First, consider the relatively optimistic view: Covid-19 will have effects akin to what economists call a seasonal business cycle — which is to say, it will be over quickly and without much lasting damage.
. . .This less sanguine option might look like this: The Chinese economic slowdown leads to a permanent loss of momentum and a global recession. At the same time, with Lombardy closed down, the Italian government defaults, but the European Union is unable to resolve the matter (and the associated bank failures) in a timely and resolute manner. Governments vacillate between policies that make it easier for people to stay at home to limit the spread of the disease and policies designed to get them back in the workplace.
The U.S. would be caught up in the general loss of confidence, as well as the contagion from European banks. . .
Let’s distinguish primary effects from secondary effects, short term and long term.
Primary effects are reductions in activity in certain industries that are a pretty direct result of the virus crisis. Secondary effects would be reduction in activity that take place because people who lose their livelihoods in a directly-affected industry at some point will have to cut back on purchases, and that will affect industries that otherwise you might think would escape problems.
The airlines take a short-term hit from a primary effect. Conferences and other events are being canceled, governments are making it harder to fly into or out of certain countries, and many of us are questioning the wisdom of taking discretionary trips. But at some point air travel will get back to normal.
Cruise ships would seem likely to take a long-term hit from a primary effect. My guess is that some of the fifty-somethings who have watched this crisis unfold have sworn off ever going on a big cruise ship when they reach retirement age, so I would lower my long-term estimates for demand in that industry (and presumably the short-term demand falls of a cliff).
Will the hit to convention traffic be short-term or long-term? What if video conferencing proves its effectiveness? Corporations might decide to save on travel expenses long after the virus scare is over.
Also, there are primary effects that come from disruptions to the international production system, commonly referred to as the supply chain. Some of these are merely short term. But long term, firms will be thinking about building in some redundancy or reducing the use of overseas suppliers. If China no longer needs to build manufacturing facilities, then they do not need to import any materials from the U.S. to build them.
Conventional “aggregate demand” policies would seem to me to be useless for dealing with primary effects. And it’s possible that the secondary effects will not be so severe. So the economists who are eager to flap their gums about what the Fed should be doing might instead want to just hold off for a while.
If there are large secondary effects, they probably will operate through the banking and financial sectors. Banks and shadow banks are often highly levered, meaning that a small adverse development can make a firm go bankrupt. And financial institutions are often intertwined, so that one bankruptcy can lead to another. As the saying goes, when the tide goes out, you find out who is swimming naked.
Perhaps governments have to be included as being among the highly levered financial institutions. Tyler mentions the government of Italy, which seems to be having considerable difficulty with the virus and is in a precarious financial situation.
When financial institutions are worried about their own survival, they are less likely to help the firms that are suffering from short-term primary effects to ride out the storm. So an airline that could still be viable if it could get some loans to tide it over might instead have to declare bankruptcy.
The specific nature of the primary effects argues against thinking that conventional fiscal or monetary stimulus will work. Instead, such policies strike me as equivalent to pouring gasoline all over a car in the hope that some of it seeps into the fuel tank.
In theory, what you want is precisely targeted support, aimed at keeping alive the firms that deserve to survive short-term effects. But what you are likely to get instead are policies that mostly favor firms that do not need help or other firms that deserve to fail.
I think the anecdotal evidence about the impact of COVID-19 on the Italian health system is instructive. COVID-19 in Italy is to China what Fukushima was to Chernobyl. There are important lessons in most/all failures; we should not ignore failures based on over simplistic assumptions.
9/11 was a case study in the near shut-down of global air-travel and COVID-19 should have a similar impact on tourism. I suspect that neither Fedex nor container shipping will be impacted so supply-chain disruption should be due to the direct impact of COVID-19 on relevant workforces.
At least in the hospital referenced in the Twitter link above, Italy’s health system has reached capacity and is in a pure triage scenario; it’s a bad time to have a stroke in parts of Italy. This is an area of macroeconomics that we don’t have a modern reference case for (maybe SARS in China?). It might be that the travel and workforce impact dwarfs the health system meltdown but my sense is that they are tightly coupled.
If they close schools, they ought to compensate parents to help deal with having to care for them all day (even if one does it oneself, one needs to skip work). This should be relatively easy to do (find out the parents of affected kids and send them a check).
They can also pay for test kits.
Perhaps a simple rule of thumb is “if doing what we say will help the crisis costs you money, we will make you whole.”
asdf, there is a shocking asymmetry in your views when you use the term “they” compared to when you use the term “we”. Should we compensate ourselves when we shut down our schools?
Conveniently, my kid’s school went on strike Tuesday, so we get to skip all that virus hassle.
Fortunately, my wife works from home so it isn’t a huge burden, but I am given to understand that only ~4,000 kids in the MSP area are going to be able to get child care during the day from the school district. I bet the other parents would love to be made whole for the costs of the strike.
They should indeed be made whole. The fact that they won’t be is only a function of the bad laws in their jurisdictions.
In those cases when private schools are liable for not being open, it’s common for families to get prorated tuition reimbursement as well as reliance-based compensation for costs associated with having to “cover”, especially at the last minute.
Whether to make culpable striking labor potentially jointly or fully liable for these types of costs is a political decision, and many systems are unwilling to do so, regardless of the justice of the claim.
It’s officially illegal for many public servants to ever strike at all, but when they do, non-prosecution agreement is usually part of the strike-ending deal, as well as expungement and compensation for any union strike leaders who may have gotten arrested.
Those deals should be illegal, which would fit in with the effort to rein in content decree / settlement abuse. Otherwise the law is a joke, just another bargaining chip.
So, we’re all responsible for taking care of your children? Good to know, I guess that means we also have a claim of collective ownership over them as well, right? Inasmuch as the schools save you a bunch of money on day care, they’re a subsidy to parents. It was nice of us to give it you in the first place, it’s not something you’re owed.
The question is who bears the burden of unexpected, extraordinary, emergency state measures. When certain actions are taken for the general welfare and are public goods, then the incentives are best when the costs are spread around instead of particular groups carrying most of the weight.
So, in Singapore, the government is paying both quarantined employees and their employers for the mandatory absence, because otherwise it would be a public good with private cost, and too many people wouldn’t comply.
And in Texas after Hurricane Harvey, if the Army Corps of engineers needs to flood a thousand homes to save one hundred thousand, then that’s like a “taking”, and those homeowners should receive just compensation for the public use benefiting from the sacrificial destruction of their private property.
In the case of what amounts to mandatory universal homeschooling, that is a big, costly private disruption with huge potential public benefits.
There is nothing un-libertarian or un-American about any of that, it’s the basic idea behind the 5th Amendment takings clause. When the state takes extraordinary action out of compelling public interest that would be unlikely to be coordinated spontaneously in sufficient time, it ought to fairly compensate those individuals who would be especially put out by the measure. An incidental benefit of that compensation might also be to stabilize and smooth consumption and demand.
You write: “Conventional ‘aggregate demand’ policies would seem to me to be useless for dealing with primary effects.” You add: “The specific nature of the primary effects argues against thinking that conventional fiscal or monetary stimulus will work.” But, so far as I know, this is not controversial. The case for stimulating aggregate demand posits that it is needed to combat not primary but rather secondary effects, such as mass unemployment. You often sneer at aggregate demand stimulus, but without really confronting the best case for it.
Turning to secondary effects, you write: “In theory, what you want is precisely targeted support, aimed at keeping alive the firms that deserve to survive short-term effects.” As you note, it is quite unrealistic to expect this from any actual government. But, in fact, a general stimulus, aimed merely at maintaining overall spending in nominal terms, will suffice: it can be left to the market to sort out which particular firms should fail and which survive.
Because people stay home the initial big hit will probably be in the services sectors –airlines, movies, etc..
If it does turn into a recession it would be the first one centered, concentrated in the services sectors rather than the manufacturing sectors. In this case may of the leading, coincidence economic indicators we have long watched for information on the manufacturing sectors may not work as we expect this time. In other words, the level of uncertainty will be greater than usual.
I find it interesting that some states, like KY, are pushing mandatory paid sick leave, but no one is pushing the favored Universal Basic Income as a way to keep those who won’t be getting any hours with things shut down. Seems like a ripe opportunity for a test.
Also, perhaps at some point, there needs to be a discussion of the government’s regulation of the number of hospital beds through “Certificates of Need” before you can build a new hospital. Maybe the market would still fall short of ICU beds, but what we have is limited supply due to government regulation and monopoly protection by the healthcare regulators.
Conventional “aggregate demand” policies would seem to me to be useless for dealing with primary effects.
For an article willing to discuss primary & secondary effects, with good examples, the failure to specify the useless policies is weak.
1) Lower interest rates. 2) Lower taxes. 3) Higher gov’t spending.
Seems clear to me that debt levered airlines, with short-term problems, would be helped with lower interest rates and thus lower debt payments.
Lower taxes would also help, altho special tax cuts or tax holidays for devastated industries would likely be more along the desired theoretical line of what you want is precisely targeted support
Higher gov’t spending does seem to be almost useless, but that’s only 1 of 3.
Yet even the desirability of targeting support, gov’t picking future winners, seems a bit suspect. It’s always an attempt to avoid helping those who don’t need it, or avoid helping too much those wasting it, and corrupt gov’t has mostly proven bad at such targeting of firms.
My guess is that industry targets, rather than firms in an industry, are better spent in helping the survivors of that industry make the needed adjustments, in Specialization and Trade, to survive (live long!) and then prosper in the crisis and post-crisis periods.