The negative economic effects of the pandemic come from two sources: capital obsolescence and belief scarring. The pandemic and lockdowns forced consumers to work and consume differently, which can generate persistent changes in tastes and habits for years to come. Capital obsolescence reflects this long-lasting change in the economic value of installed capital. For example, in the post-pandemic world there might be more online shopping instead of in-store purchases. Hence, some installed capital, for example, commercial real estate such as shopping malls, could become obsolete.2 The blue area in the figure shows that capital obsolescence accounts for most of the initial economic impact of the pandemic, and its net present value is equivalent to about 38 percent of 2019 GDP.
Beliefs scarring explains most of the long-term costs. For example, in the post-pandemic world, investors in leisure and hospitality, such as restaurant owners, will take into account the risk of future pandemics and lockdowns and the associated economic costs. The orange area in the figure shows that the net present value of belief scarring is about 52 percent of 2019 GDP. Hence, both capital obsolescence and belief scarring generate prolonged effects on the economy — a much larger value than the initial 9 percent drop of GDP in 2020.
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