The current, and perhaps sustained, global upheaval over the coronavirus is extensive. Disrupted supply chains and supply shocks for U.S. importers of intermediate goods, demand shocks brought on by pubic health quarantines and household and individual reticence to spend time and leisure. The millions of U.S. workers who, either of their own volition or instructed by employers, working from home, hallowing out urban cores and depriving various services-based industries—restaurants, cafes, retail—of normal foot traffic and clientele. The volatility and sudden, jerk devaluations of equity markets inducing a negative wealth effect whereby households and individuals whose retirement savings are invested in the market feel poorer, responding with higher savings and reduced consumption. In an economy where nearly 70% of GDP is through consumption, this makes certain we are in, or will be in, a recession. The only question is when, and how, the economy will recover.
This recession is fundamentally different from past recessions. Typically, economic downturns result, after a period of expansion, from businesses slowing their rate of inventory growth, resulting in a slowing of economic activity and shedding of workers, which in turns dampens consumption. Or, through central bank efforts to stem the rate of inflation through monetary action, primarily through raising interest rates. The much rarer case was the financial crisis of 2008-2009, a recession caused by an asset bubble in the housing market brought on by unregulated, profligate lending and opaque risk assessments, and whose closest brethren was the Great Depression of the 1930s. Credit markets seized up and the entire financial system was the cusp of monumental collapse but for deep, massive fiscal stimulus and monetary intervention in the form of quantitative easing.
The above scenarios are endogenous (albeit the low interest preceding the financial crisis were at least enabled by the large purchases of U.S. treasuries by the People’s Bank of China, in support of its policy of undervaluing he RMB). The COVID-19 virus departs from these scenarios. The economic chaos was created by an exogenous event—the incidence and rapid spread of a virus, whose properties experts are still working to understand. The risks are many, and warnings are easily accessible in Italy and elsewhere. Overburdened healthcare system; depressed productivity from large shifts in work from the office to the home and dramatically curtailed business travel; sick or unavailable workers. The sudden closure of offices, and many aspects of the economy writ large, is unprecedented in modern American history. This will likely pass with time, but the repercussions may be vast and indelible, shaping how Americans interact socially, in the crucible of the economy, and in our daily habits and consumption behaviors.
Spencer Cohen PhD 柯西本 