COVID-19 Pandemic and the Economy

Understanding the COVID-19 economic slowdown: Impacts on households, businesses, and recovery

The COVID-19 pandemic has disrupted daily life and created uncertainty for households and businesses alike. Many people are concerned about the future of the economy and how these short-term disruptions may affect long-term recovery. Greene Economics shares key insights on the economic impacts of the pandemic, from household challenges and stimulus measures to broader macroeconomic trends.

1. Each household is affected by the shelter-in-place and slowed economy in different ways. The hardest-hit households tend to share one or more traits:

• Employment in the sectors most disrupted by the shutdowns — travel, hotels/motels, entertainment, sports, restaurants, and bars (education is affected but not stopped, so many remain employed).

• Little or no savings to fall back on.

• The loss of an income-earning family member to the disease.

2. The federal government is providing over two trillion dollars in aid to affected households and businesses. This is approximately 10 percent of the country's GDP and, if properly administered, should help offset losses for the households hardest hit. For example, food and beverage goods (purchased for offsite consumption) and food services plus recreation services total 12.3 percent of the economy. So even if this share of the economy were completely shut down for half the year, the impact would be less (6.2 percent) than the stimulus the government is providing.

3. Some households will be less affected because many of their earning members are able to continue working from home. Others will keep working in retail, grocery stores, or an industry that may see a lift during this time, such as online retail, tech, and media. Most important to keep in mind: not all households will experience the worst.

4. The broader macroeconomy of the U.S. and the world is not fundamentally harmed by the pandemic. The basic assets that make up an economy—the factors of production—are relatively unaffected. Those factors are land, labor, capital, and entrepreneurship. The largest impact may be to labor, because some portion of the workforce may be affected by illness. But the other factors remain intact, so when economic activity resumes, there should be no fundamental problem returning to a level closer to pre-pandemic conditions. From a macroeconomic perspective, the COVID-19 economy differs from a typical recession because the decline in activity is largely intentional—aimed at slowing virus transmission rather than reflecting structural economic failure.

5. The macroeconomy is measured by GDP, the value of all final goods and services within a geography in a year. While this number will be lower in 2020 than in other years, the decline will not necessarily represent a contraction of the economy. Typically, when GDP declines it signifies a problem in the flow of goods and services, and is thus cause for concern. But in this case we are intentionally decreasing economic activity to prevent the spread of the virus, so a smaller GDP for 2020 does not mean the economy has faltered.

6. The Wall Street decline does potentially affect many people’s retirement accounts in terms of the value of those accounts. Consequently, some people may not be able to retire when they had planned. Two factors are worth noting. First, the value of stocks may rebound once the pandemic clears. Second, many believed the stock market was overvalued and due for a correction even before the pandemic. So while retirement plans may change, they might have had to change regardless.

7. We would not be card-carrying economists if we didn’t include a discussion of tradeoffs. Of particular importance now is the idea of tradeoffs through time. Although the pandemic will hurt the economy in the short run, the benefit of intentionally slowing activity will be seen in a faster return to previous levels — short-term pain exchanged for long-term gain. The alternative risk is far more serious: firms and industries could shut down for good, and job losses could become permanent. Because of that risk, it is important that we collectively accept the short-term loss to minimize the long-term harm that could occur if the pandemic recurs or relapses.

8. Public health is a public good — in economic terms, it is provided to everyone in society, and one person's enjoyment of it does not decrease its provision to others. We all benefit from a healthy environment, and one person's gain does not reduce health for others. But public goods suffer the "free rider problem": people can benefit without paying, and so undervalue the good. Here, "paying" can be interpreted as staying home and reducing your economic and social activity. Unfortunately with public health, if only a few refuse to pay, they can cause the virus to resurge in areas where it had been contained — eliminating the value of the public good for everyone else.

9. What about the potential for bankruptcies, foreclosures, and evictions?

There is real concern as households and businesses fail to bring in the revenue and income needed to pay their bills, and the concern grows the longer the pandemic continues. But in the short run (assuming a partial recovery of activity during the summer of 2020), landlords may be more willing to forgo rent or accept delayed payments for a few months than to find new renters during a recession. Under normal circumstances, missed payments signal a long-run inability to pay; under these unusual conditions, landlords and lenders may realize fewer losses overall by keeping renters until the economy recovers. Some states have forbidden evictions of any kind for several months.

10. Is there any good news? Not much — but the stay-at-home mandate and associated slowdown do present a couple of interesting opportunities. First, remember those factors of production? The fourth, entrepreneurship, could get a boost: as people spend less time traveling and doing so many other things, they may have more time to develop ideas for new businesses. Second, as seen with air quality in Wuhan, China, greenhouse gas emissions fell during the slowdown. Combined, we can hope that after a period of reduced emissions from lower production, this moment inspires innovations that maintain productivity while reducing environmental harm.

Thank you for taking the time to read through these comments. Greene Economics wishes you the best physical and financial health through this challenging time. Keep in mind: the longer the pandemic lasts, the more serious the consequences for households and the broader economy—which underscores the importance of strategies that support long-term recovery, making point 7 particularly important.