By Amanda J Felkey, PhD Our positive or negative outlook is going to determine whether our economy recovers, or we end up worse off... Key to Economic Recovery—Avoiding a Mindset Crisis

By Amanda J Felkey, PhD

Our positive or negative outlook is going to determine whether our economy recovers, or we end up worse off after COVID-19. Using what we know from psychology and economics to deliberately combat a mindset crisis that could accompany this pandemic is just as important as stimulus packages, adjusting interest rates, and relaxing regulations to prevent the eventuality of ending up worse off in the long run.

Two Potential Outcomes

Economic theory tells us there are two potential post-COVID-19 long-run equilibria for our economy, and our mindset is critical to which one emerges. The first looks a lot like our situation a month ago: Our mindset is positive, the workforce is engaged, employees are happy and able to focus, productivity is high, firms are making profits, and we enjoy a high standard of living. This is a steady state, because positive economic outcomes reinforce a situation in which workers are happy and less distracted, which supports high levels of economic productivity.

The second post-COVID-19 equilibrium is much less desirable: We adopt a negative mindset, worker engagement is low, employees are distracted and unhappy, productivity is low, firm profits continue to decline, and the standard of living remains low. As the standard of living falls, workers become increasingly worried about how they will be able to retire or send their children to college, which reinforces low productivity.

COVID-19 Creating a Mindset Crisis

With the unprecedented uncertainty created by this pandemic and the social distancing it requires, there is no doubt that we are currently facing a mindset crisis. COVID-19 is creating extraordinary uncertainty, making people anxious and distracted. Over the past two weeks, we have seen substantial global GDP decline, the first inter-meeting rate cut by the Fed in over a decade, radical stock market fluctuations, mass layoffs, and whole industry closures.

The practice of social distancing creates a lack of community connection that affects our mindset negatively. This necessary practice can lead to depression, poor sleep quality, impaired executive function, and accelerated cognitive decline, which can have real health consequences. Research indicates the health consequences are similar to those presented by obesity and smoking fifteen cigarettes a day. COVID-19 presents a unique situation in which great uncertainty and social distancing are experienced simultaneously, which amplifies these negative effects since people in isolation are less able to deal effectively with stress.

Mindset and the Economy

Our mindset is critical to our productivity, inherently linking it to our economy’s performance. Psychologists identify psychological availability as a key driver of employee engagement and work performance. Psychological availability is our capacity to focus on our work, which is diminished when we experience worry and distraction. When someone is preoccupied with the roller coaster ride their retirement is taking or with sudden changes in their job security, they are less efficient when they work and, consequently, produce less.

Additionally, empirical research in positive psychology and behavioral economics identifies happiness as a key component to productivity. In laboratory experiments economists found that happiness caused people to be 12 percent more productive on average. Positive emotions invigorate workers, so they work faster and more effectively, and make fewer mistakes. Evidence suggests the brain works better when you feel positive. In fact, 75 percent of workplace performance depends on our beliefs, connections and how we manage stress, while only 25 percent is related to our IQ. As COVID-19 makes us more distracted and unhappy, our workplace productivity could decline and inhibit our economic resilience.

Avoiding the Potential Worse Equilibrium

The social and economic uncertainty caused by COVID-19 is wreaking havoc on our ability to focus and be happy. Because mindsets are a critical input to our productivity, they are the key to avoiding a worse-off equilibrium. To mitigate long-term negative ramifications, it is critical for us to collaborate. It is vital to innovate to provide workers with connections to their colleagues and support in handling uncertainty. If we can prevent our economy being deflected to a worse equilibrium, the market’s invisible hand is on our side. As any economist will tell you, an economy tends to return to equilibrium, even after shocks. Ultimately, if we successfully combat the current mindset crisis, we will fare better after COVID-19.

Dr. Amanda J Felkey

Dr. Amanda J Felkey

Amanda J Felkey holds a PhD in behavioral economics from Cornell University and has won several awards for her publications about her decision-making research. She currently teaches at Lake Forest College, where she is chair of the Department of Economics, Business, and Finance and chair of the Entrepreneurship and Innovation Program. Notably, she wrote a paper (with Kaushik Basu) about multiple equilibria, which was published in Oxford Economic Papers.

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