Three Longs & Three Shorts

A Recession is a Public Health Necessity. Here’s How to Make it Short and Sharp

Whilst the world has now accepted the importance of social distancing as the main tool to contain the spread of the virus and thereby ‘flatten the curve’, governments are also scrambling to come up with measures to handle the economic consequences, which can be quite dire by themselves. Several hundreds of thousands of businesses will likely go under due to this virtual halt to human activity and as a consequence several million people are likely to lose jobs and means of livelihood. In this article, the authors discuss possible tools governments across the world can use to help such businesses and people.
 “The key thing to grasp is that this will be no normal recession. Economics textbooks don’t cover how to deal with the fallout from a global pandemic.
In a normal recession, the Keynesian response calls for getting cash in the hands of consumers so that they increase their spending, pumping the economy back up again. This relies on what economists call the “marginal propensity to consume”: the degree to which consumers take that cash and spend it, rather than save it.
A pandemic, however, depresses the marginal propensity to consume. And for good reason. As a matter of public health, many should not go to work or school, or out to eat, drink, shop, see a movie, etc. The immediate halt to activity is an essential public health measure.
So in the current moment, a Keynesian stimulus will most likely result in many consumers taking the cash they receive and putting it in the bank. In the face of the pandemic, our standard monetary and fiscal tools are impotent against an unavoidable decline in activity.
..Because the pandemic depresses the spending response to fiscal stimulus, fiscal efforts should be configured not with a view to boosting economic activity but to plug the hole in the budgets of the most vulnerable households and businesses over the months ahead.
A well-designed package should contain two elements:
  • Support for vulnerable households—along the lines of Strain’s proposal above—will help these households navigate the period of depressed economic activity that we are about to enter.
  • Support for directly affected vulnerable businesses will help these businesses bridge the inevitable gap in revenues caused by the necessary economic slowdown.”