April 21, 2020
I sit here coviding day after day with my circa 1978 hair missing my seasonal part-time jobs. There are no games or concerts to work. I’ve cleaned as much as I can clean. I’ve attended numerous Grey’s Anatomy cast reunions at Walmart. I have plenty of thoughts and plenty of time to think them.
A friend and former teaching colleague suggested I share some thoughts about the economics of this pandemic. I’ll take the approach I used with my classes with just a brief thought or two on basic concepts.
With an abundance of caution in these unprecedented and uncertain times, here’s my take on Coronanomics.
Let’s start with needs, wants and choices. Remember the classic dilemma about being stranded on a desert/deserted/desolate island? Well, let’s substitute facing being sheltered in place.
When you went to the store or stores, what went first? What were you willing to buy/eat/use?
Where did chocolate fall?
While you are isolating you’ve probably discovered parts of your home and things in it you haven’t seen in a while. Did you use the alone time to sort, discard or create a donate pile? What did you decide was a need?
Next, supply, demand, price (curves and shifts). What was instantly in high demand? Toilet paper and hand sanitizer became economic superstars. Beyond their obvious uses, they suddenly became commodities to trade for other items.
On the plus side, there is a surplus of gas leading to much lower prices. Good for us, bad for the producers.
What about elasticity? Was price even a consideration? How much were you willing to pay for certain things?
In an instant, our markets were in disequilibrium. Demand far outpaced supply. This has created temporary shortages on the shelves, not necessarily in the supply chain. It’s out there, they just need to catch up. Thank you, Capitalism!
And factors other than price? The vast number of sellers was a blessing. If one place was out, maybe another still had it. A loss of income weighed on purchase decisions. Can it wait? Do I really need it?
Our expectations also come into play. How much money do I have left? Will I be laid off? Should I rethink this socialism thing? (Just kidding!) How long will this last? How many rolls of toilet paper is enough?
The market always recovers, eventually.
Technology has also impacted the supply and demand curves. We are able to work remotely. Kids can learn online at home (Ahhh, teachers’ revenge!). Stores are still selling and fulfilling our needs and wants online.
And speaking of selling, you’ve seen a shift in advertising to more good will, “we’re here to help” kinds of messages. Our inboxes are full of emails from every place we’ve ever shopped telling us about measures they are taking to keep our money flowing to them while keeping everyone safe.
Let’s consider every company’s best friend — brand loyalty. How often did you shop at stores you’ve never been to before? There are some who never expected to be one of the “People of Walmart” until they ran out of Charmin. Did you buy substitutes for your favorite brands? Were they as good as your favorites?
The more desperate we become, the more likely we are to compromise.
Our circular flow has become a slow drip. It now includes dominoes and snowballs. Where do you fit in? Did you lose a job and income? Are you buying less goods and services? Is a small business going to be able to survive? What about the restaurants we go to on a typical workday? What does a loss of tax revenue mean for your community? Some businesses are actually accelerating hiring, like Amazon and grocery stores.
We are seeing irrational markets. For a variety of reasons, we are in panic mode thinking we have to buy everything now. This is a rare and severe market disruption. Businesses are being forced to shut down “in an abundance of caution.”
There is now in place a host of market interventions, the most extreme of which is the shutdown by the government. Businesses have responded by rationing so we can all be Charmin clean. Stores have adjusted hours to be able to restock and to allow senior citizens to shop. The government also outlaws price gouging of essentials during an emergency. We’ve all heard about HandSan Guy in Tennessee. Normally the market would work itself out. If someone voluntarily wanted to buy hand sanitizer for $80, we would let them (and laugh). Adam Smith’s invisible hand would have eventually smacked both of them.
Don’t forget your ethics and to lend a helping (and clean) hand.
This is as good a spot as any to mention ethics or the “Is it okay to…?” Is it okay to buy up essential goods during a state of emergency in hopes of making a profit? The pure free market capitalist would say, “Of course it is.” As a society we have said, “No.” Is it okay for an employer to dump their employees out onto the street during a crisis? I think we know the answer.
The production possibilities model has been transformed. The private sector has shifted from normal production to making masks and ventilators to address shortages. Distilleries are now making hand sanitizer.
We are witnessing the business cycle in overdrive. Not long ago we were at full employment and our economy was in great shape. Within a few weeks, we now look at potentially massive unemployment and a looming recession.
As unemployment increases, we are again faced with choices. Do I pay this bill? If you don’t, how does that impact the circular flow? I might now be willing to consider a job I once considered beneath me.
Monetary policy considerations: Lower interest rates? Quantitative easing? How much and for how long? Will it be coordinated with fiscal policy?
Fiscal policy considerations: Is a stimulus plan appropriate? How much? Who should get help? Should businesses be bailed out (again)? Can we afford it? Can we afford not to?
We are seeing wartime-like public/private partnerships in an effort to produce goods and to save lives. Thank you, Capitalism!
And while we’re on the subject, this is a sneak peek at socialism. The empty shelves and long lines should have gotten our attention. Venezuelans experience this on a regular basis. The shortages we are seeing are temporary. Our shelves will be restocked in a matter of days if not hours. Our needs will be met along with many of our wants. Thank you, Capitalism!
As of this writing, the stock market (there’s more than one) is down approximately 30 percent from its all-time highs earlier this year. Saving and investing involve understanding risk, reward, and opportunity. You’ve probably learned a great deal about your personal risk tolerance over these past few weeks. I understand it but I have a financial advisor to handle it.
Don’t panic. The market is unforgiving to those who do.
I don’t know when and by how much but I do know certain things. Invest early and often. The market has had more ups than downs historically. Bull markets last longer than bear markets. The market always comes back. It did after the Great Depression. It did after 9/11. It did in spectacular fashion after the Great Recession. It will again, eventually. Buy low, sell high.
This wouldn’t be complete without a word about globalization and international trade. We have become globally interdependent and are now seeing the ugly side of it. We have known for decades about the substandard food safety and health practices and standards in China. We’ve gambled with risk/reward for a long time. Is it time for us to rethink our dependence on this market? Take a look around your house (you’re not going anywhere) and see how many items have “Made in China” on the label. Maybe we should practice social and economic distancing.
I’m optimistic. We will survive the virus. We will survive the Great Hoard of 2020.
Robert Jacobs is the author of My Thoughts, Exactly (independently published, 2019).