Coronavirus Economics: An Economic Disease
In December 2019, the medical community in Wuhan, China, found itself with a conundrum. A mysterious disease was making its way through town, which doctors could only describe as a form of “viral pneumonia.” By the end of the year, roughly 60 patients were inexplicably hospitalized with fever and respiratory problems that wouldn’t go away. Analysis of DNA samples extracted from patients’ lungs revealed the culprit to be a coronavirus — a kind of virus, originating from animals, that can cause illnesses ranging from the common cold and pneumonia to SARS. This particular coronavirus, with genetic similarities to the SARS and MERS coronaviruses, had never been seen before; its closest relative is a “bat SARS-like [coronavirus].” It was officially given the name SARS coronavirus 2 (SARS-CoV-2), and the mysterious disease is now known as coronavirus disease 2019 (COVID-19).
As cases of COVID-19 continued to rise, China’s leaders began to worry. President Xi Jinping had spent the last seven years becoming the most powerful Chinese leader since Mao Zedong, and now he was faced with his first major crisis. The government moved to action, assembling pre-fabricated hospitals at lightning speed and putting 60 million people in lockdown under “the largest quarantine in human history.” The 15-day Chinese New Year vacation, the country’s most important holiday, was extended as workers visiting their families canceled their trips home. Factories ground to a halt, disrupting supply chains around the world. And economists are predicting that for the first time, China’s miraculous economic growth, which has famously lifted 850 million people out of extreme poverty, will end.
Today, COVID-19 is a pandemic, meaning it has spread to all parts of the world. Yale University, where I am a graduate student, has moved its courses online and asked undergraduates to stay home after spring break. The NBA and the MLB have canceled their seasons. The CNN–Univision Democratic primary debate between Vice President Joe Biden and Senator Bernie Sanders was held without an audience. And now, businesses are shutting down or asking employees to work from home as the United States prepares for the surge in cases that plagued Italy just two weeks ago and pushed that country’s healthcare system to its limits.
The focus of this series of articles is not on the medical disease that SARS-CoV-2 has caused, but rather on the economic disease that is now afflicting all major economies. My goal is to educate the general public on how to read and make sense of economic news. I hope that, by walking through some of the current events surrounding the COVID-19 pandemic, you will feel a little more equipped to approach and decipher the impenetrable charts and jargon found in the business section of the newspaper. While I am writing primarily for an American audience, many of the general principles are applicable in other countries with market economies.
An Economic Disease
What exactly is “the economy,” and what does it mean for the economy to be sick? In prehistoric times, people spent most of their time and energy trying to survive. Individuals had to hunt or forage their own food, create their own clothes and shelter, and protect themselves from human, animal, and natural threats. Thankfully, most of us don’t have to do all of this anymore. As a graduate student, I spend most of my days doing research and teaching undergraduates. I don’t have to produce my own food because farmers take care of that for me. In turn, the farmers don’t have to build their own homes because they can rely on construction workers to do that for them. While our ancestors had to do everything on their own, our needs in the modern day are fulfilled by a system — known as the economy — in which each of us performs just one job, and we exchange the fruits of our labor for the things that we cannot produce on our own.
But as federal, state, and local authorities introduce increasingly stringent guidelines on social distancing and self-isolation, parts of this economic system are now beginning to unravel. Last Monday, for example, the governors of New York, New Jersey, and Connecticut announced that bars, gyms, and theaters will be required to close indefinitely. In normal times, these businesses are active participants in the economy: they provide goods and services that people enjoy, and in return their owners and employees are able to make a living. Now that they are closed, however, these businesses are no longer able to make money. Without their usual revenue stream, many businesses will not be able to pay their employees’ salaries. Some may also struggle to pay the rent for their offices and stores. In the worst case, businesses that stay closed for too long may have to lay off employees, move to a cheaper location, or close down altogether.
The effects of these closures extend far beyond those who work at bars, gyms, or theaters. When bartenders stop receiving their paychecks, they no longer have money to spend on luxuries like restaurant meals or new clothes. Restaurants and clothing stores then lose the money they would have earned from the bartenders if their bars were still open. But this means that restaurant owners and store owners are earning less money, and they in turn will spend less, causing even more businesses to lose money. The end result is a decline in economic activity: people everywhere are spending less and earning less, and some may lose their jobs. When this happens, journalists, economists, and policymakers often say that the economy is “slowing down” or “cooling down.”
The slowdown of the US economy is already having a huge impact on workers across the nation. So many Americans have lost their jobs over the last few days that state websites for unemployment benefits are crashing. Some have estimated that at least 3 to 5 million jobs will be lost by the end of the year; and on Tuesday, Treasury Secretary Steve Mnuchin warned Republican senators that the unemployment rate could reach 20% if the government failed to act, though he later clarified that he does not expect this to happen. While these predictions are still speculative (after all, it’s impossible to predict how the coronavirus will affect the economy), even the most optimistic of these scenarios is a far cry from the healthy unemployment rate of 3.5% measured in February, when only 5.8 million people were unemployed.
Economic Vital Signs
It is clear, then, that the economy is sick, because the measures we have taken to slow the spread of COVID-19 have caused us to reduce our economic activity. But the concept of “economic activity,” on its own, sounds rather abstract and hand-wavy. How do we measure economic activity, and how do we tell whether the economy is speeding up or slowing down?
Economists define the level of activity within an economy using a number called the gross domestic product (GDP). The GDP is the total monetary value of all goods and services produced by a country, state, or city within a particular time frame. The GDP of a country is calculated by adding together the following components.
- Consumption (C): The total amount of money spent by consumers on finished products.
- Investment (I): The total amount of money spent by businesses on things that they need to operate, such as rent, equipment, and employee salaries. (This does not include money spent by investors on purchasing stocks or other financial products.)
- Government Spending (G): The total amount of money spent by the government on public projects.
- Exports (X): The total amount of money spent by foreigners on the country’s goods and services.
By adding these four components together, we are essentially taking all the goods and services produced by the country and counting the total amount of money that customers have paid for them. There is one flaw in this calculation, however: some of the money included in C, I, and G was not spent on goods and services produced within the country, but rather on products imported from abroad. Since we don’t want to include foreign products when measuring the productiveness of a country, we subtract the imports (M) of the country from the four other components. This gives us the GDP formula shown below.
For example, in the year 2019, total consumption in the United States was $58.25 trillion, total investment was $14.98 trillion, government spending was $15.01 trillion, exports were $10.02 trillion, and imports were $12.54 trillion. This means that the GDP for that year was $58.25 trillion + $14.98 trillion + $15.01 trillion + $10.02 trillion − $12.54 trillion = $85.72 trillion. In other words, the United States produced $85.72 trillion worth of goods and services during the year 2019.
The Economic Circle of Life
In the United States, GDP is calculated every three months by the Bureau of Economic Analysis (BEA) using data collected by the Bureau of Labor Statistics. Each three-month period is known as a quarter, and there are four quarters in a year. The most recent GDP calculation of $21.73 trillion was for the fourth quarter of 2019 (Q4 2019), which lasted from October 1 to December 31. The overall health of the economy is measured by its GDP growth — the amount by which GDP increases from one quarter to the next or from one year to the next. When the GDP of an economy becomes bigger, we say that the economy has grown; when it becomes smaller, we say that that economy has shrunk or contracted.
This chart shows GDP growth in the United States from Q1 2007 to Q4 2019. The numbers in the chart represent real GDP, meaning that they are adjusted for inflation; and they are seasonally adjusted, meaning that they have been adjusted to account for the fact that certain products, such as airline tickets, tend to have different prices at different times of the year. From 2010 to 2016, GDP growth has fluctuated from roughly −1% to about 5%. Afterwards, it has stabilized to around 2%.
The lowest value for GDP growth on this chart, −8.9%, occurs in Q3 2008, from July 1 to September 30. This represents the low point of the Great Recession of 2008, shown by the shaded area. A recession is defined by the National Bureau of Economic Research (NBER) as “a significant decline in economic activity spread across the economy, lasting more than a few months.” Recessions are very difficult times for ordinary people to live through. During a recession, many businesses close down, millions of people may lose their jobs, and the standard of living within a country often declines substantially. Shortly after the Great Recession, for example, the unemployment rate in the US reached 10% in October 2009 before steadily declining to the 3.5% rate measured in February 2020.
Over time, economies tend to alternate between expansions, or periods of high GDP growth, and recessions. This alternating pattern is known as the business cycle. Recessions are often caused by economic crises — events that cause significant changes in the economy. The Great Recession was caused by the subprime mortgage crisis, in which houses suddenly lost their value after it was discovered that many people were unable to pay their mortgages. The COVID-19 pandemic may also be considered an economic crisis, and many economists have said that a global recession has already begun. While we won’t know exactly how much the COVID-19 crisis has affected GDP growth until well after the current quarter ends on March 31, some economists have predicted that the economy may stop growing or shrink over the coming months. For example, Jan Hatzius, the chief economist at the investment bank Goldman Sachs, predicts that GDP growth will be 0% for this quarter and −5% for the next quarter.
Conclusion
During normal times, we often don’t have to think too much about the intricate, interconnected social system — the economy — that makes our modern lifestyle possible. But these are not normal times. The COVID-19 pandemic is both a public health crisis and an economic crisis that has already impacted millions of workers in the United States and around the world. In a time of rapid change and uncertainty, when every passing day could bring about new restrictions on our daily lives, I hope that learning about the basic principles of how the pandemic affects us economically will help make the world just a little bit less confusing.
Coming Soon: In the next article of this series, we will talk about the stock market.