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The corona virus and our economy – Editor

DEADLY virus (70023venus2009, 24 Jan 2020, Flickr cc)

Much has been written recently about the implications of the advent of the corona virus for the operation of our economy. Some of this commentary is well informed, and some of it not. Two blogs during March 2020 by Australian economist Prof Bill Mitchell [1,2] are worth considering. The preamble to the first blog is as follows:

“ Economists like to think in terms of demand and supply. Often by assuming the independence of the two, they make huge errors, none the least being when in the 1930s they advocated wage cuts to cure the unemployment arising from the Great Depression, on the assumption that the cuts would reduce costs for firms and encourage them to hire more. But they failed to understand that economy-wide wage cuts would undermine aggregate spending, upon which production decisions and employment decisions depended. The coronavirus outbreak is one of those events that emphasises the interdependence between the demand and supply sides of the economy. It is a supply shock – in that it has reduced the growth in output supply as firms stop producing because their workforces are quarantined. And that shock then feeds into a demand impact as the laid off workers lose incomes and reduce their spending accordingly. However, there is also a separate demand shock associated with the crisis, quite apart from the supply impetus. The fear and uncertainty associated with a possible pandemic has meant that consumers are altering their spending patterns rather quickly with airline travel and other such activities falling sharply. So this is a very special type of calamity that doesn’t fit the usual types of shocks that economies endure. And as a consequence, it makes the task of designing an economic policy response rather more difficult. But make no mistake. Fiscal deficits will have to rise substantially for an extended period and governments will have to do things they have never really contemplated before if a deep recession is to be avoided. “

The second blog discusses what the health professionals are now saying, and outlines some specific issues that bear on the size and design of stimulatory fiscal intervention.

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