In previous posts, we have explored how the current recession is going to be a very deep one, in fact the worst in modern history. It has an unprecedented cause which makes it even more difficult to examine because we have never experienced anything like it before.
Can we look at other natural disasters?
A common approach is to look at other natural disasters and projects that the current situation will follow the same pattern. For example, we could look at SARS, Hurricane Katrina, or a snowstorm in the NY area. The trouble with these is that none have come close in terms of global impact and extended timespan. I do not think that we can simply assume that because smaller natural disasters have gone away quickly then this will also do so.
What about 1918 Spanish flu?
From a medical and health perspective, Spanish flu was by far the closest example. However, the economic impact is likely to be very different. 1918, as World War I was coming to an end, was already a time of massive economic disruption and changes in human behaviour. Additionally, communication and the way news and information flowed around the world was very different from nowadays which meant awareness of the global pandemic was relatively poor. People were often only aware of the illness when it hit their hometown, often not knowing if a town a few miles away was suffering. This ignorance meant that behaviours did not change; terrible from a public health perspective but it meant the economy largely carried on as before.
Can’t we rely on market forces to self-correct the economy and we can go back to the way we were before?
Market forces are extraordinarily effective at managing modern capitalism. Over the past decade, we have seen huge shifts in the pattern of work with the rise of the internet and the importance of the smartphone. But whilst market forces do a good job of automatic evolution, they do not do such a good job when there is a rapid and significant shock change in the economy. In those cases, we do not seamlessly adapt.
How do we analyse it then?
If we cannot model it like a previous episode or assume it will go away soon, then I think we have to look in detail at the economic effects of the pandemic and how they might evolve. This is complex as it is both a supply and a demand shock, a shock to investment as well as large-scale government intervention. Some of these short-term effects will go away, but they can also have important long-term implications due to second round effects. Therefore we should not assume that all of the impacts are going to be short-lived and there are likely to be long term changes to how we all behave as workers and consumers.
In my next post, I will go through what I see as the major drivers of the economy and how they are affected by the pandemic.
Applied Macro 