The U.S. Is on the Verge of Lockdown 2.0

After two months of what looked like a nascent recovery, the U.S. economy is faltering again. Restaurant reservations, one of the most commonly tracked indicators of local business activity, are stagnating:

A Dining Out Pullback

Restaurant reservations, percentage change from same day in 2019

Source: OpenTable

Americans are also a bit less mobile in July than in June:

Is Another Slowdown Beginning？

Dallas Federal Reserve Mobility and Engagement Index measures mobility based on cell phone data

Source: Federal Reserve Bank of Dallas

It‘s not hard to see what’s happening. With Covid-19 infections surging in Sun Belt states and a few other states experiencing second waves, Americans are being rationally prudent and staying home. The fear this time isn‘t as great as in March, when much less was known about the disease, but it’s still enough to tank the recovery.

The key to restarting the recovery, therefore, is to suppress the virus. For cities and states where the epidemic has subsided, the best tools for preventing new outbreaks are universal mask usage, plentiful testing, prompt contact tracing and isolation of the infected. But President Donald Trump, apparently subscribing to the theory that ignoring the virus will make it go away, is attempting to block funding for testing and tracing. And for states such as Texas, Florida and Arizona that have been overwhelmed with new infections, this approach -- although still useful -- wont be enough.

New lockdowns of some sort are going to be necessary. Some cities are already considering a return to stringent stay-at-home orders of the type used in the spring. Those lockdowns probably didnt hurt the economy any more than the virus itself. But this time things might be different. Because fear of the virus is less intense than in March, blanket lockdowns that were superfluous last time might curtail the economy now. In addition, psychological stress from prolonged isolation might be fueling social unrest.

Fortunately, we understand much more about the virus than we did four months ago, and what weve learned can help us design new lockdown policies that are much less restrictive and just as effective as the old ones. Outside activities seem to be much less dangerous than inside ones, and brief contact is considerably less risky than prolonged contact. The most dangerous activities are places where people are talking loudly in a crowded indoor setting for a long time -- bars, parties, concerts, indoor sporting events, indoor religious services and so on. Offices, gyms, hair salons and indoor restaurants are somewhat dangerous.

New lockdowns, therefore, should focus on banning only the highest-risk activities. Bars, clubs and other drinking establishments should be closed through the end of the year. This will hit local businesses hard, so Congress should create a bailout fund specifically for bars and similar establishments. Similarly, indoor sporting, music and theater should be halted for the duration of the epidemic, and companies that rely on these should be bailed out accordingly.

Indoor social gatherings over a certain size should also be banned in hard-hit areas. This will require strict enforcement because people are apt to defy the law and throw parties. Religious services and college classes should be held remotely.

Moderately dangerous environments -- offices, hair salons, and so on -- should be required to use strict protections against the disease. Physical distancing, universal mask-wearing, ventilation and physical barriers should be mandatory. States, and Congress, will need to provide funds to help pay for these needed modifications.

K-12 schools are the hardest case. Keeping kids in the house forever exerts a significant toll on parents, while hurting learning outcomes. But kids, especially older ones, can pick up the virus at school and spread it to their family members, and teachers are afraid to return to the classroom. The best solution may be a compromise -- open schools with strict social distancing measures, physical barriers, and masks, and using remote learning when those other measures arent possible.

But equally important to what states and cities close is what they leave open. Outdoor activities seem to be very low-risk, especially with masks on. Parks, beaches and other open areas can help people preserve their mental and physical health for very little virus risk. Retail, meanwhile, can be safe if everyone wears a mask and keeps a reasonable distance within the store.

So the new rounds of lockdowns can afford to be smarter than the first. Nightlife, indoor events and house parties cant be allowed, but most other activities are possible with adequate precautions. That will allow Americans to return to a semblance of normal life, even in areas with high infection rates. And with vaccines and antibody treatments showing promise in trials, even these restrictions may only have to last a few months.

This sort of lockdown lite probably has the highest economic return of any policy that governments can do right now. They will hurt the economy only minimally, and they will hasten the day when the epidemic is no longer scaring people into staying home.