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As we continue to shelter-in-place and ponder our own vulnerability to the virus, many of us are also worried about the status of our future economy. Below are some thoughts that we, as Greene Economics would like to share regarding the relationship between this pandemic and the economy.
1. Each household is affected by the shelter-in-place and attenuated economic slowdown in different ways. Households that will be more affected are the ones that:
a. Are employed in sectors most dramatically affected by the economic shutdowns, such as travel, hotels/motels, entertainment, sports, restaurants, and bars. Education is also affected, but not stopped, and so many remain employed in that sector.
b. Have no savings upon which to fall back.
c. Lose a family member who generates income 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 be able to make up for some of the losses experienced by the households that are 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 to be completely shut down for half of the year, the impact to the economy would be less (6.2 percent) than the stimulus that is being provided by the government.
3. Some households will be less affected because many of their earning members are able to continue working from home. And others will continue working in retail groceries, or in an industry that will experience a lift during this time such as online retail, hi-tech, and media. Most important to keep in mind is that 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 as these are known in economics – are relatively unaffected. The factors of production are land, labor, capital, and entrepreneurship. The largest impact may be to labor as a factor of production, because some portion of the workforce will die from the virus. However, the other factors should remain intact, so when we are able to resume economic activity, there should not be a fundamental problem in returning to the economic activity somewhat closer to that we knew before the epidemic.
5. The macroeconomy is measured by GDP, which is the value of all of the final goods and services within a particular geography within a year. While this number will be lower in 2020 than in other years, the decline in the metric 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 thus is cause for concern. But in this case, we are intentionally decreasing economic activity to prevent the spread of the virus, and so the concern about a smaller GDP for 2020 does not mean that the economy has faltered.
6. The impact of the Wall Street decline does potentially affect many people’s retirement accounts in terms of the value of those accounts. Consequently, it is possible that people may not be able to retire when they had planned. But two factors are worth noting here. First, the value of stocks may rebound once the pandemic is cleared up. But secondarily, many people believed the stock market included overvaluation and needed to correct even before the pandemic struck. Hence, while retirement plans may change, they might have had to change regardless of the pandemic.
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 impact our economy in the short run as identified above, the benefits of intentionally slowing the economy in order to stop the pandemic will be seen in a swifter return to previous economic activity; short-term pain in exchange for long-term gain. The risk of long-term economic slowdown could involve much more serious harm to the economy. That is, firms and industries could shut down for good, and job losses could be permanent. Because of this risk, it is important that we collectively suffer the pain of short-term loss in order to minimize the long-term harm that could occur if the pandemic is to recur, or relapse.
8. Public health is a public good, which in economic terms means that it is provided to everyone in society and that one person’s enjoyment of the good does not decrease the provision of the good to the others. In public health, we all benefit from a healthy environment where no one gets sick easily, and one person’s benefit of the condition does not mean that there is less public health available for others. But, public goods suffer the “Free Rider” problem, which is that people can benefit from the good without having to pay for it, and consequently undervalue that good. In this case, “paying” for the good could be interpreted as staying home and decreasing your economic and social activities. But, unfortunately with public health, if only a few ‘refuse to pay’ they can cause the virus to resurge in areas where it had previously been contained or controlled, and consequently eliminate the value of the public good for everyone else.
9. What about the potential for bankruptcies, foreclosures, and evictions? There is concern for these events to occur as households and businesses fail to see the revenues and incomes needed to pay their bills. This is especially concerning the longer the pandemic continues. But in the short run (e.g. assuming there is a partial recovery of economic activity during the summer of 2020), landlords may be more willing to sacrifice rents or accept delayed payments for a few months than try to find new renters during a recession. Under normal circumstances, failure to make payments is an indication of long run inability to pay, but under these unusual conditions, landlords and lenders may realize fewer losses overall by maintaining renters until the economy can recover. Some states have forbidden evictions of any kind for several months.
10. Is there any good news? Not much. But there are a couple of interesting opportunities presented by the stay-at-home mandate and associated economic slowdown. First, remember those factors of production? The fourth factor, entrepreneurship, could experience a boost from the slowdown. That is, as people spend less time traveling and less time doing so many things, they may have more time to create ideas for new businesses. In addition, as seen with air quality in Wuhan China, greenhouse gas emissions were reduced during the economic slowdown attributed to the virus. Combined, we can hope that after a period of reduced emissions seen through reduced production, perhaps there can be some greater innovation surrounding how to maintain a productive economy while reducing the destruction of the ozone.
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. Please keep in mind that the longer the pandemic lasts, the more dire the consequences. Hence point #7 above is probably the most important.