We are living through very challenging and uncertain economic times, amidst the spread of the coronavirus. Millions of people have filed for unemployment benefits. Entire sectors of our economy such as travel, hospitality, entertainment, restaurants, and retail, are largely shut down. We are challenging the limits of our healthcare system. For those of us who are fortunate to remain working, most are doing so remotely, and many are also guiding our children through the challenges of online schooling. Within just a few months, our lives and lifestyles have drastically changed.
Amidst these challenges, I am reminded of why I became an economist. While some may call it the dismal science, I prefer to think of economics as a reality check. Economics teaches that we must make choices and that every choice has a cost, or more precisely an opportunity cost. This means that our choices involve trade-offs, often hard ones. It also means that there is no free lunch; in other words, there is a cost to every choice we make, be it money, time, lost opportunities, etc. And now we find ourselves facing particularly hard economic choices.
When do we go back to business as usual?
This is the question on everyone’s minds and a major source of public debate. We look at the data and data trends which show a growing number of coronavirus cases and deaths in the U.S. and elsewhere. We are told that the virus may (hopefully) peak by mid-April and that it will likely remain prevalent well beyond that. Our healthcare system is struggling to develop the capabilities to handle this healthcare crisis, including the ability to generate widespread, reliable and rapid testing. And amidst all of this, we are wondering what the economic fall out will be from this crisis. Will we fall into a major recession akin to the great recession of 2007-2009? Or perhaps something even worse?
I don’t pretend to have the right answer to the question of when we go back to business as usual or at least move strongly in that direction. Certainly, the primary concern in answering this question is mitigating the potential spread of this virus. Beyond that, the important thing to me as an economist is that as we debate this issue that we ask and attempt to answer the hard economic questions. What can we do to facilitate the ability of our healthcare system to effectively respond to this crisis? How best can we continue to stimulate consumer spending and business activity during this crisis? How can we financially support those individuals and industries that are hardest hit during this crisis? What is the effect on the economy and on unemployment levels if we continue social distancing measures beyond April?
Who will pay for all of this?
While we are heavily focused on when the coronavirus crisis will end, or at least subside, one thing that is often ignored is who will pay for the cost of dealing with this crisis. Our response to this crisis is necessary but costly. For example, the federal government recently passed a stimulus package that provides for a variety of subsidies including direct cash payments to taxpayers of $2,000 or more. That will certainly provide much-needed financial assistance to many Americans but the cost of the stimulus package is a staggering $2 trillion! To put this in perspective, our national debt is now about $23 trillion – which is roughly double what it was about 10 years ago, largely because we have been consistently generating about a $1 trillion/year federal government deficit. This means the federal government has typically spent $1 trillion more annually than it has received in tax revenues. So now we can add at least $2 trillion more to that for 2020. A scary thought but an economic reality nonetheless!
There are other costs as well. There are the direct healthcare costs which are estimated to be in the tens of billions of dollars – costs that are likely to substantially contribute to rising health insurance premiums. And the economic fallout from the coronavirus is likely to create an even greater financial strain on businesses, investors and federal, state and local governments. All of this will require making hard economic decisions in order to ensure that we are able to provide the necessary financial assistance to those who are hardest hit economically by the virus, but that we also have a plan to fund such assistance.
How will our economic priorities change as we move forward?
But there is good news in all of this. I have spent almost 30 years studying numerous industries within our economy and I am still amazed at how adaptive and flexible our business environment is. We have bounced back and adapted to a wide variety of economic crises in recent decades and there is every reason to believe that we will respond effectively to the current crisis.
So how will we adapt and change our economic priorities going forward? I believe this will have a major impact on the way that we do business going forward in a variety of ways.
Certainly, those sectors that are hardest hit by the coronavirus will go through major changes in the way they do business. There will no doubt be a decline and consolidation in certain industries including travel, hospitality, food, entertainment, and retail. These industries will need to adapt to the prospect of periodic shutdowns in their businesses in the face of potential future pandemics. Consumers are likely to pay higher prices going forward for meals, entertainment, and travel – prices to reflect the recognition of greater business risk in these industries.
At the same time, other business sectors will grow and thrive. The movement towards online alternatives will accelerate. This includes online retailing, online entertainment and online education – as well as the associated logistical mechanisms that deliver these alternatives. Industries that facilitate remote business activity, such as video conferencing, will thrive. The healthcare industry will no doubt need additional investment in order to be better prepared for future pandemics.
More generally, all businesses will need to adapt to the reality of potential future pandemics. Businesses will need to expand their capabilities to support their employees to work remotely. There will be a greater emphasis on maintaining financial liquidity and on limiting debt. And businesses will need to have contingency plans in place to deal with potential future pandemics.
While the coronavirus will no doubt take a substantial economic toll, we can find hope in our past experiences responding to a variety of economic crises and in our ability to adapt to and respond to the economic challenges ahead. At a more personal level, I hope and pray that the economic challenges brought about by this virus, and the social distancing that we are all experiencing, will lead us to turn to what matters most once this crisis ends, including especially spending time with our family, friends, neighbors, and co-workers.