The Realities of the Coronavirus Economy

by Ray Keating

The Keating Files – March 25, 2020

Just in case any doubts lingered about government’s ability to destroy business and economic activity, while at the same time being completely incapable of ginning up the economy, the coronavirus should wipe them away.

Indeed, most slowdowns, recessions and depressions are about government doing something stupid, and then trying to fix the problem with the wrong responses.

What’s different with the government’s response to the spreading coronavirus is that elected officials chose to shut down large chunks of the economy. That is, rather than creating a recession by mistake, this time, it was done on purpose. And quite frankly, in terms of the severe health care risks, there’s not much else that government could do under the circumstances.

But that doesn’t mean that there have not been and will not be brutal costs involved with this government-ordered recession. Consider that Goldman Sachs has predicted that the U.S. economy will shrink by 24 percent in the second quarter of this year, after a decline of 6 percent in the first quarter. If this turns out to be the result, that’s never happened before. On the brighter side (really?), Goldman’s economists look for growth to bounce back to 12 percent in the third quarter and 10 percent in the fourth.

Responses to the current state of affairs vary widely. Let’s consider two groups. Voices from Group 1 proclaim that the government’s actions went too far, and the economy needs to be quickly “re-opened.” And Group 2 awaits the passage and signing into law of some kind of salvation via a massive federal government aid package (likely to happen today, or the next day or two). This package will tally up to more than $2 trillion. Basically, both are wrong.

The problem with Group 1 is that they downplay the harsh realities of the coronavirus, including the potential deaths of hundreds of thousands of Americans if this is not stomped down. The coronavirus must be made manageable, and then the restrictions on business and individuals can be lifted. 

As for Group 2 and a massive government aid package, a few points must be considered. First, in the short run, it makes sense for government to step up to help people thrown out of work, and businesses torpedoed and sank by government shutting down the economy on purpose. And we all hope that government somehow overcomes its inherent waste and inefficiencies to provide some much-needed assistance. But no one should be surprised by delays, foul ups and special-interests grabbing resources – that’s government.

Second, the current situation doesn’t mean we can wish away economic reality. Government aid dollars do not appear magically out of thin air. Instead, they are drained from the private sector. So, it must be noted that this massive aid package over the longer haul will serve to inflict additional damage on our economy. The best case scenario for this aid effort is that it manages to alleviate a chunk of the short-run severity, while we must recognize the added woes it will bring over the longer run.

There is no clear way to deal with the coronavirus in terms of its effects on jobs, businesses and the economy. We’re kind of feeling our way step by step each day, and for the most part, up until now, it’s hard to disagree with most of the actions taken. In the coming months, it will be about limiting the downside – again, even while recognizing that the damage promises to be deep and severe. 

As for the economy snapping back, there should be some of that late this year and into 2021. But the coronavirus itself and the coronavirus economy will not just go away with a flip of the switch. The effects promise to linger some, with a longer road to full recovery than perhaps many are expecting right now. And that recovery depends upon government doing the right thing and not making matters worse – always a dicey proposition.

The worst case scenario would be extending government interference in the economy due to the coronavirus emergency into the post-coronavirus period. Once we’ve reached that point where the virus is being managed properly, government needs to quickly step back and shrink, so that entrepreneurs, businesses, investors and workers are free to get back to innovating, working, investing, and growing businesses, the economy, income and jobs.

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Ray Keating is a columnist, an economist, a novelist (his latest novels are The Traitor: A Pastor Stephen Grant Novel, which is the 12^thbook in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction), a nonfiction author (among his recent works is Free Trade Rocks! 10 Points on International Trade Everyone Should Know), a podcaster, and an entrepreneur. The views expressed here are his own.