Pandemic macroeconomics

I've been thinking about the economic stimulus package and the additions being considered in U.S. Congress in response to the coronavirus pandemic. This is not a typical recession for which stimulus measures are usually promoted by proponents of Keynesian macroeconomics (are we all keynesians now?). Keynesian stimulus is usually promoted when an economy goes into a recession caused by a contraction in demand for goods and services. The typical situation is that something, some sort of change in economic circumstances, causes consumers (could be capital investors reduce spending, but more often it is a pull back by consumers) to reduce spending which causes demand for goods and services to take a precipitous fall. Producer and seller inventories rise to unplanned levels, signaling reduced business prospects, causing layoffs of employees.

The result is unemployment (excess labor) and excess capacity at both producer and retail establishments (idle capital - factories, machinery, office buildings, etc.) This excess supply of goods held in inventories and services finding no demand spreads to other sectors - banking, financial investing, real estate, construction, farming, mining etc. If we were to wait long enough prices throughout the economy might fall enough and faster than a fall in wage income so that consumer demand begins to rebound. Or they might not, or they may take too long and the waste of excess labor and excess productive capacity would be too painful to endure. Hence, the cure (along with policy to lower interest rates), is for increased government spending, hopefully wisely on infrastructure, education and health care, for instance.

Done wisely, this government spending would put money in consumers' pockets (unemployment benefits and food stamps and increased welfare also play a role) while simultaneously adding useful public goods to the economy. This reverses the fall in consumer demand and causes capital spending projects to resume. The economy recovers. Workers are put back to work. The increased government spending to support demand during the recession can wind down. The government spending acts as a sort of pump primer.

There is some disagreement among economists about how prone capitalistic economies and their mostly free markets are prone to such adverse changes in demand that lead to recessions, with some believing such incidents are less likely, and that when they do occur if left alone the economy will recover fairly quickly. Others believe they can be frequent and long lasting and painful without government intervention.

The key to the efficacy of Keynesian stimulus is that the government spending is to replace the fall in consumer and producer spending so as to soak up and use the excess labor and capital that arose during the recession and so put that idle labor and capital back to work.

But in this pandemic the problem is not a fall in demand and resulting layoffs in the first instance. Rather it is a forced fall in the supply of labor. A large fraction of the labor force is not able to go to work in safe conditions because of the threat of infection from the coronavirus pandemic. In this case there was no unplanned rise in business inventories and fall in demand for services that led to layoffs of labor and idle capital. The problem is not that labor wants to go to work but there are not enough jobs to go around because of a fall in demand. Rather the problem is that it is not safe to go to work because of the threat of a deadly infection.

So what can a Keynesian stimulus package accomplish in this situation? It can't get increased production. One needs people getting back to work, producing goods and services for that to happen. But the pandemic precludes that. Sure the government can issue bonds which the Federal Reserve and other brave souls can buy, but that doesn't get any real goods and services to the marketplace for people to buy (note the shortage in toilet paper and meats in the grocery stores). Note how the bulk of the stimulus package in response to the pandemic is direct money payments to taxpayers, increased and expanded unemployment benefits and loans and grants to businesses. This props up money incomes but it doesn't produce any goods and services. You need labor for that. In other words you need people to get back to work. And that won't happen until we get the risk of, and infection from, the virus and the severity of the consequences of such infection under control with the discovery of an effective treatment, or better still with an effective vaccine that prevents or reduces the risk of infection. And that doesn't appear to be on the immediate horizon.

So until we get an effective vaccine or at least an effective treatment we are left with testing, contact tracing and quarantine of those exposed to the virus and that is the purview of epidemiologists not of economists. But economists and the rest of us can support income support for the victims of this pandemic.


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