Coronavirus and recession: How is this economic crisis different?
In its speed and its depth, this new global recession really is different from those that came before.
That鈥檚 how economists view the near shutdown of economies across major portions of the world due to the coronavirus. And they say it means the solutions should be different too.
Unlike the housing market and banking meltdown of 2008, this is a contagion affecting public health that has hit the global economy much more suddenly.
Why We Wrote This
The United States has been through both pandemics and recessions before. But while they offer some insights into what the coronavirus is doing to the economy, the current situation is unique.
How about the 1918 Spanish flu? That was another serious pandemic, in fact one where the deaths totaled an estimated 2% of world population. But this time around, the economic toll comes from conscious efforts to stop a disease before it gets that bad.
The unusual nature of this crisis has implications for the policy responses now underway in Congress and beyond.听
Editor鈥檚 note: As a public service, we鈥檝e removed the paywall聽for all our coronavirus coverage. It鈥檚 free.
One key example: A plunge in business revenue, prompting a record-fast spike in unemployment, is putting special focus on how to prop up ailing businesses 鈥� not just households or banks 鈥� to avoid still deeper and more permanent job losses in the weeks ahead.
Moreover, because of its roots in a pandemic, the economic answers to this crisis are also prominently intertwined with public health 鈥� perhaps extending to wartime-style mobilization of resources. And on all fronts, experts say this crisis calls, more urgently than most, for both a rapid initial response and a sustained, adaptive follow-through.
鈥淭his is a unique and profound challenge,鈥� says Jonathan Rothwell, principal economist for Gallup and a nonresident fellow at the Brookings Institution in Washington. It requires an extraordinary response, he adds, even as he voices hope that with proper containment of the disease, within months people may 鈥渇eel comfortable going on vacations again and going to sporting events again.鈥�
How is this different?
The abruptness and severity stand out. From restaurants and hotels to auto production and Uber rides, major segments of the economy have come to a virtual halt amid government-encouraged efforts to contain the COVID-19 disease.听
Disease-induced effects on the economy are rare but not unprecedented. Researchers say a 1918 influenza pandemic (inaptly called the 鈥淪panish鈥� flu) was the since 1870, after World War I, World War II, and the Great Depression.听
There was 鈥渟ocial distancing鈥� and similar efforts back then, but not to today鈥檚 extent. This may be the first time that government responses to a public health crisis have caused a recession, says economist Timothy Taylor, managing editor of the Journal of Economic Perspectives, by email.
Yet that doesn鈥檛 mean intervention on behalf of public health is bad for the economy. A examining the 1918 pandemic, by Federal Reserve and Massachusetts Institute of Technology economists, finds that聽cities that intervened earlier and more aggressively did not perform worse economically 鈥渁nd, if anything, grow faster after the pandemic is over.鈥澛�
What does this mean for solutions?
Today鈥檚 temporary curbs on restaurant dining, concerts, movies, and numerous other activities are described by many experts as efforts to 鈥渇latten the curve鈥� of COVID-19 deaths, to hold a spike in check and reduce it over time.
The economic responses, similarly, aim to flatten a different curve 鈥� the magnitude of the recession鈥檚 effects on households and businesses.
On Friday, the House passed a $2 trillion bipartisan deal, struck by the Senate in consultation with Treasury Secretary Steven Mnuchin, sending it to President Donald Trump for his promised signature.听 includes loans and assistance to stave off mass layoffs by small businesses and hard-hit industries such as airlines. It also targets most individual Americans with relief checks, and bolsters the unemployment insurance system. Comparable steps are being tried in many nations around the world.听
Although all that is being called 鈥渟timulus,鈥� the goal differs from typical recessions.
鈥淵ou can鈥檛 simultaneously create conditions that cause whole industries to shut down, and also 鈥榮timulate鈥� the economy at the same time. What we鈥檙e doing now is just a gigantic Band-Aid,鈥� Dr. Taylor says.
This is where persistence and adaptation comes in. The immediate bandage is vital. (Britain, Ireland, and Denmark have plans to retain jobs by directly helping with payroll costs during the downturn. The U.S. is trying easy loans toward that same end.)聽
But so is resolving the pandemic. Getting the economy restarted while also minimizing recurrences of COVID-19 鈥渨ill be an ongoing process,鈥� Dr. Taylor says, 鈥渁nd it鈥檚 probably going to involve both bottom-up experimentation and top-down regulation.鈥�
What are the challenges and pitfalls?
The foremost question about all this is, what will actually work? Steps such as cash payments to households and loans to businesses have proved their worth in past crises, economists say. And although the big rescue package from Congress has flaws, Dr. Rothwell says it echoes聽聽by offering loan forgiveness to businesses that use the money to maintain their payrolls.
Other questions relate to fairness or concerns about inequality. Plenty of economists, even on the liberal side, stress the importance of speedy and generous assistance over agonizing about who鈥檚 getting how much help. Yet many counter that a rescue can and should be tailored .听
鈥淭here鈥檚 no reason for me to get a $1,000 check,鈥� says Dr. Rothwell in Washington, noting that he鈥檚 still being paid while many Americans have lost all or much of their income.听
The U.S. Senate bill will mandate that Trump-family businesses won鈥檛 get direct government infusions of money, and that cash payments to households have an income-based ceiling.听
While some observers still decry what they see as a federal penchant for bailouts, economist Ioana Marinescu of the University of Pennsylvania says businesses aren鈥檛 responsible for this crisis. Instead, she says they warrant rescue in this case as a kind of 鈥減ublic good,鈥� for the collective benefits (jobs and incomes) that are at risk if they fail.
As some experts see it, the stakes go beyond public health and the economy. Social cohesion is also potentially threatened if the crisis leaves many desperate and without money.
鈥淭he main (perhaps even the sole) objective of economic policy today should be to prevent social breakdown,鈥� writes economist Branko Milanovic, an expert on global inequality at the City University of New York, in a .听
And although these are extraordinary times, that doesn鈥檛 guarantee such challenges won鈥檛 recur, notes Dr. Taylor. Now is the time to refine the menu of responses.听
鈥淲ith the next outbreak 鈥� whether it鈥檚 COVID-19 or something else new 鈥� governments will have no excuse for not being much more prepared from day one,鈥� he says.
Editor鈥檚 note: As a public service, we鈥檝e removed the paywall聽for all our coronavirus coverage. It鈥檚 free.
