The second quarter of 2020 brought some catastrophic GDP figures, how come there's not more panicking about it, and can we get out of the Covid Crash before there's a vaccine?
If an economy shrunk by 20% in a quarter you’d things were very bad. Unemployment in the double digits, a stock market crash, and perhaps Great Depression-style soup lines. Yet the Covid-19 induced recession hasn’t featured any of that yet. How come? The obvious answer is stimulus programmes, and while massive fiscal and monetary stimulus have no doubt had a big impact I want to discuss another factor. This post will be a brief tour of how the economy has fared during Covid-19 and ending by proposing a way for things to go back to normal without a cure or vaccine.
One of the many irregularities with the 2020 recession is that it’s taken for granted that its temporary. Of course every past recession has been temporary too, the difference this time is that it seems widely accepted that growth was only stopped by measures to contain the spread, and that growth will resume as soon as Covid-19 disappears. The question of how bad the recession then, should be a function of how long it takes for Covid-19 to disappear. Most seem to believe that a vaccine is the key to getting rid of the virus, but I think finding more effective treatments could neuter the danger too. The question is if it’s possible for an economy to make a full recovery after an extended shutdown across many service sectors.
There are some good arguments for a full recovery, after all the economy is operating far under max capacity. Another argument for a swift recovery is pent up demand, the idea that people and businesses have put off purchases which will be needed eventually because of the virus, and will thus purchase those items when the danger of getting ill has passed. The arguments against a quick recovery is that many businesses will have been permanently put out of business and that some workers will give up on getting a job again which will, on aggregate, make it more difficult for workers to return to gainful employment and for businesses to return to profitability. Furthermore, the longer it takes to find a solution to the virus issue, the more businesses and individuals will suffer which will in turn make it more difficult to go back to the way things were before January.
There are benefits to recessions on a macro-scale, Schumpeter’s famous ‘creative destruction’ kicks in and culls the stagnant firms in favour of the innovative and frees up resources to new, more fruitful enterprises. Normally, creative destruction is the silver lining to a dark cloud as people lose their jobs and businesses as part of the cycle of innovation but in a limited time, quick recovery context the time it takes to see the positive effects of a recession could be drastically shortened.
Perhaps that’s why stock and housing markets have maintained their valuations despite drastic slowdowns on the economy. Or perhaps it’s because the transmission mechanisms between central banks and the real economy aren’t working as intended. If you’re interested in how the currently prevailing monetary policy climate harms the economy and in particular the young, you can read another one of my posts on the subject here. The housing market doing well in the 2020 recession is both perfectly understandable and somewhat troubling. On one hand, it makes perfect sense that people would want to buy more space when they’ve been couped up in their homes for months on end, which drives up demand and therefore prices. On the other hand, the combination of high unemployment, and/or furloughing, with rising housing costs could spell trouble for many.
The almost constant use of the word ‘unprecedented’ when referring to the pandemic earlier this year annoyed me thoroughly, pandemics and recessions are hardly unprecedented, though I have to concede that things are very uncertain which I suspect was what was meant with ‘unprecedented’. I don’t know if the 2020 recession will be a quick affair or a year long drag, but I’m confident that the quicker societies find a way to deal with the virus the more likely we are to experience a quick recovery. Hardly an unprecedented analysis, I know, but unlike many other commentators (an unprecedented inflation of my own position I dare say) I don’t think a vaccine is the magic bullet.
Just as I think the reason the economy has held up very well given the circumstances by a widespread belief that the recession is temporary there’s an inverse effect beliefs have had on the virus. Now, I don’t want to seem flippant or disrespectful to those who have lost loved ones or suffered because of the virus but it is not all that dangerous. It’s a tired trope to compare the lethality of the virus with the lethality of other diseases and comparing the deaths from Covid-19 to the deaths from smoking but those are both legitimate comparisons we should make. It would be ridiculous to make direct comparisons between smoking and the virus of course, but I believe it’s a useful indirect comparison when discussing acceptable risk. Society has evidently deemed that the health risks, and the risk of death albeit far down the road, from smoking are tolerable but have decided that the risks associated with letting everyday life continue undisturbed are not. I’m not here to preach about how societies should handle the virus or to impose my view of how things should be handled, but it think it’s worth considering that the current public health policy, and by extension the wider economy, could change simply from the public having a change of heart, no vaccine or cure required.
If you found this post interesting please share it with a friend or coworker and come back next week for another one, if you want to read more you can read a previous post about memes here, and you can read all my posts about economics here.
Written by Karl Johansson
Cover Photo by Yaroslav Danylchenko from Pexels
-Edited by Karl Johansson
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