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Minnesota’s businesses are suffering from a lack of certainty. Gov. Walz can help with that

I’ve written a lot recently about the economic cost of Minnesota’s fight against the Coronavirus. Unemployment has soared to unprecedented levels and businesses have closed for good.

The economic costs of uncertainty

The problem facing businesses is that their revenues have dried up thanks to the shutdown but they still have expenses. Labor costs – which can be reduced by the painful measure of furloughs and lay offs – are not the only cost that businesses face. They will have rents to pay in many cases, or payments on equipment. These ‘fixed costs’ have to be paid no matter what the business is producing, or isn’t producing, as the case currently is.

These obstacles would be difficult enough to deal with but they are compounded in this case by sheer uncertainty. On March 16th, Governor Walz issued an order temporarily closing bars, restaurants, and other venues that serve dine-in guests which was originally supposed to run until 5 p.m. March 27th. On March 26th, he announced a Stay At Home Executive Order (SHO) directing Minnesotans to limit movements outside of their homes beyond essential needs from March 27th at 11:59pm to Friday, April 10th at 5:00pm. He extended this further on April 8th, to run until May 4th.

All of this generates ongoing and increasingly costly uncertainty for our state’s businesses. Indeed, this uncertainty could be more costly than the shutdown itself. A new paper from economists Scott R. Baker, Nicholas Bloom, Steven J. Davis, and Stephen J. Terry titled ‘COVID-Induced Economic Uncertainty‘ which sees “a year-on-year contraction in U.S. real GDP of nearly 11 percent as of 2020 Q4” finds that:

The exercise says that about 60 percent of the forecasted output contraction reflects a negative effect of COVID-induced uncertainty. 

How to reduce uncertainty

It would be a mistake to set a date for the reopening of Minnesota’s economy: the Coronavirus does not operate to a calendar. But our state government can make a move towards a measure of certainty by setting out benchmarks.

Gov. Walz has gone some way towards this. As I wrote last week, he “has set two conditions for moving to Scenario 3”, which would extend the SHOs for those especially vulnerable to Covid-19, such as older adults and people of any age who have serious underlying medical conditions, but would allow other Minnesotans to get back to work observing CDC safe practices.

The first – the 5,000 tests a day – looks to have been met, or is very close to it. The second – the ‘surge capacity’ of 3,700 ICU beds – needs some work. To shift to Scenario 3 when the current measures expire on May 4th and get Minnesota moving again, meeting this goal must be a priority.

A flat out effort by the state government which met these targets by May 4th would leave no excuse for extending the SHO beyond that date. This should be an absolute priority in the next week. Declaring that to be the case would go some small way to offering Minnesota’s suffering businesses some of the certainty they need to survive.

John Phelan is an economist at the Center of the American Experiment. 

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