If you’re worried about the economic toll of the Covid-19 crisis, you’re not alone — it’s scary. There’s no clear forecast and each country’s experience will be different. But here’s what we do know:
The steady flow of goods, services, money, and people is essential to a healthy economy. To prevent the spread of Covid-19 there are live-saving stay at home orders that are severing the flow that is essential to the economy. Due to this, recession will be inevitable, but what the recession will look like and how we will bounce back is unclear.
To imagine what could happen, recessions and their recovery come in different shock shapes. These are determined by how hard the crisis hits the supply side of the economy. As the credit is being interupted, the more difficult it becomes to maintain productivity. From best to worst, we have three recession shapes: V, U, and L.
The V shape is a one time dip. If credit can continue to grow, productivity and labor are less effected. The growth of the economy dips, but it is able to recover to its pre-crisis level and rate. The U shape is much more costly. Credit flow is disrupted and the growth drops and never returns to its original level. The rate of growth is able to recover but there is a large gap between the pre-crisis growth trend and the actual growth. The L shape is the worst shock shapes. Credit is severely disrupted and there is very little investment. This economy never recovers to its pre-crisis path and the rate of growth also declines. The crisis leaves permanent structural damage to the supply side.
So the question is: What shape are we in?
We are in risk of a double-shock of the financial system and the real economy. The months of necessary social distancing raises the risk of both types of shock, which feed off of each other dangerously. For example, a prolonged crisis can drive up real economy bankruptcies, which make it harder for financial systems to manage. And a financial system crisis will starve the real economy of credit, which can cripple investments and growth. In this double crisis capitol does not grow, pushing the economy towards the U shape.
The U shape shock can sound ominous and menacing, but there is a way we can combat this crisis. Innovation. On the medical side, vaccines, treatments, and capacities innovations are required to save lives and lessen the economic damage caused by Covid-19 and social distancing. On the economical side, we need policy innovations. For example, in the U.S. the 2 trillion dollar stimulus bill is a good start, but we need innovative ways to deliver the money to those who need it because never before has there been such a great number of those in need.
The economic goal is to get the economic shock shape closer to a V and further away from a U or an L shape. Quick and well executed medical and economic innovations are our best bet in combating this Covid-19 crisis.
Opinions expressed by AsianBlurb contributors are their own.
Vincent Le is a pre-medical student at Georgia State University with an interest in surgery.
