In the past month, during which the coronavirus started washing up on our shores, the U.S. has changed in tremendous and abrupt ways. Unemployment offices have been besieged with new filings in recent weeks, and the economy is contracting after essentially being suspended in a deep freeze, with supply shortages in hospitals, grocery stores, and online marketplaces eerily reminiscent of wartime woes. Suffice to say, we’re in the thick of things.
We’re in the belly of the whale. We’re in the middle (though perhaps that’s an optimistic prediction) of the dark tunnel.
American life, presently, is weird and uprooted. When it comes to the question of life post-virus the hitch is that no one knows precisely how long this crisis period will last and how they, and the rest of their fellow citizens, will emerge when the dust settles.
Government has had to restrict its length of vision to immediate concerns and thus, will know no better than us how to cope with the “new normal” when it eventually arrives on our doorstep. The thing not often said is that government is far more reactive than proactive in times of crisis.
Currently, government officials are worried about what form the inevitable recovery will take. The “V-shaped” recovery is the preferable outcome—a sort of bounce-back comeback story in which the economy recoups its losses in a relatively short amount of time.
This, as I will explain, is probably too hopeful a scenario. When the coronavirus threat subsides, it will be much harder to stimulate demand again than many officials are banking on. This probable scenario has as much to do with human psychology as it does with the practical reality of our unlucky bundle of circumstances.
Consider, for instance, that when the coronavirus danger does start dissipating and we are finally able to see the light at the end of the tunnel that the upturn will not be as sharp as the downturn for the simple fact that the culprit—a virus–is a sticky threat. Meaning, it will require prolonged caution. The threat won’t completely evaporate by a certain date, allowing us to clean up the mess it wrought; instead, it will linger.
Thus, the frustrating policy of social distancing will likely linger too. The essential problem is that the nation can either focus its energies on restarting the economy or it can focus its energies on pursuing cautionary measures to mitigate disease aftershocks. Most likely, it will need to do both at once, but at the cost of economic potential.
Total energy will be diffused across two necessary goals that are fundamentally at odds with each other. That is to say, we are shackled by the particulars of disease and it is a-pinch-too-optimistic to assume that the recovery will be robust considering the lingering uncertainty that will inevitably afflict us for a while.
Naturally, the economic freeze that the coronavirus menace caused prompted government officials to get ready with “helicopter money”. An unprecedented plan of mass-distributed $1,200 checks, not to mention, an equally unprecedented $2 trillion stimulus bill materialized from the buzzing center of Washington in recent weeks. These sums of money—regardless of how colossal they are—will do nothing more than keep the system afloat temporarily. They won’t propel anything.
Now, officials likely know this given the unique circumstances but I nevertheless point it out because aggressive stimulus will probably be in the cards for the post-virus recovery road too, and it won’t work then either. Even if the threat subsides enough to give us a tempting brush of normal life again, people’s behavioral impulses will already be set.
Individuals are likely going to be suspicious and exercise caution with their money. Even if the government gives them a check, will they all go out and indulge in some good, old-fashioned American consumption? That’s a dubious outcome. People will be instinctually compelled to protect themselves and will show less interest in accessorizing themselves, per se. Given how much our economy has historically relied upon the engine of consumption, this further diminishes hopes for a robust recovery.
The problem is not so much the amount of cash (after all, the more that is injected, the more watered-down it will inevitably become). Instead, it is the uncertainty sloshing around the entire economic ecosystem that is the biggest nemesis of all.
And tragically, this uncertainty stands no chance of being ameliorated with the futile tossing-about of cash. The “new normal” won’t just be different circumstances—like somebody moving around the pieces in a game. Instead, it will involve an entire climatic shift in behavior and attitude of both companies and individuals.
After all, we have to consider the units that make up the economy—that being companies and individuals—and see the humanity in them. Consider the full weight of the following: millions of people may be on unemployment with no end-in-sight, courtesy of coronavirus lay-offs and their companies either folding in the interim or being reluctant to take on a full staff again.
A large percentage of these individuals will be people that have never been in this helpless position before—having to claim unemployment, suffering the loss of a job that they perhaps worked hard for, or that brought meaning to their lives. They are likely to feel vulnerable, ashamed, scared. Their conception of who they are—their very identities—have been kicked around and in some cases, ripped out from under their feet. That’s a very psychologically uncomfortable thing.
So, when we talk about “uncertainty” and the “new normal” we have to acknowledge that that doesn’t just refer to the hide-and-seek game we will likely have to play with the coronavirus for a while. Instead, it means the significant shifts in identity and socioeconomic status that both businesses and families might have to weather.
This is another reason why people will be reluctant to return to their old money habits and why the hope of stimulating demand will likely flounder. Knowing how such rocky shifts destabilize people—both practically and psychologically–in times of economic distress scrubs away the possibility that a clean-and-simple V-shaped recovery will be in order.
Keep in the mind that stimulus packages typically don’t end up being knights in shining armor for very long. Their effects fizzle out and while they can serve as a temporary shot in the arm, they ultimately fail to jumpstart sustained economic growth. People have good reason to be skeptical about them.
Consider that short-term stimulus smells of dependence—it’s a bit like a drug. Soon enough, the effect wears away and you’re back where you started. So what happens then? More is injected. And on some level, there exists a subconscious collective grasp of the idea that temporary stimulus takes from somewhere. A hidden equation exists that is seldom pointed at. It is this: temporary stimulus damages long-term prosperity.
Understand: stimulus is paid for by either creating new money (causing inflationary pressure), increasing the national debt, or raising taxes (by far the most “visible” route, and thus the most unpopular). The bottom line remains: stimulus packages aren’t a free lunch.
And people, I would submit, aren’t dumb when it comes to intuitively understanding that government aid given to them and American business isn’t “free”. It’s this hunch that makes people edgy and afraid to come back into the light and partake in a rowdy economic circus as if nothing happened and everything’s fine. It just doesn’t feel right.
That said, government will likely try their best to dislodge this pessimism. They will have their eyes trained on manufacturing demand sufficient to carry us into a noticeable recovery. They’ll try to keep things afloat. In an attempt to keep everyone in the game, they might parcel out some more money.
But nothing will kick into gear unless the correct sentiment exists to accompany it—unless people really believe in the good times around the corner. And belief is very tricky to manufacture, especially in the fear-to-optimism direction which is what the coronavirus predicament saddles us with.
It still may be too early to bandy about talk of the coronavirus economic recovery when we are likely still on the uphill trajectory in battling the disease on U.S. soil. But if one thing’s for sure, our country won’t be the same afterwards. Hopes of a V-shaped recovery assume that we will bounce back to the “normal” that we essentially had before the virus’ intrusion.
But the coronavirus has made too heavy an imprint on the national consciousness that the “new normal” will in fact be nothing like the “old normal”. We’re in for a paradigm shift. When the powers that be inevitably try to get the economy roaring again by prodding consumer demand they may be in for an unpleasant surprise, facing individuals and businesses too scarred to want—or be able to–party again.
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Good article, Ms. Reiff, and one of the first I’ve read that demonstrates an awareness that, while economic activities may decline precipitously, they invariably accelerate very gradually. between the last recession and this deliberately induced “cliff-dive,” we are quite likely to see folks begin to behave as did those that lived through the economic collapse of the 1930’s.
For those too young to have observed the behaviors and attitudes of the above-mentioned survivors, they were prototypically fiscally conservative in every detail. To today’s youth, I say; I sincerely hope you’ve enjoyed our shared insouciant fiscal profligacy, for you will be strongly advising your progeny to embrace personal financial conservatism, at the very least.
The idea consumers spending would make for a V recovery is a flawed premise in the first place. If the government gives you $2k, and you buy a TV made in China, that’s $2k (well technically probably $800) taken straight out of the American market (or Australian or whatever market), and put into the Chinese economy. And that’s before we talk about the longer-term drag debt plays on the economy.
If you want a V recovery, you get people to be productive. That $2 trillion dollars used for nation building projects would still be putting money into people’s pockets, but would both also be a less drag on welfare, plus given some productive output in return. And essentially, that’s what an economy is, productive output; the sum of everything we produce formulated into a currency value.
Thanks for a thoughtful essay.
Interesting. Though the author, like most economic forecasters, fails to fully acknowledge that all such forecasts are partly self-fulfilling, telling us more about the forecaster’s own personal attitudes and behaviour than about our own. The author cannot with certainty predict her own future behaviour, much less anyone else’s. That applies to all forecasters, even the most influential and relied-upon, PARTICULARLY the most influential and relied upon. Hence what might be called “Greenspan Syndrome” whereby the famous former Federal Reserve Bank chairman Alan Greesnspan became so influential that he could say very little without affecting the US and world economy. “The economy”, “The future”, and other such huge and remote-sounding entities are not things that happen to us. They ARE us and the accumulated results of our actions and inactions. And yes, governments can be more reactive than active, as can we all. “This probable scenario has as much to do… Read more »
Excellent piece and “realist” analysis of the situation. It does a great job to assess with rightful skepticism the ongoing expectations about the recovery. Covid-19 is not like a bump on the road. It is a thick swamp in which we fell into.