Social distancing efforts have proven to be effective in slowing the spread of the coronavirus. As the White House Coronavirus Task Force, as well as multiple governors, have mentioned, isolating non-essential workers has made it more difficult for transmission to occur. But at the same time, shutting down non-essential businesses for even a short amount of time can block the flow of revenue into those businesses, hurting business owners and their employees alike. What we are currently seeing is a decline in economic output, and if this happens for two consecutive quarters, we will formally call it a recession.
Many economists say this will be the greatest recession since the Great Depression of the 1930’s, but the same economists point out that the effects will not be as long-term. Jerome Powell, the Chair of the Federal Reserve, mentioned earlier this month that the coronavirus recession does not stem from “anything being wrong with the economy,” yet rather a natural disaster that immediately shocked consumer spending. The question becomes: “How will the markets behave after social distancing measures are lifted?”
There are three possibilities. The first path, known as the “V” path, is that the economy will immediately rebound back to earlier spending measures. The second is that the economy will slowly make its way back in a “U” path, like we saw after the Great Recession of 2008. The final path is the “L” path, in which the economy ominously stays stagnant for several months. Economists are hoping for the “V” path, and many are even touting it as the most likely event. After all, as Mr. Powell said, there’s nothing wrong with the economy to hurt it in the long term. However, without government support and consumer spending, the markets can actually follow the U or L paths more closely.
Many Americans have a rosy picture of post-social distancing shopping. A bell will ring signaling the end of quarantine measures, and Americans will pack the local businesses with dollar bills in their hands. Unfortunately, many of those local businesses will not be there. Federal Reserve researchers have reported that anywhere from 200,000 to 1 million businesses could file for bankruptcy in the coming weeks due to a lack of current revenue. Not only does this reduce options for consumers, but it will inevitably put tens of millions more Americans out of work. Bankruptcy is undoubtedly the biggest threat in this recession, and the government must extend a lifeline to help these businesses keep employees until quarantines are lifted.
These lifelines can take many forms. Some include lowering the costs of operating a business in the present time. A reduction of the payroll tax, a delay of mortgage payments, and a temporary lifting of the business tax will make it more likely that costs do not exceed savings. Unfortunately, that will not be enough. According to a recent Goldman Sachs survey of small business owners, 83% believe the government should take grants, and 70% believe the government should introduce a new short-term loan program. Much like the nearly $50 billion lifeline provided for the airline industry in the recent stimulus bill, a grant and loan program to small businesses could help keep costs manageable in the short run.
Yet it is inevitable that furloughs and layoffs will continue for the weeks to come. Victims of the unemployment frenzy may fail to pay their mortgages or rent for multiple months, which could severely squeeze their spending even more. Government measures to help businesses and individuals will certainly mitigate these problems, but it will not be a perfect fix. In order to truly alleviate the impacts of coronavirus on the economy, we need citizen support.
When quarantine measures are lifted, it is up to Americans who have the means to spend to flood shopping malls, stores, and even online retailers to at least return to their past spending habits. This, in turn, will help businesses increase revenue, grow production, and take on the workers they laid off. Then, and only then, can we see the debt burden start to decline.
Of course, this is easier said than done. There will be no grand bell signaling a return, and there will likely be no national “re-opening day” as many imagine. Rather, governors will likely gradually broaden the definition of the “essential worker” and closely monitor infection rates. As soon as a certain threshold is met, then the remaining “unessential” workers will be allowed back to work.
It is up to us, the American consumers, to switch back to our normal consumption habits after the economy re-opens. If we allow ourselves to get accustomed to our current Spartan standards, the economy will not rebound in a “U” or “V” shape. It may take the “L” shape, instead. The government will do what it can to extend a lifeline to businesses over the next few months, but that will all go to waste if we do not re-enter the economy with a boost.
Article by Shariar Vaez-Ghaemi of Montgomery Blair High School
Graphic by Katherine Hua of Robert Frost Middle School