24.3.20

How the Covid-19 recession could become a depression

As the Covid-19 pandemic worsens, it’s hard to decide which are scarier: the conversations I’m having with epidemiologists or the conversations I’m having with economists.

“This is an economic tsunami,” Mark Zandi, chief economist at Moody’s Analytics, told me. Social distancing is economic distancing. We are telling people to cease going to stores, to restaurants, to workplaces. We are insisting they stop supplying their labor, making their goods. To slow a pandemic, we are forcing a recession, perhaps a depression.


It was common, in 2008, to hear economists say that nothing had changed in the real economy. The US still had just as many workers, factories, and machines. We hadn’t lost any land or knowledge. There was no physical reason the economy was in crisis. The collapse in credit markets had changed economic behavior — businesses were afraid to invest and hire, and families were afraid or unable to spend.

What we had was an “output gap” — the difference between what the economy could produce and what it was producing. The solution to an output gap, particularly one caused by collapsing economic demand, is simple: fill it with money. Invest in infrastructure projects. Give families cash. If corporations and consumers won’t spend, then the government should spend on their behalf, creating the economic demand necessary to push the economy back to normalcy.

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