Economic downturns are very strange creatures. Regardless of what causes them, the effects are usually the same—people losing jobs, income, and wealth.
It’s not uncommon to see war metaphors used to describe an economic crisis—“War in the Time of Coronavirus,” “Coronavirus: Trump puts US on war footing to combat outbreak,” etc.—yet many people who lived during actual wars point out that in an economic crisis the factories are not really bombed out, the warehouses are not actually burned down, and the railway lines are not sabotaged.
Severe price drops of stocks, which we’re currently witnessing amid the COVID-19 pandemic, seem like destruction, but then again, to continue the war metaphor, the factories and machinery are still there and able to produce things.
The real issue boils down to what economy actually is—people producing things that other people want and purchase. It is more complicated than merely producing things. Nail factories in planned economies got very good at producing large nails because success was measured in the kilograms of nails produced, but they largely failed in their true economic purpose—satisfying customers. If we look at economy as an exercise in satisfying customers’ needs, rather than a tally of economic activity, then the real damage becomes clearer.
With the coronavirus lockdown, certain goods and services that people would otherwise buy and enjoy are off limits, since restaurants and bars are shut down. It does not mean, however, that you have stopped eating. Instead of going out, now you make your food at home and are probably getting the same amount of calories at lower cost. You reduced your consumption of dining services (bad for restaurants), you consume more store-bought food (good for supermarkets), and are spending less money on food calories.
As a result, you can now spend more money on other things, or save that money and spend it later. Switching from consumption to saving might appear like a massive GDP drop; but this is not economic destruction, merely delayed consumption.
Obviously, some restaurants might not survive until people are willing to spend again on dining. Therefore, some of the proposed policy responses attempt to encourage people to spend rather than save. However, if you give everyone $2,000, as some have proposed, it does not mean that people will splurge on restaurants or air travel. If $2,000 is to help people who might struggle during the downturn, then giving everyone $2,000 is a very inefficient way to help those in need. It is like trying to empty the lake to help a drowning person.
If we go back to the idea that the economy is people producing what other people want, then even during economic downturns there are many things that people want and are able to pay for. It’s not like there are “no jobs” or services to deliver, they are merely different—grocery delivery to homes, cleaning and disinfection, remote learning and countless others.
Demand for all sorts of different goods and services will increase drastically due to coronavirus, one would expect. Indeed, this is precisely what we see happening with announcements by Amazon to hire at least 100,000 people to help with deliveries, vodka distillers switching to making hand sanitizer, people using 3D printers to make needed medical equipment. Shifting resources to produce what people want is the way to avoid situations where people are forced to sit idle and hope for helicopter money—which represents a true economic downturn.
Of course, some shifts are easier than others. It is easy to train a bartender to become a grocery delivery driver; it does not work like that for doctors. Serving cocktails may pay more than delivering groceries. Switching from a job or activity where you have skills and experience to something new and uncertain is stressful and may pay less. Nevertheless, true economic resilience, both for individual people and for entire countries, comes from the ability to adapt to changes, not ignoring or masking them.
The coronavirus crisis keeps unearthing strange and inexplicable barriers that prevent people from doing useful things. Laws that prevent medical staff from practicing in other states, unnecessary occupational licensing, needless bureaucratic red tape that regulates practically every economic activity in the US economy.
Getting rid of all of them could yield economic gains during and after the crisis. It also will save countless lives, which is no doubt why we’re seeing the government allowing doctors to practice across state lines, backing off of restrictions on trucker drivers, and slashing red tape to allow private and university research labs to actually provide solutions.
Contrary to alternatives, such as giving everyone $1,200 or $2,000, removal of such barriers allows people to create things that other people actually want and need, therefore creating true economic value.
If there is a silver lining from this whole experience, it is the reminder of how important flexibility is. The world will face many crises in the future, many with economic (and life-saving) implications.
We cannot put a giant glass dome on current reality and wish the changes away. Rather than spending resources on glass domes, simply making the economy more flexible—through deregulation, private individual safety nets, etc.—will make it easier to produce what other people want.
That is the formula for a vibrant economy that will allow us to respond to future crises—in whatever form they come.