Pandemic economy

“How are we going to pay for it?”

In all the understandable worry about how the CoVID-19 pandemic will play out, a common component is people’s concern about how this will affect the economy: people’s jobs, savings, access to health insurance.

And when people lose their jobs, or even just see reductions in working hours, there are very real problems with how people are going to even maintain access to food, or pay their utilities.

More generally, there’s the question of, “How are we going to pay for the country’s response to the coronavirus?”

The first thing to realize is that that is definitely the wrong question to be asking first.

At the same time, it is definitely a question that needs to be asked.

The upfront right questions are:

1. What things need to be done?
2. Are those things physically, logistically possible?

My understanding of the expert advice is that we need people to:

1. Massively reduce their physical interaction with other people.
2. Get tested (I’ve seen differing advice on who exactly should get tested. In a situation with insufficient numbers of test kits, there will be some sort of prioritization based on the nature and severity of symptoms, and the extent to which someone is necessarily going to be interacting with wider circles of people, e.g., health professionals.).
3. Get treatment if they develop a severe case.

For right now, that’s it.

If that’s our program, then a few things absolutely need to keep running:

1. Food production and distribution.
2. Medical services, from hospitals through the manufacture and distribution of pharmaceuticals and medical supplies.
3. Utilities (electricity, natural gas, water, sewer).
4. Public safety (there will still be heart attacks needing transportation to hospitals; buildings will still catch fire; and even with reduced traffic on the roads, there will still be accidents).

Some additional things need to keep going to some extent to support those “must have” activities, for example:

5. Production of metal and plastic for food packaging.
6. Production of motor fuel for necessary commuting and shipping.

Other things absolutely need to not happen, most prominently:

1. Pretty much the whole nexus of culture / entertainment / leisure / tourism: restaurants, theaters, museums, theme parks, etc.
2. Other retail besides food and medicine.

That’s a lot of people who won’t be working, and for most of them, not working means not having an income, and any sort of income replacement from the government will be less than 100%, so “optional” purchases go right out the window. Manufacturing activities like the car industry should probably be limiting their operations in the interest of social distancing, but with so many people losing income, it’s going to be an atrocious time to be selling cars, so there’s very limited need to be making them at the moment.

This has short-term and long-term consequences, but the those two things are very different from each other. The short-term consequences are physical and unavoidable. The long-term consequences are social and financial, and in principle, they don’t have to happen.


Short term
As a rough approximation, the Gross Domestic Product (that holy grail of the economy) is the market value of the work done in any given economy.

I’ve just described a situation where a whole lot less work is being done. It stands to reason that the GDP will go down.

I did a back-of-the-envelope for the effects on employment and GDP. Some sectors I assumed were shut down entirely. Others would see a reduction of 20% or 50%. I tried to be conservative in my guesses, and I came up with a reduction of 30% in employment, and 27% in GDP.

On the one hand, those drops are about the same size as what we saw in the Great Depression.

On the other hand, the Great Depression dragged on for 10 years, where we’re looking at something like several months.

On the other other hand, the Great Depression took four years to reach its nadir, while we’re heading to ours in a matter of weeks.

Hopefully the disruption is relatively short, but I wouldn’t be surprised if unemployment reached 20% at some point, and if the reduction in GDP, averaged over the year, were something on the order of 5% to 10%.


Long term
Look ahead to roughly a year from now. I’ve seen estimates that a vaccine could be available at scale by January, 2021. And so let’s say that by March, 2021, enough people have been vaccinated for some herd immunity to be in effect and we can be making our way back toward something resembling normal economic activity.

 

What will the economy be like?

 

In terms of our ability to do things—make cars, serve meals at restaurants, produce movies, refine petroleum, etc., etc., etc.—it’s possible that very little will have changed.

 

If we handle social distancing well, the overall fatality rate will be comparable to a bad flu season. (To be clear, this statement is not minimizing coronavirus. We can limit the loss of life to something like a bad flu if we shut down large parts of the U.S. economy for a few months. We’re definitely not warranted in treating the larger phenomenon as “just a bad flu.”)

 

With a little basic maintenance, all of our buildings are intact, our restaurant kitchens are still there, our airports are no worse than we left them, and so on.

 

Physically, the economy should be fine.

 

But in financial terms, we could be looking at a moonscape.

 

Households affected by the unemployment spike will have reduced or wiped out their savings—if they’re lucky. A lot of people in food service, tourism, hospitality, and the like, earn fairly low wages and have little or no savings, so there will be a spike in whatever borrowing people have access to, just to keep body and soul together.

 

There are broad-minded business owners who want to do right by their employees and do something for their communities in this crisis. In my town, many restaurants have offered free lunches for kids who need them in the midst of this disruption, and I imagine that’s true all over. But with no customers coming through the door, there’s only so much they can do.

 

Even if a business makes the hard-nosed accounting decision to simply lay off most or all of their employees, they still have rent or property taxes, some utilities to keep the property in good shape, invoices coming in from other companies that are equally strapped for cash, and loan payments on any debt the business may have taken on.

 

No year-round business budgets for two to four months of zero revenue.

 

So in this post-CoVID world of March, 2021, our physical ability to do work is untouched, but many businesses have gone under and many households are financially wiped out, which means they’re not good customers for whatever businesses have straggled through or are thinking of opening up.

 

If we look back at the CoVID shutdown from the other side, in physical terms the lost output shouldn’t matter. Sure, we didn’t make many cars in June, 2020, nor did we serve many restaurant meals. But in March, 2021, we’re still able to do those things and benefit from them, just as before CoVID. The response to the disease doesn’t have to have any long-term effect on the economy.

 

But if we let our society’s finances become completely disordered, it will.

 

What’s needed is the financial equivalent of a medically-induced coma.

 

We need some way of slowing down the flow of bill collection before the process of financial contagion can do too much long-term damage.

 

And it needs to be systemic.

 

The business owner can’t keep paying their employees, because there are no customers and the landlord is still asking for rent.

 

The landlord doesn’t necessarily want to drive their tenants out of business, but they’ve got their own bills to pay.

 

I don’t know what this “financial coma” looks like in detail, but right in line after shoring up the medical system and making sure there’s food and utilities, I think it’s next in line as something that needs to be addressed.

That’s the sense in which we need to figure out, “How are we going to pay for it?”