Keynesian Economics and COVID-19
Since the emergence of the COVID-19 pandemic, our country and world has experienced an immeasurable economic toll. Not only has this pandemic cost us nearly 250,000 lives, but it had also spiked our unemployment to 14.7% in Q2, leading to our GDP falling nearly 32%. In April, our government issued a stimulus package worth over $2.2 trillion (CARES Act), following John Maynard Keynes's theories to relieve the burden placed on workers, families, businesses, and others. This government intervention depicts the traditional ideas of Keynesian economics, where the government pumps money into the economy in times of need. It was clear at the time that our country needed remobilization, especially for those unemployed, but to what extent?
Effects of COVID-19 on Unemployment
Before the pandemic, our economy boomed with a 50 year low in unemployment, a meager inflation rate, and strong GDP growth. Since then, the pandemic has had adverse effects on our economy, especially our unemployment. “In the current recession, the unemployment rate increased from 3.5% in February 2020 to 4.4% in March 2020, peaking at 14.7% in April…” [1] Not only does this evidence portray the millions of people that lost jobs during this time, but it also foreshadowed our economic downfall in the future. These citizens who had lost their jobs had to become warier of their spending, which led to them spending less money. This decreased spending has been shown in our GDP, which “experienced two consecutive quarters of declines; it even recorded its steepest quarterly drop in economic output on record, a decrease of 9.1 percent in the second quarter of 2020…” [3]. This economic downfall can be attributed to two major aspects of our economy: supply and demand. Due to decreased work efficiency from COVID-19 infections, quarantine, and shutdowns, our supply of goods and services has been slowed down. At the same time, our consumers had been cutting down on discretionary spending, leading to less aggregate demand. This phenomenon is also known as paradox thrift, where less aggregate demand leads to less economic output. This forces companies to decrease costs by laying off workers, in turn leading to even less demand. This increase in unemployment has led to more than “65 million claims that have been filed, largely because of the coronavirus (COVID-19) pandemic.” [2] Within weeks our government was flooded with unemployment claims, forcing our policymakers to address both issues with our supply and our demand.
Government Intervention and the Implementation of Keynesian Economic Ideas
John Maynard Keynes, in the 1930s, had developed a plan in an attempt to quickly recover from a future market crash after experiencing the Great Depression. Keynes advocated for urgent government expenditures and decreased taxes to stimulate aggregate demand and increased spending. Keynesian economics focuses strictly on the short run when the citizens are suffering the most. His theories were implemented and proven to be effective during the Great Depression and the 2008 financial crisis. Similarly, our government now followed suit with their $2.2 trillion stimulus package signed earlier this year. The CARES Act, signed on March 25th of this year, was implemented to save individuals and businesses from going bankrupt and stimulate the economy in any way possible. This bill attempted to stimulate the economy by the expansion of Unemployment Insurance, funding to help small businesses, and recovery rebates for taxpayers. These systems put into place show a clear usage of Keynesian economic theories by giving massive amounts of short-term funding to our households, unemployment benefits, tax breaks, small businesses, etc., in hopes of increasing spending to rebuild the economy.
Since the implementation of this package, we have seen a promising decrease in unemployment, as shown from April to October, so shouldn’t that mean that our economy is back on track and we will be back to normal in no time? Not necessarily.
Why Keynesian Strategies May Not Work?
Although it may seem like our economy will rebound quickly because our citizens now have more buying power, therefore increasing aggregate demand, this is a simple misconception that many people make. In reality, there are TWO reasons for why our economy had crashed, which are SUPPLY and DEMAND. In fact, our supply has been an even larger issue for us than demand. This is proven in a study performed by Oxford University where they found that “…supply and demand shocks represent a reduction of around one-fifth of the US economy’s value-added, one-quarter of current employment… Supply shocks account for the majority of this reduction.”[4] This evidence proves that our supply problem has been the main reason why our economy has entered a recession. Unfortunately, Keynesian economic theories and the stimulus package implemented by our government focus purely on increasing spending and increasing aggregate demand, therefore doing nothing to address supply. Due to COVID infections, quarantine, and other effects of COVID, our working class has not only been in work less but has also had significantly lower levels of efficiency. In fact, “The United States actually saw a 7.2% decrease in productivity…” due to COVID restrictions. This decrease in productivity severely harmed our supply because now our companies cannot produce the supply needed to meet the demand that our government is attempting to increase. Keynesian economics and government intervention provide relief for one part of our major issue, but what can be done about the supply?
What should our government do?
Since COVID cases have begun to increase again, “new infections in the U.S. are now hitting new highs of more than 100,000 per day…” [5], which will further disrupt the supply chain and will have adverse effects on the economy. The supply problem that our country currently faces can only be solved by reducing COVID cases. This means that the government needs to control COVID cases. Additionally, “although U.S. GDP rose 7.4% in the third quarter of 2020, the economy is still more than 3% smaller than it was at the end of 2019”[5], meaning that the government must issue another stimulus package. Issuing another stimulus package would allow for more financial flexibility for our citizens and businesses. By decreasing COVID cases, we will sustain the supply chain because our workers will work in normal conditions, improving their productivity.
Conclusion
Even though our government's intervention is a major step forward in fixing the economic turmoil, it only fixes half of the issue. To fully recover, we need to solve both our demand-side and supply-side economic issues, and it starts with containing COVID.
Works Cited
Falk, Gene. “Unemployment Rates During the COVID-19 Pandemic: In Brief.” Congressional Research Service (CRS), Federation of American Scientists (FAS), 6 Nov. 2020, fas.org/sgp/crs/misc/R46554.pdf.
The Coronavirus Pandemic Continues to Cause Record Claims for Unemployment Insurance.” Peter G. Peterson Foundation, www.pgpf.org/blog/2020/10/the-coronavirus-pandemic-has-caused-a-massive-increase-in-claims-for-unemployment-insurance.
Bauer, Lauren, et al. “Ten Facts about COVID-19 and the U.S. Economy.” Brookings, Brookings, 18 Sept. 2020, www.brookings.edu/research/ten-facts-about-covid-19-and-the-u-s-economy/.
del Rio-Chanona, R Maria, et al. “Supply and Demand Shocks in the COVID-19 Pandemic: an Industry and Occupation Perspective.” Oxford Review of Economic Policy, Oxford University Press, 29 Aug. 2020, www.ncbi.nlm.nih.gov/pmc/articles/PMC7499761/.
Pozen, Robert. “Americans Need Another Stimulus Bill Now to Get through 9 More Months of the Coronavirus Pandemic.” MarketWatch, MarketWatch, 13 Nov. 2020, www.marketwatch.com/story/another-stimulus-bill-is-needed-now-to-get-americans-through-another-9-months-of-the-coronavirus-pandemic-2020-11-11.