![Economic Policy and the Coronavirus: How to Mitigate Harm and Plan for the Future](https://www.commondreams.org/media-library/we-really-need-to-start-thinking-of-a-much-richer-set-of-economic-tools-that-can-solve-society-s-problems-in-coming-years-pho.jpg?id=32260952&width=1200&height=400&quality=90&coordinates=0%2C16%2C0%2C166)
We really need to start thinking of a much richer set of economic tools that can solve society's problems in coming years. (Photo: Tayfun Coskun/Anadolu Agency via Getty Images)
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We really need to start thinking of a much richer set of economic tools that can solve society's problems in coming years. (Photo: Tayfun Coskun/Anadolu Agency via Getty Images)
The direct cost that Covid-19 inflicts on human health is obviously its most important effect on society. But this direct cost can be worsened by flawed economic and policy structures. And the indirect damage the disease causes through economic ripple effects could be large, so policymakers should do everything they can to minimize them.
Past decisions that have weakened our economic policy infrastructure will hamper our response to Covid-19; this is already baked in the cake. But there are some short-run ameliorative actions we take that might help, and, there are long-run policy changes that will aid our response to future epidemics.
In technical economic terms, Covid-19 combines potential supply shocks with sector-specific demand shocks. Basically, supply shocks hamper our ability to produce goods and services, and demand shocks are sharp cutbacks in spending from households, businesses or governments. I provide a list for policy makers of what could/should be considered to deal with some of these below.
The supply shocks come from disrupted global value chains, as, for example, Chinese production of inputs used by U.S. manufacturing and construction firms are not delivered on time because Chinese factories have temporarily closed. In countries where schools are shut down for long periods of time, a shock to labor supply can occur as working parents have to stay home to care for kids.
The potential sector-specific demand shock is to businesses where consumption is largely social--done with other people around. Think bars, restaurants, grocery stores, and malls. As people avoid social contact to minimize disease transmission, this leads to less activity in these sectors.
These effects mean it will be hard indeed for policymakers to spare the economy any pain from this.
There's very little that can be done about the supply-side shocks--particularly in the short-run. Demand-side shocks are generally easier to address with policy (in theory--policymakers still often fumble the ball in this regard), but the specific nature of the demand shocks associated with Covid-19 make them slightly harder to address. Simply giving households more money won't boost consumption much in the sectors likely to be affected--the pullback in consumption is not driven by income constraints, but due to concerns over catching the illness.
This means that while traditional stimulus can be useful in keeping this sector-specific demand shock from spilling over to the economy more widely, it likely will not be able to completely neutralize the effects of this sector-specific shock.
What are the types of things policymakers should be thinking about as they wrestle with the economic effects of Covid-19 and (hopefully) think about the next epidemic? In the long-run, the list is obvious.
But all of these options will take a long time to phase in and will likely miss the current Covid-19 epidemic. Is there anything in the short-run we could do to blunt the potential economic pain of Covid-19?
Perhaps notably absent from this list is anything about the Federal Reserve, even as the Fed's response--culminating in today's decision to cut interest rates by half a percent--occupied much of the economic commentary surrounding the response to Covid-19. The Federal Reserve is a hugely important economic institution, and their decisions matter a lot for many reasons--but they're largely a sideshow in the response to Covid-19. For one thing, their main instrument to boost demand (cutting interest rates) operates with a lag that is long enough to likely miss much of the epidemic's duration. Further, unlike fiscal policy responses, the Fed's tool really cannot be tailored or targeted in any way to alleviate particular distress. If a knock-on effect of the economic damage done by Covid-19 includes distress in the financial sector, then the Fed can usefully provide liquidity and other support to banks (in exchange for banks' forbearance in collecting debts from affected businesses). But, in the first round of response it seems like focusing on what the Fed will do is a bit of a distraction. Economic policy commentary has become far too Fed-centric over the past decade. We really need to start thinking of a much richer set of economic tools that can solve society's problems in coming years.
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The direct cost that Covid-19 inflicts on human health is obviously its most important effect on society. But this direct cost can be worsened by flawed economic and policy structures. And the indirect damage the disease causes through economic ripple effects could be large, so policymakers should do everything they can to minimize them.
Past decisions that have weakened our economic policy infrastructure will hamper our response to Covid-19; this is already baked in the cake. But there are some short-run ameliorative actions we take that might help, and, there are long-run policy changes that will aid our response to future epidemics.
In technical economic terms, Covid-19 combines potential supply shocks with sector-specific demand shocks. Basically, supply shocks hamper our ability to produce goods and services, and demand shocks are sharp cutbacks in spending from households, businesses or governments. I provide a list for policy makers of what could/should be considered to deal with some of these below.
The supply shocks come from disrupted global value chains, as, for example, Chinese production of inputs used by U.S. manufacturing and construction firms are not delivered on time because Chinese factories have temporarily closed. In countries where schools are shut down for long periods of time, a shock to labor supply can occur as working parents have to stay home to care for kids.
The potential sector-specific demand shock is to businesses where consumption is largely social--done with other people around. Think bars, restaurants, grocery stores, and malls. As people avoid social contact to minimize disease transmission, this leads to less activity in these sectors.
These effects mean it will be hard indeed for policymakers to spare the economy any pain from this.
There's very little that can be done about the supply-side shocks--particularly in the short-run. Demand-side shocks are generally easier to address with policy (in theory--policymakers still often fumble the ball in this regard), but the specific nature of the demand shocks associated with Covid-19 make them slightly harder to address. Simply giving households more money won't boost consumption much in the sectors likely to be affected--the pullback in consumption is not driven by income constraints, but due to concerns over catching the illness.
This means that while traditional stimulus can be useful in keeping this sector-specific demand shock from spilling over to the economy more widely, it likely will not be able to completely neutralize the effects of this sector-specific shock.
What are the types of things policymakers should be thinking about as they wrestle with the economic effects of Covid-19 and (hopefully) think about the next epidemic? In the long-run, the list is obvious.
But all of these options will take a long time to phase in and will likely miss the current Covid-19 epidemic. Is there anything in the short-run we could do to blunt the potential economic pain of Covid-19?
Perhaps notably absent from this list is anything about the Federal Reserve, even as the Fed's response--culminating in today's decision to cut interest rates by half a percent--occupied much of the economic commentary surrounding the response to Covid-19. The Federal Reserve is a hugely important economic institution, and their decisions matter a lot for many reasons--but they're largely a sideshow in the response to Covid-19. For one thing, their main instrument to boost demand (cutting interest rates) operates with a lag that is long enough to likely miss much of the epidemic's duration. Further, unlike fiscal policy responses, the Fed's tool really cannot be tailored or targeted in any way to alleviate particular distress. If a knock-on effect of the economic damage done by Covid-19 includes distress in the financial sector, then the Fed can usefully provide liquidity and other support to banks (in exchange for banks' forbearance in collecting debts from affected businesses). But, in the first round of response it seems like focusing on what the Fed will do is a bit of a distraction. Economic policy commentary has become far too Fed-centric over the past decade. We really need to start thinking of a much richer set of economic tools that can solve society's problems in coming years.
The direct cost that Covid-19 inflicts on human health is obviously its most important effect on society. But this direct cost can be worsened by flawed economic and policy structures. And the indirect damage the disease causes through economic ripple effects could be large, so policymakers should do everything they can to minimize them.
Past decisions that have weakened our economic policy infrastructure will hamper our response to Covid-19; this is already baked in the cake. But there are some short-run ameliorative actions we take that might help, and, there are long-run policy changes that will aid our response to future epidemics.
In technical economic terms, Covid-19 combines potential supply shocks with sector-specific demand shocks. Basically, supply shocks hamper our ability to produce goods and services, and demand shocks are sharp cutbacks in spending from households, businesses or governments. I provide a list for policy makers of what could/should be considered to deal with some of these below.
The supply shocks come from disrupted global value chains, as, for example, Chinese production of inputs used by U.S. manufacturing and construction firms are not delivered on time because Chinese factories have temporarily closed. In countries where schools are shut down for long periods of time, a shock to labor supply can occur as working parents have to stay home to care for kids.
The potential sector-specific demand shock is to businesses where consumption is largely social--done with other people around. Think bars, restaurants, grocery stores, and malls. As people avoid social contact to minimize disease transmission, this leads to less activity in these sectors.
These effects mean it will be hard indeed for policymakers to spare the economy any pain from this.
There's very little that can be done about the supply-side shocks--particularly in the short-run. Demand-side shocks are generally easier to address with policy (in theory--policymakers still often fumble the ball in this regard), but the specific nature of the demand shocks associated with Covid-19 make them slightly harder to address. Simply giving households more money won't boost consumption much in the sectors likely to be affected--the pullback in consumption is not driven by income constraints, but due to concerns over catching the illness.
This means that while traditional stimulus can be useful in keeping this sector-specific demand shock from spilling over to the economy more widely, it likely will not be able to completely neutralize the effects of this sector-specific shock.
What are the types of things policymakers should be thinking about as they wrestle with the economic effects of Covid-19 and (hopefully) think about the next epidemic? In the long-run, the list is obvious.
But all of these options will take a long time to phase in and will likely miss the current Covid-19 epidemic. Is there anything in the short-run we could do to blunt the potential economic pain of Covid-19?
Perhaps notably absent from this list is anything about the Federal Reserve, even as the Fed's response--culminating in today's decision to cut interest rates by half a percent--occupied much of the economic commentary surrounding the response to Covid-19. The Federal Reserve is a hugely important economic institution, and their decisions matter a lot for many reasons--but they're largely a sideshow in the response to Covid-19. For one thing, their main instrument to boost demand (cutting interest rates) operates with a lag that is long enough to likely miss much of the epidemic's duration. Further, unlike fiscal policy responses, the Fed's tool really cannot be tailored or targeted in any way to alleviate particular distress. If a knock-on effect of the economic damage done by Covid-19 includes distress in the financial sector, then the Fed can usefully provide liquidity and other support to banks (in exchange for banks' forbearance in collecting debts from affected businesses). But, in the first round of response it seems like focusing on what the Fed will do is a bit of a distraction. Economic policy commentary has become far too Fed-centric over the past decade. We really need to start thinking of a much richer set of economic tools that can solve society's problems in coming years.