Coronavirus turns economic theory into action

There is a scene in the movie “Independence Day” when President Whitmore and senior leaders take refuge in Area 51. They meet the wild-eyed Dr. Brackish Okun, who had spent years studying the alien’s technology.

Okun was enthused; the arrival of extraterrestrials turned the crashed spaceship “on.” Caught up in the excitement of the science, Okun exclaimed with glee that “the last 24 hours have been really exciting!”

The (fictional) president lost it. “People are dying out there. I don’t think ‘exciting’ is the word I’d choose to describe it!”

That is a rough analogy for the economic aspects of the COVID-19 outbreak. While real-world economists are a bit more empathetic than Dr. Okun, practitioners of the dismal science are intellectually engrossed in the situation.

The United States’ economy is almost certainly in a recession. However, the question of “why” presents the “exciting” answer.

Is it because a tower of exotic financial instruments, built atop a mountain of ill-advised and unsustainable debt, collapsed? No.

Is it because of irrational exuberance arising from the future promise of technology and the advent of the “end of history”? Nah.

Is it because the price of oil unexpectedly spiked due to the rise of Islamic radicalism in the Mideast? Nope.

Instead, we are in the midst of something never before seen. We have intentionally caused a recession by hitting the big, red, metaphoric “STOP” button on our economic machinery.

Signs are popping up in windows of businesses in the Bangor area that have had to close due to the coronavirus. This sign is hanging in the window of Happy Endings martini, tapas & dessert bar on Main Street downtown Bangor. Linda Coan O’Kresik | BDN

Over the past several weeks, “social distancing” has turned into “gathering restrictions,” and then onto “stay (healthy) at home” orders. Economies of all stripes are built upon the exchange of goods and services. In many cases, those exchanges occur in the physical world.

So when a microscopic virus threatens to spread far more rapidly than our physical health infrastructure can manage, we have to do something. This time around, we hit the emergency shutoff on the economy.

Like other equipment, shutting things down means production stops. Yet time doesn’t. And the latter is a resource we can never get back.

People are understandably worried. It is an unsettled time, and economic demands continue even while the economy itself doesn’t. Rents and mortgages still need to be paid; your place of residence still needs to be maintained, which requires material and labor, both of which cost money.

We all still need to pay excise taxes on and register our cars and trucks when the emergency is over, not to mention pay now for all the other costs of life; diapers, food, water, et cetera. Modern communications, whether phone or internet, keep us connected when distant, but aren’t free. It all adds up.

Businesses feel those same pressures. If they — restaurants, retailers, bed-and-breakfasts — cannot sell their goods and services, then they have no way to pay their costs that continue while the economy is closed.

Which makes people worry more, because those businesses are their employers. And if their employers don’t have jobs, then the end of the pandemic is far from the end of the problem.

That brings us back to our excited economists. Congress has enacted numerous programs to help people bear those costs while the economy is stopped. Expanded unemployment benefits, paid leave, paycheck protection loans; they are designed to meet basic needs and maintain some semblance of normal income during the “stay home” period.

But wait, there’s more. Congress also passed a “stimulus” program, giving many American homes north of $3,000; $1,200 each for an adult, $500 each per kid. Economists call this “helicopter money.” It is “extra” beyond existing programs and is intended to reinvigorate consumer demand when the situation returns to normal-ish.

We’ll see if it works. Economists theorize that, when the “all clear” sounds, people will spend this dividend. If they do, it will act as a pull cord on an old two-stroke, restarting the economy. Getting it back into gear will bring with it jobs, tax revenue, investment, and the like.

But if people are too spooked by the COVID-19 situation and instead squirrel the dividend away? Well, then the best guess is that everyone will have a bit more in their nest as we settle into a much longer recession.

Like the invaders in “Independence Day,” we will beat COVID-19. The only question remaining is how quickly will the economy bounce back. “Exciting” isn’t the right word for this situation, but we will get a real good look at economic theory in action.

Michael Cianchette

About Michael Cianchette

Michael Cianchette was the chief counsel to Gov. Paul LePage from 2012-2013 and deputy counsel from 2011-2012. A Navy reservist, he was deployed to Afghanistan from 2013-2014 as a trainer and adviser to the Afghan National Police. He is an alumnus of the Leadership Maine program and holds a BA in economics and political science from Boston College along with a JD and an MBA from Suffolk University. He works as in-house counsel and financial manager for a number of affiliated companies in southern Maine.