The Economic Fallout from COVID-19: Sinan Aral

MIT leader offers a five-point plan of action to stave off a global meltdown

By Sinan Aral

On March 17 the White House’s top economist Robert Ludlow said the “fundamentals of the economy are strong.” This idea misses, in its entirety, the existential threat COVID-19 poses to the global economy. The fundamentals of last month’s economy are irrelevant because this pandemic threatens a once in a century meltdown. Why? Because it is an interdependent threat that is not limited to any one sector of the economy.

Without travel, not only does the airline industry grind to a halt, but all the hotels, car rentals, meals, sunscreen and beachballs that would have been bought vanish. With restaurants closed, the restaurants suffer, but the staff isn’t paid either and they don’t spend on food and toilet paper. With schools closed, teachers and facilities workers tighten their belts. The downturn cascades through a fundamentally interdependent economy. Susan Athey and Dean Karlan explain this interdependence (and what we can do about it in our daily lives) well here.

The innovation economy is also at risk because so many small and medium-sized businesses and startups have taken on record amounts of debt to support their expected growth. That debt is difficult to manage when revenues go to zero.

See story here

The hardest hit are middle- and lower-income households and households that live paycheck to paycheck. Spending by these households also drives the consumption economy. Without their spending, the retail businesses that depend on their revenue falter. The economic outcome we face is “high variance.” It could be ‘bad but manageable’ or it could be the once-in-a-century meltdown many fear. Make no mistake: the latter is a realistic possibility. The threat should not be understated. But, it’s not guaranteed.

The key factor that will determine the economic outcome is the evolution of the pandemic itself. If we do not control the pandemic, if it overwhelms the global health infrastructure, if travel, spending, revenue, investment and incomes stall, this will be a black swan event.

What we do in the next four to six weeks will determine where in the best and worst possible scenarios we land — let that sink in: What we do, from a public health standpoint, in the next four to six weeks will determine whether we experience a once in a century global meltdown.

Several things can be done:

  • First, a Federal commitment to fund and operationalize a massive comprehensive national public health intervention including the deployment of the Army Corps of Engineers to build temporary testing and triage facilities, loosening of FDA and CDC regulations to scale testing and treatment facilities, the purchase and deployment of respirators, respirator staff and intensive care facilities and imposition of federal requirements for physical distancing until the pandemic is under control.
  • Second, money needs to be infused into the economy and into the hands of middle and lower income households in particular. Several proposals by people like Mitt Romney and Ro Khanna are circulating and the legacy of Andrew Yang’s policy proposals are looming large. Infusing capital into the economy will help those families most affected, but will also help buoy the spending necessary to prop up the consumer economy and all the retail businesses that depend on it. Read more here.
  • Third, debt and tax relief must be considered in the case that we need to act on debt quickly, meaning student and mortgage loan forgiveness needs to be on the table an we need to be ready to pull the trigger on those options if we face the real threat of a wave of debt default.
  • Fourth, the federal government must deploy fiscal policy measures. Interest rate cuts have been exhausted. Money is as cheap as we can make it. Now, we must deploy tax relief and federal spending on the health infrastructure and economic support to critical industries like airlines.
  • Fifth, we must be prepared to work digitally. The physical distancing required during what will, in a globalized world, become more and more regular pandemics, we need an IT infrastructure and the skills to build effective teleworking, to support not replace co-located work.

The interdependent global economy is teetering on the brink… there’s no escaping the scale and scope of the worst case economic scenario. We must lean in with everything we have, first against the pandemic and then against the inevitable economic fallout it will create.

The health consequences are of course the first priority. But, the economic consequences are the next natural consequence and cannot be ignored.

The fundamentals of the economy are not strong. That economy no longer exists, not in the same way it did two weeks ago.

Stay strong and stay connected! And keep communicating! The online world will be an important respite for our solidarity and our mental resilience.

Originally published March 17 at https://www.linkedin.com.

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The IDE explores how people and businesses work, interact, and prosper in an era of profound digital transformation. We are leading the discussion on the digital economy.

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MIT IDE Paula Klein, Editor

MIT IDE Paula Klein, Editor

Addressing one of the most critical issues of our time: the impact of digital technology on businesses, the economy, and society.

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