of Turkey. He was a consultant to AIG Financial Products from 1996 to 2008.

Dr. Gorton received his doctorate in economics from the University of Rochester. In the field of economics, he received master’s degrees at the University of Rochester and Cleveland State University, and also received a master’s degree in Chinese Studies from the University of Michigan.

Glenn MacDonald, the John M. Olin Distinguished Professor of Economics and Strategy, warned of negative fall out from the new minimum wage that goes into effect this month in St. Louis.

In an article distributed by the Associated Press, MacDonald said, “There are plenty of negative aspects: Jobs will be cut. Costs will be passed on to consumers. Even then, not all businesses will be able to absorb the added cost. Some businesses that are hanging on by their fingernails will just shut down.”

Other business owners and employees quoted in the article were more optimistic about the impending hike in the minimum wage. St. Louis businesses will be required to pay a $10 minimum wage, increasing to $11 in January, 2018.

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The Federal Reserve voted Dec. 14 to raise interest rates a quarter of a percentage point — the first increase in a  year, and only the second since June 2006. With the post-election Dow surging since Donald Trump’s triumph, many wonder what this move will mean for stocks,  future lending rates and the U.S. economy.

An international economist and financial expert at Washington University in St. Louis said that while the move was widely anticipated, he would have liked to see the Fed postpone an increase until President-elect Trump’s inauguration.

Dean Mark Taylor

Dean Mark Taylor

“Today’s interest rate rise is no real surprise,” said Mark Taylor, dean of Olin Business School and formerly a senior economist at both the International Monetary Fund (IMF) and the Bank of England. “The Fed signaled in September that it wanted to raise rates ‘relatively soon’ but did not want to rock the economic boat just before a contentious election.

“Personally, I would have held fire a little longer, until something more is known about what shape President Trump’s economic policies will take. Combining an interest rate rise with such policy uncertainty is not the best prescription for the economy, in my view.”

Taylor, who became the dean at Olin Dec. 1 after a term as dean at Warwick Business School in England, also is a professor of finance at Washington University. In addition to previously working as a senior economist at the IMF and the Bank of England, Taylor also was a fund manager at BlackRock.

Donald Trump’s election as president initially sent global markets reeling. What might we expect from the markets moving forward? John Horn, senior lecturer in economics at Olin breaks it down.

  • Economic Implications: “The election of Donald Trump will have long-lasting implications for the United States and global economy. The election will be significant economically because his main support came from the middle- and lower-class workers struggling in the face of globalization. Immigration (the wall on the border with Mexico), trade deals (NAFTA and TPP), taxes (across the board, but aimed mostly at the higher income brackets) and health care will all be addressed in the coming months. How these topics get addressed will fundamentally determine whether President-elect Trump can truly make America great again.”
  • Trade: “Most economists agree that trade and globalization have been good from a macro perspective: The size of the overall economic pie has gotten bigger in the U.S. and around the world. The core of Trump’s constituency are those who have not gotten a bigger slice of that pie … which is the downside of trade – not everyone shares equally in the gains. If we cut off trade with the rest of the world and the pie shrinks, how will President-elect Trump ensure that those who got left  from the bigger pie (with trade) end up taking a larger slice from the shrinking pie (without trade)?”
  • John Horn

    John Horn

    Manufacturing: “Manufacturing jobs have been hurt more by productivity gains (automation) than trade – those jobs lost to machines aren’t coming back. Unless there is a massive, large-scale retraining and skills-upgrade program, where will the new jobs come from? Infrastructure investments are good, short-term fixes to create jobs, but they don’t create long-term jobs (i.e., for 10 years or more) for those in the construction trade (unless we continually upgrade our infrastructure). Multiplier effects would help create ancillary jobs, but if the construction goes away, so do those support positions.”

  • Negotiating deals: “If the U.S. kills off NAFTA, and the Mexican economy tanks, how will that help reduce illegal immigration into the U.S.? If the U.S. starts to thrive again, and Mexico shrinks, the pressure on the wall will become immense. Trade deals are as much political as they are economic – the EU and Trans-Pacific Partnership are as much about regional political power as they are about GDP growth. President-elect Trump often had the advantage of negotiating business deals from a position of power. But the U.S. will have a harder time dictating terms to the rest of the world. Incentives matter, and the leaders from other countries are incentivized to help their constituents – and keep their own jobs! Trump might be able to perfectly thread the needle and get better deals, but it’s hard to see how they would fundamentally advantage the U.S. without simultaneously disadvantaging the other countries. It’s hard to envision why another leader would accept that kind of deal.”
  • Tax cuts: “Tax cuts to the wealthiest, including corporate tax cuts, could lead to more jobs, but could just as easily lead to more dividends to shareholders, or to further investments overseas. Economists will never agree 100% on which is more likely to happen… . Mandating what companies do with those tax cuts will be hard to pass Congress, and even harder to implement and enforce if authorized. There is no certainty that the lower and middle class will get pay raises and more jobs just because corporate tax cuts are enacted.”
  • Obamacare: “The Affordable Care Act will not look anything like it does today – but what will replace it? If the lower and middle class get hurt by the repeal, then another plank of Trump’s support will weaken.”
  • Be afraid. Be very afraid: “Ultimately, this is as much a political issue as an economic issue … though they are intricately linked. With the rise of nationalism in Europe with the U.K., Germany and France), with China’s struggles with a slowing economy, and with the collapse of oil revenues in the Middle East, the world is not in a great place to handle major shocks to the system. Trump’s supporters unquestionably have been hurt by globalization trends over the last 30 years. But there are major questions outstanding about how his major policy planks – immigration, trade, taxes and healthcare – will be implemented, how disruptive they will be and ultimately how well they will help that core constituency. If designed perfectly, they may well strengthen the lower and middle class. And a strong U.S. economy should help the global economy – as long as we haven’t cut ourselves off from it. But if the policies don’t help, or if Trump walks back those campaign promises, that dispossessed center will become even more angry with leadership in Washington. And that’s an election that we – and the rest of the world – should all be afraid of.”

Horn was a Senior Expert in the Strategy Practice of McKinsey & Company, based out of the Washington, DC, office, before joining Olin. Prior to joining McKinsey, John assisted major U.S. financial institutions with fair lending compliance as a consultant with Ernst & Young LLP.

From Washington University’s The Source Election 2016