How long will it take the economy to recover?
Julie K. Smith (JKS): I am going to provide the economist’s answer: It depends. Consumption makes up almost 70% of real GDP (national output), so what happens to households who do all this consumption will affect what happens to the economy. If consumers believe they will be recalled to their jobs and that others will buy goods and services, then their spending will more likely be restored. Greg Mankiw, Harvard University macroeconomist, called the current recession we are having a “recession by design,” so if policymakers can mitigate the negative effects, then the economy is likely to recover sooner. The recovery will be greatly influenced by how well the country keeps infections under control. One fear is that resuming activity too soon will lead to spikes in infections and then having to “close” the economy again. The infection rate will determine if we could see a u-shaped or w-shaped recovery, but a v-shaped recovery seems very unlikely given testing capacity and contact tracing capacity.
What consumer behaviors should we expect as states/cities reopen?
Joaquin Gomez-Minambres (JGM): Consumers’ confidence and expectations are more based on emotions than on reason. We call this way of thinking “availability heuristic,” the tendency to assess the probability of an event based on the ease with which it can be imagined. For example, in the aftermath of an earthquake, insurance for earthquakes rises sharply; and it declines steadily only as the vivid memory recedes. Regardless of the actual outcome of the virus, the COVID-19 crisis is likely to linger in people’s minds for some time, negatively affecting their willingness to consume and slowing down the recovery.
What will help consumer confidence?
JGM: We need leaders, both in government and in business, who can stay calm, project confidence, and provide comfort. We need leaders who can show empathy while people are suffering. We need leaders who can tell us: “The only thing we have to fear is fear itself,” or “If you are going through hell, keep going.” We need leaders who can instill confidence about the future during a catastrophic present. We need LEADERS.
JKS: I agree. Having strong leaders who are willing to use the fiscal power of the United States would go a long way to restoring or at least stopping the declines in consumer confidence we have seen. Jerome Powell, chair of the Federal Reserve, has shown tremendous leadership and pushed the Fed to pursue swift action, but he does not get the same press as Congress and the president.