How the Covid-19 recession could become a depression

Coronavirus is a global economic catastrophe.

 
 
 

It was common, in 2008, to hear economists say that nothing had changed in the real economy. The US still had just as many workers, factories, and machines. We hadn’t lost any land or knowledge. There was no physical reason the economy was in crisis. The collapse in credit markets had changed economic behavior — businesses were afraid to invest and hire, and families were afraid or unable to spend.

What we had was an “output gap” — the difference between what the economy could produce and what it was producing. The solution to an output gap, particularly one caused by collapsing economic demand, is simple: fill it with money. Invest in infrastructure projects. Give families cash. If corporations and consumers won’t spend, then the government should spend on their behalf, creating the economic demand necessary to push the economy back to normalcy.

The mistake the US made in 2008 was not spending enough. We underestimated the size of the output gap, and then passed a stimulus too small to fill it. When the Obama administration returned to Congress for more fiscal ammunition, Republicans refused, and the recovery limped rather than roared. This is recent history, and in ways both implicit and explicit, it’s shadowing the immediate response to this crisis.

More . . .

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *