As the COVID-19 pandemic continues to sweep the world, projections and realities of the virus’ economic impact look increasingly dim.
The Dow Jones industrial average fell 913 points on Friday, a drop of 4.55%, as U.S. markets concluded their worst week since 2008. A JPMorgan Chase research note predicted the economy would shrink by 14% between April and June, the worst contraction in post-World War II history.
Locally, businesses across town are locking their doors.
In California, the California Department of Public Health has called for the closure of all bars, nightclubs, pubs, wineries and breweries. Here in Santa Barbara, the City Council echoed the state order Tuesday afternoon, effectively closing all movie theaters, live performance venues, bowling alleys, arcades, gyms and fitness centers.
Economists fear that by the time the coronavirus pandemic subsides and economic activity resumes, entire industries could be crushed. With whole sectors shutting down to limit physical contact, the scale of the problem is unlike anything seen before.
“COVID-19 will hit everything,” said Peter Rupert, a professor of economics at UCSB. “We’ve never faced something like this. It’s not like the Great Recession in terms of banks holding a lot of bad debt. It’s not like an earthquake reducing the production of firms with structures being destroyed.
“We’re actively telling people they can’t go outside and spend. We don’t have insurance for something like this. We don’t have pandemic insurance. It’s really going to be tough over the next few months.”
Without previous experience to rely on, uncertainty, in the economy as well as health, has defined life in America and around the world over the past few weeks. The stock market continuing to spike and spiral from day to day is an indicator alone of just how little people know about the economic consequences of COVID-19.
While predictions have ranged from rolling recessions to a quick economic turnaround, Mr. Rupert argues the long-term impact will rely on one thing – how everyone reacts.
“It all depends on how governments, banks, and other people respond to this,” he said. “We want to make this a V-shaped hit rather than a U-shaped hit. We have fallen very hard with everything shutting down in a weeks’ time We need to ensure that when health gets back to normal, and health is our first priority, life turns back on and business runs as usual.”
To do so, Mr. Rupert believes each sector – including the government, banks, mortgage companies, landlords, businesses and individuals – needs to be a little more understanding.
“Everyone just has to be a lot more flexible,” he said. “This means helping firms to keep employees on payroll so that two or three months from now, we can actually open back up.”
The world’s productive capacity has not decreased, Mr. Rupert noted. When life resumes to normal, industries will therefore have the ability to generate what they had prior to closure. The only problem is ensuring the existence of a workforce to match.
“We all want to be able to live again,” said Mr. Rupert. “Businesses need to keep employees hired as much as possible. Letting workers go will only make starting up in three months take longer.”
Allowing employees to work from home or giving paid leave provides people with the chance to deal with the impact of COVID-19 without worrying about their jobs. Actions like that of UC President Janet Napolitano, who allowed up to 128 hours of paid administrative leave for all workers, are a much needed sigh of relief.
“We can think of this as a three-month stasis,” said Mr. Rupert. “Somewhere between Halloween and New Year’s, manufacturing firms aren’t doing too much. They all have their holiday merchandise out, and the economy goes into neutral mode for a few months.
“If we think of it like that, but to a larger extent, we’ll be ready to get going again when the time’s right.”
Though some businesses can suffer through a quarter if they have the necessary inventory and reserves, Mr. Rupert admitted others will not be able to persist without any assistance. For smaller firms that already exist on the margins, this kind of shutdown could leave them with no option other than bankruptcy.
This is especially true of businesses that don’t allow for remote work, like restaurants, bars, and boutiques. Left without any source of revenue, these businesses will not be able to pay rent, putting pressure on landlords. Yet this is where Mr. Rupert argues some flexibility is warranted.
“There will be bankruptcies for sure, but how many will come from the relationship between business and landlords,” he said. “Making firms pay for rent over three months without some kind of assistance or loan could be devastating.
“Instead, if the landlord says, ‘Look, I get it, we can work out some kind of deal like a longer lease and no eviction,’ that could work.”
Businesses, as well as those left without a job, may also need to take out loans to survive, Mr. Rupert said. But without the insurance of a stable income or employment, banks cannot be sure debts will be filled.
“Banks have always had a difficult time with unsecured loans,” said Mr. Rupert. “That’s when the government has to step in and say, ‘We got you covered.’ This means backing up defaulted loans and not letting people foreclose because they can’t pay their mortgages.”
As the lender of last resort, the Federal Reserve can lend to banks during a financial crisis. Existing as a backup source of liquidity, support from the Fed gives banks the confidence they need to provide unsecured loans.
Elsewhere, debt forgiveness already seems to be catching on. Last week, Italy suspended mortgage and other debt payments to offset the economic impact of the coronavirus.
While not yet mortgage suspended, the United States seems to be toying with a similar plan to step in and prop up those left financially stranded by the pandemic.
On Sunday evening, negotiations stalled in the Senate over a nearly $1.8 trillion rescue plan aimed at preventing the U.S. economy from further collapse. This includes sending direct payments to many Americans and devoting $350 billion towards helping small businesses avoid massive layoffs, as well as an additional $200 billion to help other sectors like hotels.
“I think our government has made it clear that they’re going to be there for us,” said Mr. Rupert. “The federal government has said they’ll give a trillion dollars’ worth of aid to businesses and families. That’s the kind of response we need. That’s how we’ll get through it.”
Still, Mr. Rupert has trouble with the idea of sending checks directly to residents at this time. The Trump administration has proposed giving at least $1,000 to each American adult to help tide people over until other government aid arrives.
While possibly a short-term solution to paying rent and buying groceries, Mr. Rupert thinks focus should instead fall on generating more understanding across the board.
“A pandemic is what we call an externality, where me being sick makes you sick and we all get sick – both physically and economically,” he said. “This is the rare time when the government needs to have explicitly flexible fiscal policy.”
In the case that an externality causes the market to operate inefficiently, government action is often necessary to help move the market back towards stability and efficiency, Mr. Rupert said.
To this effect, President Trump signed a relief package to aid people affected by the pandemic into law Wednesday evening after the Senate passed it by a wide margin. With the promise of free COVID-19 testing, paid emergency leave, bolstering of unemployment insurance, and expanded food assistance programs, the package hopes to expand the safety net required of any potentially catastrophic financial crisis.
These programs, along with the other stimulus package in the works, are just the policies that Mr. Rupert thinks can help the U.S. and global economies avoid long-term consequences.
“I definitely think we’re going in the right direction,” he said. “If we get a handle on the health part of the situation, this won’t be more than a blip in the long run. We’re all going to take a hit. But all of us need to pitch in.”