The notion that a pandemic such as the one we are currently living in might cause long-run economic damage is not a new one. However, there is much speculation as to what will be impacted most after the dust settles from COVID-19. Since the depression, macroeconomist have understood that severe economic downturns might tip the economy into a "liquidity trap", in which interest fall to zero and monetary policy struggles to stimulate the market. Furthermore, there are also concerns that without any fiscal stimulus, the economy may be stuck in a slump. There is also a chance that all the uncertainty at the moment may lead to "hysteresis" in the job market and have a long term negative effect on the unemployment rate. Even when the demand recovers in the labour market, people will have been out of work for so long that their skills and motivation begin to fade away and jobs will become harder to find.
Problems such as these could scar the economy as the pandemic leaves us. Yet, there is something that seems to be concerning economist just as much. Research suggest that traumatic economic episodes can exert a drag on growth simply by altering people's beliefs about the future. For example, Ulrike Malmendier of the University of California, Berkeley, and Leslie Sheng Shen of the Federal Reserve have studied consumption patterns in the aftermath of downturns. They concluded that periods of economic hardship and spells of unemployment tend to depress people's consumption for some time, even after controlling income and all other variables. Not only that, but consumers also tend to purchase lower-quality or discounted items. Moreover, young people are especially effected, which can potentially prolong the economic struggles.
Lastly, in one recent study of 19 pandemics going back to the 14th century, concluded that outbreaks like this depress real rates of return for decades. The study found that rates decline, on average, for about 20 years, and do not return to the previous level for 40 years. This effect could be reflective of the human toll exacted by past pandemics, which shrank the workforce and reduced the return on new capital investment. But they study also reckoned that an increase in savings by wary households could have a depressing effect.
2 comments:
https://www.economist.com/finance-and-economics/2020/08/27/psychological-scars-of-downturns-could-depress-growth-for-decades
With rates already being low, it will be interesting to see if they continue to decline or remain low for the next 20 years. With the Fed targeting higher interest rates, it is likely assumed rates will stay low. However, with savings being high during the pandemic, there is a real possibility of rapid increases in consumer spending once the economy reopens and government restrictions are lifted. With how the economy has recovered to this point, my assumptions will be that this will be a much faster recovery than in past instances.
Post a Comment