By Dr. Clardy, Economics Professor Ellen Clardy of Houston Baptist University
“May you live in interesting times” is a phrase from the 20th century that is often incorrectly attributed to an ancient Chinese expression. Surely, though, it does seem to ring true today, as we are facing the coronavirus, a pandemic that originated in Wuhan, China. Barely 10 years past the Great Recession, a calamity that required unprecedented fiscal and monetary policy interventions into the economy, we are now facing the Great Cessation.[i]
This downturn is unlike any other because the decrease in aggregate demand is not originating from a pessimistic swing in animal spirits; instead, it results from government mandates to shut down or vastly curtail large segments of the economy in the name of public health. Meanwhile, the negative productivity shock is due to many in the labor force being told that they cannot go to work. Because the underlying economy was strong before the Great Cessation, we may expect a quick recovery when we restart the economy. However, we must take steps to limit the damage.
For a system that can be successful in the long term, we need policies to promote social, environmental, and economic sustainability. Needs in one area, however, will inevitably clash with those in other areas. Protecting public health has caused us to sacrifice short term economic sustainability to serve the needs of social sustainability. Putting aside the debate on the wisdom of that decision, we must now focus on policies that promote long-term economic sustainability. In times of crisis, the Federal Reserve is intended to be the lender of last resort.[ii] Originally, the Fed’s primary tool was the ability to make loans to banks, but they innovated many other tools in response to the Great Recession. They are doing so again to respond to the coronavirus shut down and to restore the economic system.