How Our Mental Health Will Impact the Economy

As the country begins to emerge from the COVID-19 pandemic, state economies are attempting to reopen to aid the more than 40 million Americans who have filed for unemployment and get businesses up and running again.

But as industries begin the slow journey back to full strength, there is an often-overlooked variable just as critical to economic success in times of crisis as public safety measures – the public’s collective mental health.

Instructional Specialist in Economics David Axelrod, whose research centers on the intersection of mental health and economic behavior, says society’s mental state after months of trauma could impact buying decisions.

With consumer purchasing typically accounting for 69 percent of the United States’ Gross Domestic Product (GDP), the choices we make could cause the recovery to go much slower than anticipated.

“Traumatic situations like this cause us to put complex decisions, which often center around finances – whether or not to buy a product, make a home improvement, or make an investment in a stock – on the back burner,” says Axelrod. “Our current environment causes us to focus on the potential short-term risks associated with these behaviors, and less on the potential long-term benefits. This can prove problematic from an economic standpoint, because people may be more risk-averse in their decisions.”

The Economics of the Mind

 From an economic perspective, mental health is a form of human capital.

“A healthy mind has a scarcity of bandwidth and time pressures to deal with, even without traumatic events occurring around us,” Axelrod says. “If our recent experiences are difficult and painful, it can take a while to process. Recovery uses much of our mind’s available bandwidth, leaving less space for decision-making in other areas.”

The mind also operates under a “Certainty Principle,” which causes people to downplay or even ignore much of the uncertainty around them and attempt to simplify the world as much as possible. In these uncertain times, these two dynamics can come together to create a psyche that could be more risk-averse in all areas of life – especially around money.

“In a crisis, we attempt to simplify things as much as possible and remove as many potential risks as we can, which is an important part of making buying choices.”

The “Growing-Healing Cycle”

Risk is essential to growth as part of the “Growing-Healing Cycle,” a concept critical in developing economic policies.

Axelrod explains: the cycle has six phases: taking the risk, feeling the pain, stopping the trauma, healing the wound, confronting the fear and transforming the spirit. According to Axelrod, the pandemic has placed the economy and the majority of the public in the healing phase, and it could be an extended period of time before patrons are willing to take the risk to shop in public – and subsequently restore and grow the economy.

“Healing the wounds within the cycle requires the avoidance of risk-taking,” he says. “Only then can we truly accept and take risks without fear. Because the pandemic isn’t finished and the wounds are still so fresh, we as a society are still healing. So, even as things begin to reopen, the economic impact may not be as immediate as hoped because the majority of people aren’t ready to take risks – both for their own health and for their financial well-being.”

What We’ll See

Ultimately, the risks people have taken in other areas of their lives will mirror their economic decisions, says Axelrod.

“You’ll see those who were risk-takers during the height of the pandemic – those venturing out without masks and gloves, and those who may not have been strictly practicing social distancing – replicate that behavior economically,” he says. “These people are further along in their own personal Growing-Healing Cycle and they’re ready to take the risks now that things are reopening, both in going out in public and in spending money.”

It’s these risk-takers who will determine the economy’s fate. They are critical to the economy reopening because they will be “early-adopters,” and will serve as the litmus test for the risk-averse.

“If the risk-takers venture out and there isn’t an immediate spike in new cases, that could pave the way for a quicker rebound of the economy, because the risk-averse patrons will see a positive outcome and begin to venture out themselves.

“If there is a spike, however, it will only further elongate the road back, and those risk-averse will be even more reticent to change their behaviors moving forward. That will lead to a much slower rebound than hoped, which could lead to a long-term economic downturn that would exceed the recession of 2008.”

For information on Montclair State University’s academic offerings in economics, visit the Feliciano School of Business.

For press inquiries, contact Senior Media Relations Specialist Andrew Mees at meesa@montclair.edu.