How the world will get back to business

March 25, 2020

Q&A

The coronavirus pandemic has uprooted how the world conducts business. With this in mind, we asked five faculty members for their thoughts on areas ranging from the economy to the state of journalism to judicial impacts. For the next five issues, we’ll hear from a different faculty member.

This week Saif Mehkari, associate professor economics, explains how the economy will recover.

How do you think the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act will affect the economy?

Economists may argue about the magnitude of the effect and whether it could be achieved more cheaply than spending $2 trillion, but I think they universally agree that the act will help. Let me outline three basic ways:

First, the Act provides a number of provisions aimed at keeping households liquid, such as tax rebates and generous unemployment benefits. If households stop buying goods and services, businesses will start losing money causing them to shut down. This would  cause even more unemployment leading to households further cutting back on expenditures leading to a vicious downward spiral in the economy.

Second, the Act contains roughly $1 trillion in funding aimed at keeping businesses of all sizes afloat — this is in addition to the massive monetary injection provided by the Federal Reserve Bank. This funding will partly help these businesses keep households employed and liquid, and it will partly also ensure that business don't permanently shut down, which could lead to long-term unemployment even beyond the crisis itself.

Third, roughly $150 billion of the Act was allocated toward public health. This is helpful for the economy too as it will help ensure a relatively healthy workforce in the interim. Within the public health provisions, the Act contains funding for diagnostic, treatment, and vaccine development to help reduce the total amount of time the economy is affected by COVID-19.

Without the Act the economy would have surely suffered a lot more — we would have seen much higher unemployment rates and many more businesses running out of cash and permanently shutting down.

 

The economy will adapt to the crisis through innovation.

Q: What will the economic recovery look like?

This is the multi-trillion dollar question. I believe how the recovery looks will very much depend on how long the effects of COVID-19 on the economy persist. The longer the negative effects last, the deeper the economic effects — and the recovery will be much slower. For example, if businesses en masse start shutting down, restarting the economy will take a lot more time.

I will also add that lifting stay-at-home orders doesn't necessarily mean that the economic recovery has started. Lifting stay-at-home orders doesn't automatically translate to people going out, spending, and greasing the wheels of the economy. For the economy to restart, people don't only need to be allowed to go out, they also need to feel safe going out. The one thing I worry about is that if stay-at-home orders are lifted too early, then a possible second wave will scare households so much that even when eventually there is little risk they will continue to stay-at-home hurting the economy.

Q: What is the worldwide economic impact of COVID-19?

Every major economy of the world is currently hurting because of COVID-19. The World Trade Organization expects worldwide trade to fall significantly in 2020 with some estimates being as high as 30%. World trade had already been hurting due to trade tensions, and now because of weak economic conditions, I would expect it to fall quite a bit.

Q: Are there any economic positives?

Yes! COVID-19 is a net negative, but there are also a number of positives. The economy will adapt to the crisis through innovation. Some innovations will be temporary and only help during the crisis, but others will have positive externalities well beyond the crisis. For example, ecommerce is an area where I think there will be a lot of efficiency gains. Also, firms will realize that some part of their workforce can work remotely or don't have to be situated in expensive high-density cities leading to an efficient reallocation of resources that are currently spent to maintain large office spaces in expensive commercial districts. And, finally, there will be a lot of innovation in the healthcare sector, which will have benefits for years to come. There is a silver lining.