if you're worried about the economic
toll of the coronavirus crisis you're
not alone
it's scary there is no clear forecast
and each country's experience will be
different
here's what we do know a steady flow of
money goods
services and the people to make them
flow is essential to a healthy economy
and that flow is severed right now by
life-saving stay-at-home orders
recession is inevitable but what kind of
recession it will be
and what recovery might look like is
still unclear
to help imagine what could happen
authors from boston consulting group
point out that recessions and their
recoveries come in various
shock shapes these are determined by how
hard a crisis hits the supply side of an
economy that's an economy's inputs
capital like machinery factories
software labor or
workers plus productivity or how we use
labor and capital productively the
harder the supply side is hit the more
credit is interrupted
meaning less money is injected in the
form of loans to businesses and
individuals to fuel investment
and the more difficult it is for
productivity to recover
from best to worst we have v u and l
recession shock shapes the v
shape is a one-time dip if credit can
continue to flow
productivity and labor are less affected
you can see that growth dips but
recovers to its pre-crisis level and
rate
the u-shape is much more costly credit
flow is disrupted and growth drops
precipitously
never rebounding to its pre-crisis path
the rate of growth recovers
see how the slopes are the same but a
large gap between the old and new paths
represents one-off damage to the
economy's supply side
the l-shape is the worst credit is
severely disrupted not once but
perpetually and there is very little new
investment
this economy never recovers its prior
output path and the rate of growth also
declines
the crisis leaves permanent structural
damage to the economy's supply side
these examples represent crises that
started in the financial sector
disrupting credit flow and thus capital
growth we have some off-the-shelf
policies for dealing with these
however we are now in uncharted
territory with a double risk of a
financial system shock
and an epic freeze of the real economy
the households firms and government that
deliver
real physical goods and services
countries have no existing playbook for
dealing with this double shock
months of necessary social distancing
raises the risk of both types of
problems
which can feed off each other in
dangerous ways
for example a prolonged crisis can drive
up real economy bankruptcies of
everyday people and firms making it
harder for financial systems to manage
and a financial system crisis would
starve the real economy of credit
which could investment and
ultimately growth in this combined
crisis
capital does not grow pushing the
economy towards a u-shape
not good however we can head off a you
or
l-shaped recovery and lessen the
intensity of the crisis
how primarily innovation
on the medical side vaccines treatments
and capacity innovations are needed to
save lives and end the economic damage
caused by social distancing
on the economic side in addition to a
vigorous and efficient policy response
we will need policy innovations for
example in the u.s
the two trillion dollar stimulus bill is
just a start
we will need innovative ways to deliver
that money to those who need it
since never before have policy makers
had to help such large numbers of firms
and households
for example the so-called discount
windows that allow unlimited access to
funding for the financial sector
could be replicated for households and
firms in the real economy
so that they can stay afloat
zero interest bridge loans to households
and firms a moratorium on mortgage
payments for residential and commercial
borrowers
these are potential solutions that could
help make a real difference
the economic goal is to keep our shock
shape closer to a v
and further away from a u or an l speedy
well-executed medical and policy
innovations are our best hope
to save the most lives and avoid
permanent economic damage
you