The past is some guide to this. The only global, widespread pandemic that has happened during times where we kept some economic data is the flu of 1918.2 The problem, of course, is that pandemic was hot off the heels of World War I, although it was precisely the end of that war and the returning soldiers that led to it being a global event. This made it hard to disentangle what was due to the war and what was due to the pandemic.
Economists Robert Barro, Jose Ursua, and Joanna Weng have looked at the impact of the 1918 influenza pandemic and have calculated that it likely resulted in the deaths of 2 percent of the world’s population over a two-year period.3 That put it in a class of disasters akin to the world wars and the Great Depression where there were greater than 10 percent declines in real per capita consumption in an adjacent year. Nonetheless, it is hard to separate the pandemic from the war.
To tease this out, the economists noted that World War I had different intensities of combat both on and away from a country’s own soil and that there were some differences in how the pandemic spread across countries. They concluded that, in the United States, the fatality rate of 0.5 percent likely led to a decrease in GDP of 1.5 percent (2 percent for consumption) but that there was a corresponding decline through 1921 that caused a 6 percent decrease in GDP (7 percent for consumption) in that year alone. In other words, these were declines similar to the Great Recession of 2008–2009.
Could we be facing a dark recession that is worse than this? It is hard to say. On the “bright” side, unlike 1918, most of those becoming seriously ill are not of working age. On the “dark” side, we have more complex and integrated supply chains where an outbreak in a particular workplace or region can cause widespread disruptions. Even completely ignoring the horrific loss in life and uncertainty, a dark recession is very significant and something we want to work very hard to prevent.
The Recession We “Want”
A dark recession could come later. At the beginning of the outbreak, we have policies being enacted that are generating an immediate recession. This is the recession we want so as to prevent the catastrophic outcomes we really don’t want. But that doesn’t mean it isn’t without costs. It is, as former Obama economic advisor Austan Goolsbee said, a “now problem” that we want to “prevent forever damage.”4
Small businesses are worried about both now and the future. The majority of countries are pursuing social distancing in response to the pandemic, which means that those businesses have found that, all of a sudden, their customers have disappeared and with them the payments they make. What hasn’t disappeared are lots of bills. If you are a restaurant owner, you can scale back purchases of food and you could also lay off employees. In both cases, there is the specter of supply chain disruption, which is what many economic policymakers immediately worried about. But what those businesses cannot do is easily stop paying rent, loan repayments, utilities, and other costs that do not vary much (or at all) with customer volume.
Here is what normally happens if a business loses its customers. They scale back expenses, and then, if it continues, they are unable to pay for those other items and so go out of business. This is part of the ebb and flow of the economy and a reason for businesses to work hard to keep their customers coming. On the other side, there is little tolerance for unpaid bills because those suppliers — say, a landlord or a bank — have their own businesses to manage. This is why we measure economic activity by the volume of payments that are made between people in a year (as we do for GDP and its relatives). We are richer when we pay each other more and are poorer otherwise.
This time it really is different. We know exactly why businesses have seen their customers disappear—the pandemic response of social distancing, whether enforced or otherwise, wants to ensure that people do not congregate even if that is the way economic activity takes place. Moreover, we know that, ideally, we want people to go straight back to their economic activity afterward. In other words, in a normal recession we don’t want to go back to business as usual because that likely caused the problem. In a pandemic, we do.
This may seem like a tough task, but we should take solace that we choose to have recessions all of the time and it just works out. This may seem like a surprising statement, but consider what happens on December 25 in many countries. On that day, economic activity declines at levels that would make the Great Depression seem like a picnic. Apart from some people who would really like Chinese food, this does not appear to have significant economic costs. You may want to work that day or you may want to buy something, but you will have difficulty finding others reciprocate in the transaction. Hence, payments stop and, with that, economic activity.
If we measured GDP changes daily rather than monthly or quarterly, this may show up in our economic mindset. The same is true of our “weekly recession” that occurs in we call “the weekend.” Once again, we appear to agree that no one is transacting as much on Saturdays or Sundays (or Fridays in some places), and even if you want to, you cannot engage in some forms of economic activity. It’s a regular recession and one that we appear to want just to give everyone a break.
This is the reason why pandemic-induced social distancing that causes a recession is a little like a national holiday. We have agreed not to engage in economic activity, so we should not be surprised when our usual measures of such activity show a decline.
Herein lies our potential mistake: treating this recession like a normal recession when it is not. People are not getting paid and resources are lying idle. But that is what makes a recession and not the normal state of affairs. If we layer on the concern that the usual way of measuring economic activity is sending us bad signals, which is what happens in a normal recession, then we have a problem.5
It shouldn’t be that way. Instead, we have to do what we do on weekends and holidays. We need to stop time.
The Pause
“Stopping time” is a lovely turn of phrase that I can attribute to Scott Ellison, who was quoted on the Marginal Revolution blog with this proposal:6
I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.
He notes that most do this every fall when we all agree that time will be paused one hour and pretend that we deserved more sleep. The problem, however, is that much of the economy needs to actually keep running—some more intensively than before—which means that just calling a time-out won’t do the trick.
The principle, though, is a useful one. Without something different, a business that finds itself in trouble will have to shut down. Shutdowns are costly precisely because it is hard to get started again. Our hypothetical restaurant owner would have to find a new place, secure new capital, and make new investments, all before hiring people and opening up. It is like hitting the eject button and removing the CD from the player. Instead (and you can anticipate a tortured metaphor here), what the restaurant owner wants to do is hit the pause button. They want their business to stay where it is but to stop playing.7