If second-wave lockdown happens, parts of the economy may not return

Open this photo in gallery:

As a second wave of the COVID-19 pandemic closes in on Canada, so, too, does a serious dilemma.

Public-health officials are increasingly concerned about places where people gather indoors, in numbers and in close quarters, raising the risk of further increasing already worrisome transmission rates. The prime sources of worry are bars and restaurants.

Government officials are hesitant to order these businesses to shutter their indoor spaces for an extended period, as they did when the pandemic first hit in the spring.

Some see the government’s reluctance as a cynical pandering to the business lobby – putting money ahead of public well-being. That overlooks that there’s a whole lot of public well-being tied up in the health of the economy, too – perhaps not as urgent as a killer virus, but a serious concern nevertheless.

A second-wave lockdown could well mean sacrificing pieces of the economy that may not come back once we reopen. It’s what economists call capacity destruction. And it’s a big problem – not just for corporate interests, but for all of us.

When companies fail, their contribution to the production of goods and services is lost. When the broader economy recovers, the jobs that those businesses provided don’t come back. Nor do the incomes that they generated, the investments they would have made, their capacity to grow and create more jobs and livelihoods for more workers. It’s gone.

We saw the impact of capacity destruction after the Great Recession of 2008-09, which proved the death knell for many struggling Canadian manufacturers. The loss contributed to the painfully slow and halting recovery in the years that followed. Large chunks of the pre-recession economy that would have grown as demand recovered, that would have built new production capacity and hired more staff and invested in productivity-enhancing machinery and equipment, no longer existed. Yes, new companies emerged, but it took years for them to reach the scale to fill the hole.

We have a pretty good sense that some capacity was destroyed in the spring lockdown, and more has been lost in the only partial reopening in the months that followed. Even after largely opening up the economy through the summer, we’re still 1.1 million jobs short of where we were before the spring lockdowns; our total output is about 5-per-cent short of pre-COVID levels.

What’s very hard to tell is how much of that is, for all intents, permanently lost. Statistics Canada’s latest data on business openings and closings only take us as far as June; at that point, only four in 10 businesses that closed their doors in the lockdowns had reopened.

Of course, in July and August, employment increased by a massive 665,000 jobs, a pretty good indication that a lot more businesses resumed operations. On the other hand, a lot have not. All you need to do is walk through any busy retail strip of any town or city to see the shuttered shops.

And anecdotal evidence suggests that many businesses that have reopened, especially in high-traffic service sectors such as retail and food service, continue to work with skeleton staffs and reduced hours. They face deferred rent and debt payments that their current reduced operations don’t come close to covering. Many are just barely hanging on. They won’t survive another lockdown.

That will not only be tragic news for them, but for the health and stability of the economy. It will mean higher unemployment, for longer. It will mean more families defaulting on mortgages. It will mean a deeper and longer economic slump, in which already vulnerable segments of the labour force that are particularly exposed to those service businesses – low-income workers, young workers, women, recent immigrants – will face the greatest hardship.

The task for policy makers, then, is to find a way to bridge affected businesses over a second lockdown, if one becomes necessary. A hint may lie in what worked well in the spring lockdown: the Canada Emergency Response Benefit.

By using the CERB to replace the lost incomes of workers who were displaced by the lockdowns, the federal government was able to keep them afloat and protect against what would otherwise have certainly been a disastrous wave of debt defaults and insolvencies.

Businesses, by contrast, received supports that largely postponed their financial obligations and increased their debts – which helped at the time, but has also left some even more fragile.

In the event of a second lockdown, perhaps we should consider a CERB equivalent for small-business owners. A program that would simply replace a portion of lost income of shuttered businesses for a few weeks, until they can reopen.

It wouldn’t be cheap. But the cost of letting those businesses sink could prove much harder to bear in the longer run.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.