I think it's instructive to set aside money for a minute and think about things in real terms: if we shut things down, then which parts of the economy won't be functioning and what is the cost of that.
For example: suppose hospitality workers are paid to stay at home. How is that paid for? Well actually it's entiely paid for by people having fewer of the hospitality experiences that they are used to. It is obvious when you take money out of the equation that hospitality workers staying at home will not cause there to be any less of essentials such as food and shelter to go around.
There are other sectors like manufacturing where there is a real cost to be paid. But that could be as small as delaying the purchase of the manufactured goods by period of lockdown. No so bad.
Whem you look at it like this way, QE seems entirely justified. All it really does is spread the effects accross the economy to people who can bear them, and avoids financially ruining people which will be a primaey cause of long term economic damage once things reopen.
People say we're shutting down the economy for rhetorical effect. (Guilty as charged here.) In practice, a large majority of economic activity is either doable from home or considered essential, and 20% of economic output lost for 2 months does only add up to about 3% over the year.
While everything is shut down? Including the food distribution network? What good will money do in that scenario?
Shutting everything down isn't an option. The economy isn't some nice-to-have thing you can turn on and off on a whim. It's an essential part of providing the basic necessities that people need to live—which includes much more than just food.
I think it is pretty hard to compute the cost, because what's the counterfactual? Even if you don't force a shutdown people may still opt to isolate themselves and businesses may opt to close, and the degree to which they do so is probably dependent on the dynamics of the pandemic, so you're going to be pretty sensitive to modeling errors.
That's exactly why I'd like to see some kind of dependency web. I was going to mention additional things such as the utilities: power, gas, water, but food made the point well enough, and you've demonstrated the reach of one of its tentacles very well.
> The shutdown actually serves to keep these facilities open, because it has reduced the virus's spread through the population
Yes, in total agreement. I'm in favour of the shutdowns because I can see far enough ahead to know how much worse things would be if they didn't happen. Those who bemoan the damage to the economy strike me as either incredibly short-sighted or selfish or both. Admittedly, however, I'm coming from the lucky and mightily privileged position of not having lost my job (at this point), although I do have "that Damocles feeling" fairly constantly.
The point is, it costs something, as a recurring cost, to keep them up. In a shutdown, the only costs you can justify are the costs of shutting down. It is easy to project that the long-term costs of keeping almost anything running will exceed the cost of closing the doors. The author wants to treat the shutdown as though it is temporary, while the executive is required to treat it as though it is permanent.
And that's why government action to shut down businesses, should absolutely be coupled with action to protect workers salaries. In the UK, government is paying 80% of furloughed workers pay up to a certain amount, and there is relief on property taxes etc for businesses.
In my opinion the two (shutdown and relief) go hand in hand.
I must be very naive, but I also don't understand why general lockdown has to have negative consequences. Couldn't we stop most non essential activities for a few months, feed everyone in the meantime (thanks to the work of essential workers), and just start again exactly like it was before the shutdown?
I feel like you've lost the thread here. Real Life™ is the part of the economy that's being shut down; over a billion people are no longer allowed to go to a cafe or speak to friends or continue their day to day activities. The concern isn't that an extended shutdown will be bad for Goldman Sachs, but that it will make ongoing life intolerable and resuming normal life impossible.
You can't assume this problem is only supply side. This interruption is going to have long-lasting implications on demand because lots of expenses are still piling up without businesses and consumers receiving their regular income. If you want everything to magically go back to the pre-pandemic levels, you either need to waive all those expenses or give them money to pay them. Otherwise those consumers and businesses are going to be reducing spending for the next year plus as they pay off all their expenses that are building up during the shutdown.
Right. But, more than that, I'm talking about the fallout of shutting things down—of breaking the chain of production—and then the difficulty of starting things up again.
I was horrified when things got shut down. Even when I originally bought into "two weeks to slow the spread" and believed it was only going to be for two weeks, I was concerned that a global, advanced division-of-labor economy cannot be switched on and off like a lightbulb.
The shutdown isn't preferentially impacting those people though.
If we could wave a magic wand and eliminate that waste we obviously should (shutdown or no shutdown), but we can't. Or at least that magic wand probably costs more resources enforcing it than those people consume.
When GP says "minimum economy to maintain our standard of living would necessarily be all of it" I imagine they mean "the minimum portion of our economy that we can choose to restart to maintain our standard of living would necessarily be all of it" - because we don't have the knob to chose to restart only the good parts.
A fallacy that might be at work here is comparing the shutdowns that actually occurred with a counterfactual world where business activity remained essentially unchanged.
We'll never know for sure, but I doubt that's the correct comparison. Even without government-mandated shutdowns, many areas--especially major urban cores--would still have experienced massive shocks as people voluntarily shifted to working from home, stopped going out to eat, etc. In other words, much of what the government did through law would likely have happened anyway out of fear and individuals exercising their common sense.
Sure, it wouldn't have been exactly the same, but I think the counterfactual is much less rosy than you assume. And then there are the benefits of the shutdown which helped to direct the drop in activity towards less essential parts of the economy and increased predictability, to say nothing of the benefits of reduced viral transmission.
Every expense is income to someone else. If I stop paying my mortgage it means some pension fund doesn't have the income to pay their retirees.
There's no real way out of a months long shutdown. Our economic out put will be cut ~10% on an annual basis for every month. Thats real economic production gone forever. And theres no pause button on the economy. Stopping it means businesses fail and the relationships/organization that generates economic value will go away with them.
we could be sweeping something else under the rug: knock-on effects of the shutdown. people are somehow just starting to realize that there's worse impacts of shutting down the economy than lower share prices. people go hungry. people riot. cities burn. innocents get killed throughout the whole process. we're just getting started if the economy doesnt turn around quick.
For example: suppose hospitality workers are paid to stay at home. How is that paid for? Well actually it's entiely paid for by people having fewer of the hospitality experiences that they are used to. It is obvious when you take money out of the equation that hospitality workers staying at home will not cause there to be any less of essentials such as food and shelter to go around.
There are other sectors like manufacturing where there is a real cost to be paid. But that could be as small as delaying the purchase of the manufactured goods by period of lockdown. No so bad.
Whem you look at it like this way, QE seems entirely justified. All it really does is spread the effects accross the economy to people who can bear them, and avoids financially ruining people which will be a primaey cause of long term economic damage once things reopen.
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