Even if some US states and regions are spared the catastrophic COVID-19 infection and death rates of New York and Detroit, the disease’s economic impact is likely to spread across regions, suggests research from Columbia’s Jay Hyun and Johns Hopkins’s Ryan Kim.
This observation stems from the researchers’ study of how economic shocks spread during the Great Recession, namely through companies operating in multiple areas.
Knowing that changes in housing values may affect consumer spending, Hyun and Kim looked at how a cooling real-estate market in one area changed the prices and quantities of products producers sold in that market and elsewhere.
Using housing-price data from Zillow, barcode-level shopping data from the Nielsen Datasets at Chicago Booth’s Kilts Center for Marketing, and manufacturing-level data from the National Establishment Time Series database, they find that economic shocks in one county hurt demand in that same county—but also changed what companies sold elsewhere. Steep slowdowns in one region’s housing-price growth led producers to offer lower-price, lower-quality products even in regions that weren’t as hard hit.
This is in part, they write, because of the scale effect: when demand drops for a more expensive product, a company might no longer have the scale it needs to cover its costs to produce it widely.
“Producers coordinate their product-replacement decision across many markets, which means households in many regions face the same product quality,” Hyun says. “The poor guy in a poor region and the rich guy in a rich region will eat the same cheap, processed, nonorganic cheeses, even if the rich guy in the rich region could have afforded organic cheeses—because organic cheeses won’t be on the shelf.”
How much the economic pain spreads depends in part on the number of areas affected, the study finds. Hyun and Kim’s model suggests that when half the US experiences a shock where, say, consumption falls by 10 percent, the other half sees a 1 percent decline purely because of spillover within companies operating in multiple regions―a 10 percent pass-through.
In the case of the Great Recession, corporate spillover effects were equivalent to “putting a tax of $400 on people in less-shocked regions and sending out $400 checks to people in more affected regions,” Hyun and Kim write.