A man on an urban street wearing a surgical facemask

How COVID-19 impacts economies

In tandem with the human and health care costs of the worldwide spread of the COVID-19 disease, economies are impacted as consumers, workers and markets react to a public health threat.

Dean Baker, visiting professor of economics, and Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, recently wrote in the Washington Post about the potential for economic downturn stemming from the novel coronavirus outbreak, as well as financial incentives that the government might offer that could offset some of the downturn.

Peter Philips, professor of economics, studies the economics of labor and construction markets. We sat down with Baker and Philips to ask what makes this different than previous economic crises and how Utah might fare as it plays out.

Many people are familiar with the basic economic law of supply and demand. How does the spread of COVID-19 put pressure on both?

Dean Baker, visiting professor of economics.

Baker:

People missing work due to their own illness, caring for a sick family member or having to stay home with children out of school, could mean that a lot of businesses are short staffed. That would mean longer wait times for a wide range of services, including everything from haircuts to visits at doctors’ offices — which will already be hard hit.

On the demand side, we will be seeing a lot people canceling travel plans. This means not only a hit to the airlines, which we are already seeing, but also hotels and restaurants and other businesses that depend on tourism and business travelers. We may also see fewer people going to restaurants, sports events, movies and other public places. There will be a secondary effect as the workers who are laid off or have unpaid days of sick leave, have less money in their pockets and therefore spend less.

Philips:

Peter Philips, professor of economics

Until we have medical treatments for those infected and vaccines for those who are not, our major lines of defense against the coronavirus involve good hygiene and prudent limits on person-to-person interactions. The farther we go in the direction of limiting social contacts, the more we collectively interrupt the normal operations of both supply and demand.

On the supply side, while some folks can work at home, most cannot.  Usually we work in groups.  When the workplace becomes a source of infection, the supply of goods and services can be interrupted. Even something as simple as a potato chip starts in the potato field, goes to the food processing factory, gets packaged from packaging material made somewhere else, gets trucked to the store, shelved and sold.  Each step is a link on a chain.  And each link relies on the strength of all the other links to reliably go from farm to table.

If work in one of those places becomes a source of coronavirus contagion, then that weak link breaks the chain of supply.  Shortages then emerge and folks working at other links in the chain who are not being exposed to the virus nonetheless can be idled or even laid off for lack of adequate parts supplies.

What remedies to an economic downturn might not be as effective in this situation as they might have been in a different financial crisis?

Baker:

The 2008-09 crisis was overwhelmingly a demand side story. We did have to keep the financial system operating, but that was largely completed by early 2009. After that, the problem was simply getting enough spending in the economy. We know how to do that — the government just spends money — but we faced political obstacles to more aggressive stimulus which could have brought the economy back near full employment much more quickly.

In this case, demand side remedies will not keep people from getting sick and missing work, nor will they get people to risk exposing themselves to the coronavirus in planes, restaurants and other public places.

Philips:

Economists are like generals.  They are always getting ready for the last war and not ready for the war you have to fight today.  This is not a financial crisis.  It is a shortfall crisis—potentially involving supply shortages and a drop in demand tied to staying away from crowds.

Lowering interest rates will not repair broken supply chains or sweet-talk people onto cruise ships.  Cutting taxes won’t either.  So standard economic remedies will not get to the heart of the problem IF a crisis occurs.

However, just like the flu can lead to pneumonia, the economic effects of a shortfall crisis can spin out of control leaking into the financial sector.  When hunkering down to avoid infection leads to evaporating demand for goods and services, those economic players reliant on debt will have trouble servicing that debt.  If they default on their obligations, a chain reaction can occur with those they owe defaulting on their own debts.

This potential second round within a shortfall crisis is called a knock-on financial crisis.  Here the Federal Reserve can help by providing money that debtors can borrow to service their debts.  In short, standard economic policies can mitigate some of the debt-symptoms of a shortfall crisis but standard remedies cannot get at the root cause.

What can help is government subsidies to those who become ill and face major medical bills, subsidies for those who must stay home with children if schools close or stay home with an ill family member.  In short, if there is a shortfall in demand because folks are hunkering down, some government assistance could soften the knock-on effects of that hunkering down on economic activity.

What industries in Utah might be particularly vulnerable?

Baker:

Utah has a reasonably well-balanced economy, with a large amount of high tech and normal levels of manufacturing. These sectors will probably fare reasonably well through this period. However, Utah’s tourism industry is likely to be hit hard. There are millions of people who visit the national parks and other tourist sites in the state. I’m sure many trips have already been cancelled. This is especially bad news in the southern part of the state, where the economy depends almost entirely on tourism.

Philips:

According to the Utah Office of Tourism, in 2018 tourists spent almost $10 billion in Utah, supporting about 136,000 jobs resulting in about $1.25 billion in state and local taxes which amounts to almost $1,300 in tax revenues per Utah resident.

This piece of the Utah economy will be hit very hard if this virus turns out not to be seasonal and does not recede with warmer weather. If we are lucky and the coronavirus comes and goes on the shoulder season between winter and summer, then Utah tourism might rebound quickly.

The University of Utah, Utah State and BYU are the second, third and fourth largest employers in the state.  There are about 27,000 employees in elementary and secondary schools in Utah.  If the pandemic gets to the point that schools are closed, many of these workers may be furloughed.  There are about 650,000 elementary, middle and high school students in Utah.  If they stay at home, some parents will have to stay at home with them creating a ripple effect throughout the state’s economy.  Online teaching which has grown rapidly over the last few years in higher education may help offset any virus driven education interruption.  With this in mind, I am busily preparing three online classes for next academic year.

What signs, events or trends should we pay attention to as the crisis unfolds?

Baker:

The Unemployment Insurance Weekly Claims Report is an advance warning sign for large-scale layoffs. This is still very low, but that probably will not be the case for long. There are a number of measures of business plans. The most important are the ones put out by the Institute for Supply Management, but several of the regional Federal Reserve Banks have business surveys in their own districts. These will provide advance warning of businesses seeing fewer orders, having difficultly securing inputs, or laying off workers. We should also look for statements from the airlines or hotel chains on business prospects and worker layoffs.

Philips:

Watch the ATA trucking index, Salt Lake City International Airport Air Traffic Statistics, the US hotel occupancy rate, Employment Situation Summary, and the Calculated Risk blog which is an excellent summary of newly released data of all sorts.

What’s the importance of paid sick leave in this situation?

Baker:

We really don’t want workers who are sick to go to work and risk spreading the disease. With many people working pay check to pay check, they don’t have an option of staying home if they don’t have paid leave. Unfortunately, 30 percent of private sector workers don’t have leave. The numbers are considerably higher in low-paying industries like hotels and restaurants. These are also industries where workers will have direct contact with large numbers of people, and therefore a big risk of spreading the disease if they come to work sick.

We also don’t want to see people who are forced to stay home, either from their own illness or to care for others, to miss paychecks and therefore have less money to spend.

Philips:

Paid sick leave helps soften the economic and health damages of this pandemic.  If people can stay at home when they or someone in their family has symptoms consistent with this virus, that slows the virus’ spread.  Paid sick leave helps people make a better and more balanced decision regarding family health versus family finances.  One novel public policy addressing this novel virus could be providing tax relief to companies providing sick leave benefits and/or subsidies to families needing to stay home.

Finally: How have you changed your handwashing routine?

Baker:

My wife has been bothering me about this, but habits die hard. I do have some travel planned for next month to Seattle, if I make the trip, I will learn how to wash my hands.

Philips:

I am 72 years old and I have had pneumonia twice in my adult life.  So, every year I get a flu shot.  I wash my hands every time I leave home and every time I come back, every time before meals and every time I get off an airplane.

I have added a few new steps to this long-standing routine—every time I arrive at school and every time I leave; I wash my hands.  Every time I go to class and every time I leave, I wash my hands.  There are now fingernail brushes hanging over the kitchen and bathroom sinks in my home.

I now wave, bow or elbow bump my friends and colleagues and no longer shake hands.  In the summertime I am a volunteer ranger at a remote back-country cabin in the Grand Teton National Park.  I figure I will be safe there, but washing hands is my way of getting from here to there.