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What We Know About The Economic Impact Of The Coronavirus And How That Should Guide Policy

  • Christian Weller
  • July, 2020
  • 424
  • Money During Pandemic

There is a lot businesses, families, governments and economists who don’t know about the economic fallout from the spreading virus

The coronavirus is spreading quickly around the globe. Governments, businesses and families respond to the pandemic in unprecedented ways, massively and necessarily disrupting the economy in the process. Policymakers are now considering or already taking quick, large steps to both ease the health care challenges and stem the economic pain. Here are seven things we know about the economy and economic policy that should guide the design of additional policy steps:

1) This is first and foremost a health care crisis

The underlying cause of the economic slowdown is a global pandemic. The spread, and thus the economic impact of the virus, are highly unpredictable. But it affects people in all countries, states and localities to some degree.

The pandemic also hurts almost all industries, turning the health care challenge into an economic one. People can no longer travel and go out. Supply chain disruptions idle manufacturing plants. Warehouse workers are becoming ill and increasingly worried about getting ill. Health-care workers on the front lines of the virus could become infected and need to self-quarantine.

The health and safety of the population remain the highest policy priority. Congress and the administration need to make sure that sufficient diagnostic, protective and therapeutic equipment are available. Policymakers also need to make sure that economically vulnerable health care workers and health aides in particular, do not have to choose between work while sick and staying home. They will need paid sick leave as well as paid medical and family leave. This will mean expanding already enacted protections, so that the self-employed also receive benefits.

2) The demand side of the economy is primarily hurt

Most of the economic disruptions affect the demand side. People can no longer go to work and often lose their jobs and incomes as businesses shutter their operations. Businesses are holding off on investments amid the growing uncertainty. And, exports will inevitably falter as other countries are taking similar actions to slow the spread of the virus.

There will be some limited supply side effects. Businesses will fail as they lack customers and cash to sustain them for extended periods of time. Small and medium sized businesses, especially in low-margin industries such as restaurants, will be among the ones most acutely hit by the economic fallout.

Any economic intervention needs to primarily focus on boosting the demand side of the economy. This means replacing incomes, especially among lower-income and middle-income families. They are more likely to work in affected industries and they are less likely to have sufficient savings to tide them over weeks or even months of income losses.

Congress will also have to consider measures to support the supply-side if those effects devastate strategic industries or excessively worsen the demand side effects, for instance, by a concentration of hotels and restaurants in tourism-dependent regions. But any bailout effort will have to come with strong strings attached, so that the aid helps workers and not the top.

3) Uncertainty over the economy reins high

There is a lot businesses, families, governments and economists who don’t know about the economic fallout from the spreading virus. The depth, length and regional dispersion of the economic decline are largely unknown. Nor is it clear whether measures taken now to contain the spread of the virus will be effective.

This uncertainty exacerbates the economic fallout. Businesses are pulling back, not just because they have no customers, but also because they don’t know how much worse it will get. Families are cutting spending in part because they are worried about drastic drops in their incomes. These reactions to the unknowable risks exacerbate the economic downturn.

The federal government can address this massive, widespread and growing uncertainty. It has the ability to quickly spend large sums of money wherever problems rapidly rise. At this point, Congress and the President need to clearly signal their willingness to undertake any steps necessary to stop an economic freefall, no matter where the problems occur and how long they will last.

4) States and local governments will quickly feel the fallout from the pandemic

State and local governments are at the front lines of the current crisis. Many people in their communities will have to quickly rely on public services. And, local businesses such as restaurants, hotels, and event venues are shuttered for the time being, reducin...

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