Why Wuhan Flu Economic Collapse May Be Transient
The COVID-19 pandemic will affect aggregate demand and aggregate supply in the US economy. How much will total demand change? To what extent do stimulus package...
The COVID-19 pandemic will affect aggregate demand and aggregate supply in the US economy. How much will total demand change? To what extent do stimulus packages (the Federal Reserve, temporary tax cuts, and increased government spending) help? The different areas of sports economics and consumer economics can give us some clues.
COVID-19 may disrupt the pattern and composition of individual needs and overall needs. Certain markets will be hit hard: restaurants, conferences and other travel-related businesses. The decrease in demand in these markets may not be completely offset by the increase in demand in other areas.
Although people spend less in one sector of the economy, they spend more in other sectors. In a short period of time, people will increase spending on toilet paper, hand sanitizers, long-term shelf life foods, bottled water, N95 masks, etc. But you cannot buy something that does not exist. No stimulus can completely offset the effects of the virus.
To see how the market will respond in the long run, it is helpful to make analogies from other economics knowledge. Here's what we can learn from the changes to new stadium-related buying methods that are usually funded by taxpayers.
It is generally believed that locally funded sports venues will increase local income and expenditure. Sports economists have studied this for decades. The conclusion is almost the same. Publicly funded sports venues often cost taxpayers more than the benefits to residents of surrounding communities.
Wuhan Flu is closing many public events. Worry is contrary to the claim that public stadiums are increasing spending. In this case, the story is that people will stay at home and expenses will decrease. However, this may not be the case. Let's move on to the public stadium to understand why.
The short answer is that there is no additional total expenditure. The net new expenditure is approximately zero. The keyword is net. People will spend more on stadiums built with taxpayer money. But they will also reduce spending on other entertainment.
For example, suppose you are considering buying season tickets for an NBA team, such as the Philadelphia 76ers. Prices start at $ 9,200. You might decide to stay in Hawaii for a few weeks instead. Think about consumers having a fixed entertainment budget. Spending more season tickets on opera means less spending on other entertainment.
The idea of a fixed budget for entertainment works in both directions. People don't spend money on professional baseball games, they usually spend money elsewhere. Maybe they will subscribe to some expensive streaming video channels. They will undoubtedly do more online shopping.
Demand for video conferencing and e-learning services has surged. Many universities are turning to online courses. The only question is whether increased spending in these areas can offset declines in other markets. Wuhan flu will undoubtedly lead to reduced spending. But this may not be as drastic as some have predicted.
This idea is the crux of the famous permanent consumption model of Nobel Laureate in Economics, Milton Friedman. Friedman's initial statement of the model was: "Permanent consumer spending is a function of permanent income."
What does he mean by "permanent income"? Think of it as the average monthly income over the past two years. (Actually, this is the income you expect to get within the plan in the coming years.)
Friedman said that people adjust for wealth to cope with short-term changes in income. At a time when income is above normal, households will increase wealth by saving, paying off debt, or both. If income is below normal, people will save wealth, increase debt or both, and reduce wealth at the same time.
In other words, when people face fluctuations in permanent income, they try to maintain an established lifestyle (permanent consumption). Even if Wuhan Flu makes you unemployed, you may be unemployed for months, not years. You will spend savings, increase debt, and try to maintain your current standard of living.
The main point in these two areas is that the decline in total spending may be smaller than expected. After all, people are frantically selling stocks. That cash must go somewhere. Part of it will be used to support the current lifestyle.
And demand will be largely delayed rather than eliminated. The economy may experience a brief downturn, but once the crisis is over, it will seek to spend heavily.
An example will illustrate these abstract models. Consider restaurant owner Chris. Business is down. Chris has been fired, so his income is now zero.
Chris will first spend some savings (fortune). In addition, Chris will borrow (debt). When Chris finds a new job, he will eventually pay off his debt and recover his savings. On the bright side, after the crisis, the business may flourish, so Chris can make more money.
This shows the important role of government. Suppose Chris has just been hired as his first job. He has no savings and no credit history, which means Chris is unlucky.
The appropriate action the government should take is to keep Chris alive. Direct financial aid, perhaps including some loans, is an appropriate remedy. That doesn't necessarily mean replacing Chris's entire income. However, in the event of a catastrophic event, the government should step in and help the most vulnerable.
This seems like a difficult task. really not. The IRS has all the data (except wealth and total debt) about Chris. They should be able to quickly screen the data, perhaps using a postal code as a rough measure of wealth. If the federal government is good at something, it's writing checks.
News References: https://thefederalist.com/2020/03/18/why-the-wuhan-flu-economic-crash-is-likely-to-be-short-lived/