In the early months of the COVID-19 pandemic in the United States, Robin Greenwood, the George Gund Professor of Finance and Banking and Anne and James F. Rothenberg Faculty Fellow, saw another catastrophe on the horizon: widespread business failure and a bankruptcy system ill-equipped to handle the scope of the economic emergency. For a related research paper he was coauthoring with Ben Iverson of Brigham Young University and David Thesmar of MIT, Greenwood marshaled a unique array of data—including airline ticket sales and restaurant tabs—to track the fast-moving crisis. Their paper, published by the Brookings Institution in the fall of 2020, predicted that business bankruptcies in the United States could increase as much as 140 percent that year, clogging courts and causing confusion in the allocation of capital.

“We saw cause for alarm,” says Greenwood, who is also the senior associate dean for Faculty Development and Research and faculty director of the Behavioral Finance & Financial Stability Project. “The national unemployment rate early in the pandemic had jumped to over 13 percent; the standard prediction would be that we were going to have an unprecedented wave of business failures. That was the starting point for our research: How many more bankruptcies can we expect if we don’t do anything? And how is that going to play out in the judicial system? Looking at numbers, we saw that judges’ caseloads could go up by 158 percent, well beyond the caseloads in the previous financial crisis.

“Thankfully, things turned out dramatically different from what we expected,” adds Greenwood. Here, he discusses the scientific, business, and government response that prevented the predictions from becoming a reality and the lessons to be learned in advance of the next shock.

What prevented the crisis that the data in the spring and summer of 2020 predicted?

There are three possible explanations. First, the crisis was much shorter and milder than we originally anticipated because the vaccines came out. Second, businesses were much more flexible than we expected. And third, we had the largest government response in the history of the United States, and that level of fiscal support was able to sustain both businesses and spending.

We’re still in the midst of the pandemic, but are businesses in the United States safely beyond the crisis point you originally foresaw?

Yes, overall, the US business sector has been remarkably strong in this crisis, but there has been a lot of reallocation between sectors. Roughly 400,000 firms in the United States fail every single year. We don’t have updated numbers yet to know what happened during the pandemic.

What about businesses, such as restaurants and airlines, that were disproportionately affected early in the pandemic—and still are?

Here is a big question to which we don’t yet have an answer: How much of the pandemic-related business shock is permanent versus temporary? For example, has the world moved to more of a takeout culture instead of one that eats in restaurants? Will fewer people travel? You have to always be careful when you’re studying business failure, because you want to have the “right” businesses fail. The economy changes over time, and you want a path whereby those changes can be accommodated. You don’t want to try to keep airlines afloat if people aren’t traveling by air anymore. That made the business of fighting the crisis quite hard, because nobody has an exact view of what the other side will look like.

In other parts of the world, business and government responses to the pandemic have differed from those in the United States. Are we seeing the type of business crisis you originally feared play out elsewhere?

The government response in the United States was much more aggressive than in most other countries. For instance, developed markets such as Sweden and Finland had more muted fiscal responses. They also had different responses on the medical side of the crisis. All these factors are somewhat confounding; the entire developed world is in an economic boom at the moment, so it’s hard to separate them, but I think future research, like the work Adi Sunderam [the Willard Prescott Smith Professor of Corporate Finance] is doing now, is going to figure that out.

Are there lessons governments can take away from this near-crisis in the United States?

I think the number one economic lesson from the crisis is that government support really works. Look at where we are today with inflation and supply chain problems—I’m not saying those are good things, but we certainly are not living with a hangover from our pandemic recession, as we were in 2009 and 2010 after a much more muted fiscal response in 2008. I think one of the things that I came to appreciate about the COVID-19 crisis is that it was politically unifying. The virus was nobody’s fault, so getting the government to act and save businesses was, I think, politically much easier than it was in 2008, when people blamed the financial sector, rightly or wrongly. This time around, the government basically came out swinging with a massive response under President Trump and then a doubling down on that under President Biden.

What lessons can businesses take from this near-crisis in our economy?

We’ve learned that businesses are much more flexible than any of us thought. Early in the crisis, I interviewed a number of executives in HBS’s Owner/President Management program, who run small and medium-sized businesses around the globe, and listened to their stories of how they pivoted their businesses over the course of sometimes as little as two weeks. It was extraordinary to realize that they could do that.

A group of pharmacies in Portugal became medical providers within a month. A barbecue chain in Texas saw business entirely collapse and then rebounded overnight with the introduction of an online ordering system and takeout food. Business after business pivoted remarkably quickly. To me, that was the huge and very positive lesson of this crisis: Businesses are amazing at figuring out a path forward.

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