With a new surge in coronavirus cases underway, I want to dive back into the economics of the pandemic. It’s driving home an underrated axiom in the discipline. The expectations we have of the future determine how comfortable we are spending money now. We saw a brief burst of unbridled optimism when states began re-opening, but new Gallup polls show that has given way to extreme pessimism in the wake of exploding case numbers. Expectations have, in fact, reached new lows. This will lead to a downward spiral in economic activity in contrast to the recently improving numbers. Explicitly promising continued consumer support is the only tool we have to keep the fear at bay. Meanwhile, Congress is quibbling over details for extending the benefits package due to expire at the end of July.
Unlike many concepts in economics, the impact of expectations is fairly intuitive. Just to briefly go over it, I’ll use an example. If you have a salaried job with a regular paycheck and you have some job security, you’ll be a lot more willing to get that new dishwasher, buy that new car, or take on a new mortgage than if you rely on sporadic bursts of cash from freelance work. By that same token, if people are worried about losing their jobs or unclear on the duration of their unemployment benefits or reliant on a stimulus check, they will pinch pennies so they won’t find themselves evicted or foreclosed on when it ends. You will want to save as much as possible until you feel like the bad days are behind you. Economists euphemistically call this ‘consumption smoothing’.
With that in mind, the new Gallup polls showing overwhelming pessimism look like the tip of the iceberg for our economic fate. In just a few short weeks, the proportion of people saying that the situation is getting worse went from 30% to 65%. Expectations are a leading indicator, which means that you see the impact before the actual activity happens. In other words, those rosy economic numbers you’ve been seeing are going to turn a much more ugly shade. You can see it in the headlines; corporate bankruptcies have been plastered across the headlines pretty consistently lately. United Airlines is going to be laying off 36,000 people.
The sad thing is that we don’t need to be in this situation. President Trump has been denying the seriousness of the situation and holding indoor rallies with thousands of people. He’s helped spread the virus more quickly with his misinformation campaigns and with his actions. Contrast that to the response of South Korea. They have not been in the news because their situation has not changed; the virus is still under control. The result is that they have avoided a recession. People are confident that the situation is under control and will remain under control, so they are spending money.
There’s no use in crying over spilt milk, though, and that’s not our situation (and there’s no turning Trump into a reasonable human being). We need to find a way to show people that they will be supported until this is all over. The virus will prevent them from doing some activities, but if people are confident that they will be supported by unemployment, they will spend money on other things. The types of purchases may change, but the only way we can ensure our economy will continue to run is to support consumers and explicitly say that we will do so. Congress needs to take action now. Increased unemployment benefits expire at the end of this month.