Understanding how we can Stabilize our Economy amid COVID-19

By: Ishita Verma

The coronavirus outbreak which had once started in China has now claimed the lives of 440,000 people from over 213 countries and territories. COVID-19 has had an upsetting impact on human lives and continues to take many innocent lives, but how has it impacted our economy? Over the course of a few months, there have been many ongoing debates regarding whether “should we open schools”, “when is it okay to go outside”, “what do I do if I lost my job during the pandemic”, and most importantly, “will things go back to normal or will there be a ‘new normal’ after the pandemic”? Another question we all have is “how will our economy recover from this” or “will there be another recession”?

The pandemic has had a huge impact on our economy and businesses. In the battle against limiting the spread of COVID-19, countries imposed new lockdowns and social distancing regulations. Countries from around the world closed all “nonessential” businesses and instructed all the “nonessential” workers to stay at home. Due to this, the economy suffered a “supply shock.” Supply shock can be referred to as the “term for what happens when an event [COVID-19 pandemic] interrupts the production of goods and services” (Maiello). In this continuous cycle, after the supply shock, the economy suffered a “demand shock”. Demand can indeed overreact to the supply shock and lead to a demand-deficient recession (Maiello). Michael Maiello states: “Workers in shuttered industries lose spending power, so demand drops in all sectors. This can sap income from even unaffected workers—and dampen their willingness to consume” (Maiello). The last few months also introduced to us the concept of “alternative demands”; for example, when movie theaters closed, we saw a greater shift towards streaming services. However, on the negative end of the spectrum, when gyms closed, people stopped purchasing workout clothes as it was temporarily “just not necessary” so companies like Nike, Lululemon, Under Armor suffered. The same applies to restaurants and travel.

An interview with Alessandro Rebucci presented, we cannot just reopen the “infected” economy and expect to see a positive progression in our economy. Rebucci was asked if removing social distancing regulation would help the economy and he answered: “Lifting social distancing will certainly bring some relief to businesses and workers. This is, however, bound to be insufficient to go back to normal, whatever that means” (Rebucci). In other words, it is simply not a shortcut for overcoming this crisis. It will not only increase the number of cases and spread the virus, but it may not even fulfill the purpose of helping recover the economy as we hoped. If we want to help gradually get the economy back to what it was prior to the coronavirus outbreak, we need to take a few measures. For one, we can help by providing funding directly to displaced workers affected by the shutdown. Additionally, policymakers can inform people that while many restaurants and bars have had their dining rooms closed, they can still help keep them [local businesses] in business by ordering take-out or delivery. Coronavirus has also spurred the rise of contactless delivery by delivery apps such as Postmates, InstaCart, and DoorDash which can be easily used to help small businesses. Another way policymakers can deal with the pandemic while also considering the economy is that we can encourage the public to keep spending from their couches by shopping online or buying a gift card for a local business. Conventional monetary and fiscal policy can offset some types of aggregate demand shocks, but other policies may be more appropriate to counter supply shocks. Understanding whether supply or demand causes a particular shock is therefore very important for policy design. The government doesn’t want to stimulate activity in certain service sectors because of concerns about further spreading COVID-19. The government could, however, stimulate sectors that are not part of the lockdown but are subject to aggregate shocks. This means that it is important to understand whether supply or demand shocks or both affect each sector.

Works Cited:

Benjamin Harris Visiting Associate Professor; Executive Director. “What Can the Federal Government Do to Get the Economy Back on Track?” Kellogg Insight, insight.kellogg.northwestern.edu/article/what-can-the-federal-government-do-economy-back-on-track.

“How COVID-19 Shocked Both Supply and Demand.” Chicago Booth Review, review.chicagobooth.edu/economics/2020/article/how-covid-19-shocked-both-supply-and-demand.

“No One Has All the Answers for COVID-19 Policy.” Chicago Booth Review, review.chicagobooth.edu/public-policy/2020/article/no-one-has-all-answers-covid-19-policy.

Parsons, Tim. “Johns Hopkins Economist: 'Reopening an Infected Economy Is No Shortcut' to Financial Recovery.” The Hub, 19 May 2020, hub.jhu.edu/2020/05/19/alessandro-rebucci-economic-impact-of-covid-19/.