Economics in the Time of COVID-19
I can see huge financial problems. The store and factory may shut down, but the clock
still ticks. Businesses must still pay debts, with nothing coming in. They likely have to
pay wages – otherwise, what will people do to buy food? People have to make mortgage
payments and rent, likely with no income coming in. Left alone, there could be a huge
wave of bankruptcies, insolvencies, or just plan inability to pay the bills. A modestly
long economic shutdown, left alone, could be a financial catastrophe.
The problem would be mitigated if we could count on the lost GDP coming back. Then
we just need loans against the future output. But the GDP won’t come back. The level
of GDP should return quickly – if these financial problems don’t wipe out a segment
of the economy. But the GDP not made is not made for good. If you make one pair of
shoes a day, when you get sick you don’t make shoes. When you get better you can
make one pair of shoes a day again, but not two to make up for lost time. Some demands
may accumulate, there is some ability to run above capacity for a while, but it’s not a
one for one gain. So the money needed in the interim cannot be borrowed against future
incomes, even if banks would lend it.
In free market nirvana, I guess we would all have pandemic insurance to give us a flood
of money in this event, and the pandemic insurers would not go bankrupt on this, by
definition, non-diversifiable event. But that hasn’t happened.
In second-best free market nirvana, we would each have recognised that at any
moment the economy could shut down for a few months, and each of us – and every
firm – has enough liquid savings to last, say, six months of expenses with no income.
Precautionary savings should do the trick. Paradoxically, though many economists
diagnose a ‘savings glut’, that glut is not widespread and there are many hand-to-mouth
consumers and highly leveraged companies around. In the old days, when crop failure,
famine, pestilence, war, and just plain winter were common, the general reaction was
to try to keep enough grain around to get through it. That didn’t always work and not
for everyone.
So back to the Fed. Absent precautionary savings, one might imagine something like a
switch turning off financial claims. But we can’t just shut down the whole economy –
people need food, heat, electricity, Netflix, hospitals, and so forth.
In sum, then, I think we need a detailed, pandemic-induced financial crisis plan, that
forestalls bankruptcies and insolvencies where possible without causing downstream
crises among people who were counting on being paid back, and floods the country
with money in the right spots – as insurance would do – but not too many of the wrong