Could the COVID-19 Crisis Permanently Affect the US Economy?

I think the types of events that we would like to avoid would be permanent shutdowns of businesses that would otherwise have been successful absent this pandemic coming along.

If you are an otherwise-successful business who is operating just fine, that does not mean that you would necessarily be able to survive a period of one month, or two months, or three months with no revenue at all. So if you shut down and you’re kind of not able to restart when this recession ends, then we have one less successful business there that’s able to continue operating when we come out of this recession.

Now that doesn’t mean that business then couldn’t be replaced by some other similar business when the economy recovers, but that process will be slower. It’s not going to be exactly the same. There can be lots of match-specific customer-firm interactions, firm-worker interactions. When those links are destroyed, you’re not going to get those things back.

Other longer-run, persistent consequences that we might want to avoid could be various things on the household side. So when large fractions of the workforce are sitting idle or unemployed and not earning income anymore, it’s going to be harder for those households to make their mortgage payments. It’s going to be harder for those households to pay rent.

If we don’t implement some sort of policies to try to limit the negative consequences of that, then it wouldn’t be surprising if months from now we start seeing waves of foreclosures and evictions. We know from the rise in defaults and foreclosures during the Great Recession that that had large, persistent consequences on the overall economy, and we ideally do not want to layer an additional Great Recession kind of effect on top of the already enlarged economic disruptions that we’re having.

Those are the types of persistent, permanent effects that policies should be trying to avoid to the extent possible. And it seems feasible to do that in a world where this goes on for one month, or two months, or three months. The longer this health shock lasts, the less transitory the actual shock is, and the harder it’s going to be to limit the permanent effects of this. 

Which I think is why the most important priorities should be direct spending on the health threat itself to try to reduce the actual length of the recession or the underlying shock that caused things. I think that’s a piece that has not been receiving enough priority in the stimulus policies that we’ve been enacting.