Most recessions occur either because of a lack of consumer demand due to the business cycle or a shock to the financial system. Lack of consumer demand is normally combated through injections of money into the economy, largely through programs such as unemployment benefits that give hard-hit people public money to replace the private money they have lost. A shock to the financial system is often combated with direct injections of public money to financial institutions to ensure they remain stable and active. Recessions such as the Great Recession of 2008 can involve both causes and require both sets of solutions, as the Obama administration and the Federal Reserve did to combat the downturn.
This recession is different because the cause of the problem is due neither to the business cycle nor to an unexpected exogenous shock to the financial system. The pandemic instead caused an induced coma throughout the developed world, and much of the developing world, as governments imposed mandatory lockdowns or social distancing measures to combat the novel coronavirus’s spread. That artificially suppressed consumer demand and shocked the financial system, but in a predictable manner that policymakers could foresee. That was why the initial pandemic relief measures doled out cash to many households in the form of the $1,200 per person rebates, loans to businesses and more accessible cash for financial institutions. These measures cushioned the blow from the initial repression of normal economic activity, and provided the necessary money for it to resume quickly once the lockdowns were removed.
The problem now is that segments of the economy are under continual stress because the virus is not under control. Employment is nearly back to normal in many sectors of the economy, such as manufacturing and the financial and information industries, but it remains at depression levels in three types of economic sectors: those facing capacity controls, such as restaurants and indoor entertainment; those that remain closed under government order, such as education; and those impacted by the public fear of mingling closely in tight, indoor spaces, such as transportation, office support services and accommodations. Those industries will remain in duress because of public fear, government orders or both, regardless of how much cash is flowing to people or institutions.
Economic relief measures, then, should be crafted to meet this problem rather than the more traditional ones policymakers are used to combating. That means less focus on traditional stabilizers such as extended unemployment benefits and more focus on the ongoing support for industries as a whole. This doesn’t mean that we should give up traditional stimulus measures; people without work still must be supported during this crisis. But it’s unlikely such people will be able to get back to work at all until the crises enveloping these economic segments abate. It’s not good enough to keep laid off waiters and cooks out of poverty if the restaurants that would have employed them go out of business.
A national relief measure also needs to incorporate a national strategy for living with the novel coronavirus. Without it, states or cities can impose their own stringent lockdowns knowing they will be bailed out by the federal government. That tilts incentives toward suppressing economic activity without any consideration for the economic health of the whole country, or even without any clear sense of whether the measures adopted will have a measurable effect at keeping the virus at bay. A rational relief measure would institute clear, objective standards regarding the virus’s spread that states would have to meet before expanded relief measures are provided.
Talks may produce a relief bill this week with a headline cost in the trillions of dollars. But without a clear sense of the true nature of the crisis, that will just be another finger in the dike temporarily holding back the economic flood that’s still likely to come.