Donovan Roy, Tyler Sperino and Kathryn Stover
Introduction
The Covid-19 pandemic has affected economies around the world. Governments in many countries made the decision to shut down their economies to try and contain the lethal and infectious virus. Drastic measures have been adopted such as social distancing and wearing up to two masks for protection. Shutting down schools, businesses, churches, and other public places has made a difference in “flattening the curve” (Brodeur et. al., 2020) in which physicians and politicians have tried to slow the number of people infected with the virus at once. The coronavirus pandemic prompted the US federal government to enact legislation that would stimulate the economy and offer much-needed relief to the public. A comprehensive response to COVID-19 would have been ideal as it wreaked havoc on the population and the economy, but relief ended up coming in stages as Congress faced a growing death toll and unemployment rate amongst differing opinions on how it should be handled. The loss of economic progress and expansion across the globe caused by this pandemic have created issues that have not been encountered since the housing market crash of 2008. It is worth comparing and contrasting the 2008 financial crisis to the Covid-19 financial crisis in order to see which crisis was harsher on the U.S. economy. The Great Recession is a worthy crisis to compare because its effects lasted for more than one year on the U.S. economy, which is what is to be expected with the Covid-19 crisis. The pandemic has affected the policies that surround economic activity across the globe such as import and export action, supply and demand issues, the support of consumer business, and new fiscal policies to help promote the support of the capitalist economic structure. The pandemic has the potential to progress into something that could threaten the world economy. This in turn would threaten trade relations throughout the world. This pandemic has changed the everyday outlook on life as well as the world economy and how it functions as a whole.
4.1. Comparing the 2008 Financial Crisis to the Covid-19 Pandemic
It is without a doubt that the Covid-19 virus has resulted in many negative effects on the economies of the world. One needs to look at different industries and indicators in the economy such as the entertainment industry, unemployment, the stock market, and energy prices to be able to see all the damage that Covid-19 has caused. Because the virus has only been around for a year and a month, most of the content in this section of the paper will be about the short-term effects of Covid-19, not the long-term effects. This is simply because it is far too early to be able to identify any long term effects on the economy from the virus.
4.1.1 Unemployment
One of the largest indicators of a suffering economy that occurred in both the 2008 financial crisis and the 2020 crisis is unemployment. One measurement that can show signs of a recession taking place is when unemployment rates increase at a rapid pace (Bureau of Labor Statistics). When more people are out of work, the economy is not going to be producing and consuming at standard levels. The unemployment rate is quite easy to calculate, all one has to do is take the number of unemployed people in the economy, and divide that number by the number of people in the labor force (Bureau of Labor Statistics). Of course, it is not that simple because different factors suggest whether or not someone is unemployed. Part-time workers and discouraged workers, or people who are no longer actively looking for work, are not part of the official unemployment rate. These workers are part of the U6 unemployment rate. The U6 unemployment rate refers to the unemployment rate but adds discouraged and part-time workers to the top portion of the equation, so that people can know what the “real unemployment rate” is, and see how underemployed the nation is (Dufour and Orhangazi, 155). Excluding discouraged workers and part-time workers to the unemployment rate is a way for the government to make the economy look better than it is truly doing. To understand more about these two crises, looking at the unemployment rate will help one to recognize which crisis was worse on the economy, and which one had longer-lasting effects.
To start, the unemployment rate of the 2008 financial crisis was the second-worst unemployment rate that the U.S. economy has seen, excluding the 2020 unemployment rate. The U.S. economy had not seen an unemployment rate that high since December of 1982 when it peaked at 10.8% (Bureau of Labor Statistics). With the unemployment rate reaching 10% in October of 2009 and 17% for the U6 unemployment rate, it was clear that the crisis had not just affected housing prices and the subprime mortgage market (Dufour and Orhangazi, 153). To put these numbers in perspective, the unemployment rate was at 5% in December of 2007 (Bureau of Labor Statistics), half of what the rate was at the peak of the unemployment spike. The effects of the crisis lasted a while as U6 unemployment was above 14% until 2013, around four years after the end of the crisis (Dufour and Orhangazi, 155). This is proof that even four years after the crisis, many people were still discouraged from finding work or underemployed. This dramatic increase in the unemployment rate was so damaging to the economy because of the jobs that were gained and lost. During the 2008 crisis, most of the jobs that were lost were middle-wage jobs (Dufour and Orhangazi, 156). 60% of jobs that were lost were mid-wage jobs, only being able to create 22% of mid-wage jobs after the recession; 58% of jobs that were created after the recession were low-wage jobs, while only losing 21% of the low-wage jobs during the recession (Dufour and Orhangazi, 156). Losing this many mid-wage jobs and replacing them with low-wage jobs is not great for a recovering economy. This was also an awful time to own a business, as people were saving their money, not spending it. “The private sector experienced a total of 235,000 establishment deaths and 172,000 establishment births (a low for this data series, which began in 1992)—resulting in a net decrease of 63,000 establishments (the biggest decrease since the data series began)” (Bureau of Labor Statistics). This quote shows just how harmful the recession was to business owners, as many had to shut down for good. The people who thought that the recession would only affect the housing market could not have been any further from the truth.
Although the unemployment rate increased to levels the U.S. economy rarely experiences during the 2008 financial crisis, they sky-rocketed and reached the highest levels the U.S. economy had ever experienced from the Covid-19 crisis. In April of 2020, the unemployment rate reached an all-time high of 14.8%, see figure one below (FRED unemployment rate, 2021).
Figure One
A study conducted amid the Covid-19 pandemic asked thousands of households if they “held a paid job” in which if the people responded yes, they would be marked down as employed; this is a different standard from what the Bureau of Labor Statistics counts as being employed (Coibion, Gorodnichenko, and Weber 2020). After asking these questions, they got around 18,000 responses and found these results: “the employment ratio fell from 60% of the population down to 52.2%, a nearly 8% point decline”; this decline in the employment ratio that only took four months to form was larger than the entire employment ratio drop for the 2008 financial crisis (Coibion, Gorodnichenko, and Weber 2020). While the authors and their new equation predicted a total of 20 million jobs lost in April, they were not too far off as the real number was 23.1 million jobs lost (Bureau of Labor Statistics). The shutdown that was implemented across the U.S. resulted in many businesses having to close their doors for good.
4.1.2 Music and Movie Theatre Industry
One of the most notable sectors of the economy that experienced severe economic loss in 2020 was the entertainment industry. Movie theatres, concerts, and music venues all encountered major revenue losses because of the implications of going to one of these places. Social distancing, stay-at-home orders, and travel restrictions made it impossible for places of entertainment to make any revenue. As one can see in Figure 2 below, before Covid-19, employment in the entertainment industry was at an all-time high in February with about 2.5 million jobs (FRED entertainment employment, 2021). Compared to the Great Recession in 2008, it seems like only 100,000 jobs were affected by the crisis, nowhere near the amount affected by the pandemic (FRED entertainment employment, 2020). As soon as the pandemic came around in March and April, employment in the entertainment industry decreased by more than 50%, and there were only about 1.17 million with jobs still. Many of the jobs lost during this period were part of the music and movie industries. Since April 2020, jobs have sharply increased, but it is unclear if the economy will ever see the levels it experienced before the pandemic (Messick, 2020).
Figure 2
The movie theatre industry was hit extremely hard because of the pandemic. With government policies in place that kept people home, theatres were not able to stay open; they were not considered to be an “essential business” therefore, they had to close. Because of the deadly virus, 41,172 theatres and drive-ins closed in the year 2020 at some point in time (National Association of Theatre Owners, 2021). Dates on when each theatre closed depended on what state they were located in. In April 2020, Box Office recorded $0 in revenue on their books because not a single theatre was open that Box Office received revenue from due to Covid-19 (Box Office, 2021). In the first quarter of 2020, Box Office recorded one of the worst quarters in terms of revenue ever, they only received about $1.71 billion in revenue, a -51% decline from 2019 (Nhamo et. al., 2020). Because of the closings of tens of thousands of theaters in March 2020, Box Office recorded $253.64 million in revenue, a -73% decline compared to March 2019 (Box Office, 2021).
Movie production and theatre employees were also affected deeply by the closings. Employees were either furloughed for a certain time, or they were laid off because the entertainment industry was just not making enough revenue (Nhamo et. al., 2020). As proof of this, Cinemark furloughed 50% of their staff, laid off 17,500 hourly workers, and slashed the salaries of the remaining 50% of staff, AMC Theatres furloughed “600 corporate employees, including the CEO and furloughed 26,000 employees that worked at theatres around the country (Nhamo et. al., 2020). Along with furloughing and laying off employees, most companies were not looking for new employees, which had a ripple effect on the entire industry; the data has not been quantified yet, but the long-term effects are surely present (Nhamo et. al., 2020). This is evidence that the movie industry will be hurting for quite a while into the future. Box Office reported only receiving $2.06 billion in revenue in all of 2020, a -82% decrease from 2019. The short-term effects of the pandemic are damaging to the economy, so it is imperative that theatres and productions open as soon as they can.
Although the movie theatre industry saw massive losses, it was not the only part of the entertainment sector that experienced revenue and income losses. The music industry is another industry within entertainment that faced extreme losses. The business model of music is quite interesting when observed. Overall, global music has two major streams of revenue. The first is live music, making up just over 50% of revenues from ticket sales to live performances and everything in between (Hall, 2020). The second stream of revenue comes from recorded music; this includes streaming, physical downloads, physical sales such as CDs, licensing of music games and television shows, and advertising (Hall, 2020). Recorded music has seen growth in revenue every year since 2016 (Hall, 2020), so because the pandemic shut down all performances and venues, 2020 was the year for streaming music.
“Between January 24 and May 6, 2020, 301 live performances were canceled, postponed or adversely disturbed” because of the pandemic (Nhamo et. al., 2020). This is because just like the theatre industry, concerts and shows thrive on close interaction between very large crowds. When stay-at-home orders and social distancing are put in place, musicians and bands are deprived of significant amounts of revenue, especially when some perform five nights a week just to afford basic necessities. Music venues have not been able to open fully until very recently in 2021. This resulted in an estimated $9 billion loss in ticket sales alone, forcing some smaller venues to close their doors for good (Messick, 2020).
Covid-19 damaged six-core occupations tied directly to live music events: arena, venue, and stadium staff, trucking and shipping companies that ship the equipment, travel and lodging companies that are closely tied with music events, production vendors that supply all of the equipment that makes the events possible, people who perform on stages such as artists and speakers, and finally, firms that design the performances themselves (Messick, 2020). Altogether, the music industry supports roughly 2.4 million jobs in the United States alone, which in 2018, was a 170 billion dollar industry in total economic contribution to GDP (RIAA, 2020). If canceled shows and performances were not enough, albums and songs had to be delayed too because bands would not be able to promote them on tour (Messick, 2020). This resulted in bands, venues, musicians, and more in having to set up GoFundMe pages so that they could afford their bills (Messick, 2020).
4.1.3 Energy Prices
Energy prices were most certainly affected by Covid-19 in the year 2020. After governments started enforcing shutdowns and stay-at-home orders, some energy commodities saw major decreases in consumption. This is because travel was only deemed necessary in very particular cases for months. For example, if someone needed to purchase groceries, they were able to do that, but it would be frowned upon during a stay-at-home order for someone to take a Sunday drive. It was rumored that a police officer would be able to ticket someone for not having a good enough reason to drive, but this rumor is incorrect (Campbell, 2020).
There are four main energy commodities that most economies use; these include oil, coal, natural gas, and electricity (Hauser et. al., 2020). Energy prices will be observed in the short run, as the studies that I draw upon analyzing prices ten weeks before and ten weeks after the appointed dates (dates that mark the start of each crisis) for each crisis. For the 2008 financial crisis, the appointed date used is September 15th, 2008. This date is used because that is the day that Lehman Brothers went bankrupt (Hauser et. al., 2020). For the Covid-19 crisis, March 23rd is used because that is the day when Germany closed schools and daycare centers, along with banning public meetings.
Oil was by far the most affected energy commodity in the world during the pandemic. For the analysis of oil, two types of oil are observed, West Texas Intermediate (WTI) and Brent Crude oil to see if any price changes existed. In 2020, even before the virus, there were price wars taking place between Saudi Arabia and Russia which decreased the price of oil. “From 63 USD/bbl (WTI) and 72 USD/bbl (Brent) in January to its lowest level in history, 17 USD/bbl (WTI, 26/03/20) and 11 USD/bbl (Brent, 01/04/20), which is a 73% (WTI) and 84% (Brent) decline and a price delta of 46 USD/bbl (WTI) and 61 USD/bbl (Brent), respectively” (Hauser et. al., 2020). On top of the price wars, a surplus of oil was observed when the first stay-at-home orders were put into place. Both public and private transportation decreased dramatically in the first month of the orders and policies put into place. Air travel and road travel are mostly to blame for the oil shock as “mobility in transit stations in Germany had declined around 70% compared to the baseline” (Hauser et. al., 2020). As one can see, the decrease in price for oil is a result of both the price wars and the stay-at-home orders. A month after the stay-at-home orders, WTI oil experienced one of its lowest prices per barrel at $19.23 per barrel on April 30th, 2020 (Cushing, OK Wti spot Price fob). For the 2008 financial crisis, oil also decreased substantially. On July 1st, 2008, the price per barrel for WTI oil was about $141; once the crisis had taken hold of the economy, that price per barrel plummeted to $35.38 on January 16th, 2009 (Cushing, OK Wti spot Price fob, 2020). Both crises had affected the price of oil with extreme price decreases. Although these insane price decreases did not last, they obviously affected economies and major corporations.
Natural gas has also seen a decrease in price during the pandemic. From the week before March 23rd, to the week after March 23rd natural gas prices saw a 20% decrease in price (Hauser et. al., 2020). This is most likely because natural gas is used in the industrial, residential, commercial, and transportation sectors for heating, cooling, cooking, driving, and more (U.S. Energy Information Administration, 2020). Once the shutdowns were put in place, most of the commercial and transportation sectors no longer required as much natural gas consumption. This is a classic supply and demand explanation, when demand decreases and supply increases, prices usually fall. In 2008, natural gas prices remained stable. There were not any shutdowns or stay-at-home policies put into place in 2008 for the financial crisis, so business still went on as usual, even though some financial institutions went bankrupt and closed.
Coal was not found to have been affected by the Covid-19 pandemic or the shutdowns put in place by governments because coal had already seen a massive decrease in demand and supply in preceding years to 2020 due to an increase in renewable energy resources (Hauser et. al., 2020). Therefore, coal prices remained stable and low during the pandemic, but the opposite is found for the Great Recession. During 2008, because of the decrease in demand for coal due to the crisis, supply increased and the price fell, just like we saw for natural gas. Large coal-producing companies are to blame for the large decrease in prices for coal because, before the recession in 2008, coal companies ramped up their investments, leading to less cash on hand for each company (Hauser et. al., 2020). Once the decrease in demand for coal took place, the coal companies were forced to lower prices to attract buyers. Coal was still used a great deal in 2008 as there were not as many renewable energy sources back then as there are now (Hauser et. al., 2020).
In the short term, Carbon emissions had been greatly reduced due to Covid-19 and the shutdowns. The amount of emissions that were not being put out into the atmosphere was due to travel restrictions put into place. China had seen great results from this as water became cleaner, skies contained less smog, and birds and fish were starting to come back. There is no proof that these effects have lasted, but carbon emissions are close to what they were pre-covid because of society experiencing some sort of normalcy again.
The final energy commodity is electricity. Electricity is an extremely volatile man-made resource that shifts in price every week (Hauser et al., 2020). During Covid-19, there are two reasons why prices have shifted so much. These include lower power demand/lower production like with natural gas and oil, and a shift in focus to renewable energy sources (Hauser et. al., 2020). It all depended on how strict the country was with its shutdown policies. Places like Spain shut down all factories (Hauser et. al., 2020), so demand for power would decrease dramatically, while countries like Germany had less strict lockdowns, so power was still needed for their factories and power plants.
The shutdowns and stay-at-home policies put into place by governments around the world led to a lower power demand, which led to an overall reduction in power output and use of energy commodities.
4.1.4 Stock Market
The stock market is another part of the economy that can help us compare the 2008 financial crisis to the Covid-19 crisis. Being able to analyze the stock market and to see if it is overvalued or not is a great way to compare these two crises because it can show us how investors are reacting to the uncertainty.
When looking at the Cyclically Adjusted Price Earnings (CAPE), we will be able to see if the stock market is overvalued or undervalued and if investors are being rational or irrational. Economists and investors care if the stock market is overvalued because that means that a bubble could be present, and it only takes one unfortunate piece of news for it to burst. The higher the CAPE ratio, the “lower than average future real return on stocks” (Lansing, 2020). This means that if one does not want the stock market to be overvalued, they would want an average CAPE ratio of about 21.0. Another measure that one can use to see how stock markets are doing is the macro uncertainty index (MUI). This index summarizes how challenging it can be to predict the future of the stock market (Lansing, 2020). Both of these measures will help compare the stock market during each crisis.
Leading up to the 2008 crisis, from the years 2001-2007, the CAPE was at its 3rd highest point (around 25-27) since 1960 (Shiller, 2015). The economy was doing well, and so were investors in the stock market. Once 2008 came around, and the Great Recession did its damage to the economy, the CAPE decreased to about 13.0, which had not seen levels that low since 1996 (Shiller, 2015). To compare this to the 2020 crisis, the CAPE had been sitting at around 31-32 (Shiller, 2015), the second-highest it’s ever been. Once the pandemic had made its way to the United States and was spreading rapidly, the CAPE decreased down to about 26 (Shiller, 2015). Now, the CAPE and the MUI are negatively related as expected, if uncertainty (MUI) rises surrounding the stock market, the CAPE should fall because people would expect fewer future returns. If the MUI decreases, then the CAPE should increase because investors expect higher returns in the future. This pattern can be seen in both crises, but the inverse relationship is exaggerated more in the 2008 crisis.
These results show that the stock market saw larger losses in the 2008 financial crisis than in the 2020 crisis. There are two types of investors when it comes to a financial crisis and the stock market. There are rational investors; people who invest in low-risk assets and expect lower future returns after a price run-up, and there are irrational investors; people who buy into the speculation after a price run-up (Lansing, 2020). They invest in medium to high-risk assets and expect large returns even after a price run-up (Lansing, 2020). The stock market took a while to recover after the 2008 financial crisis because investors were mostly rational. They were suspicious of the stock market and took their time before they started investing again. In March of 2020, the stock market crashed quickly, but then regained what it lost and more at an incredibly fast pace. This is because investors during the 2020 crisis were irrational, they saw the dip in the stock market and bought more stock immediately (Lansing, 2020). This irrational behavior is the reason why the stock market did so well last year, but because of this irrationality by shareholders, it is difficult to see if the stock market is overvalued or if a stock bubble is forming.
Investors acted vastly differently in each of the crises. In 2008, investors were rational, they bought low-risk stocks and expected to see lower returns. In 2020, investors were irrational, buying all the stock they could afford and hoping to see large returns in short amounts of time. The CAPE and MUI have an inverse relationship and that can be seen in both crises, but the relationship is magnified in the 2008 financial crisis; proving that the stock market crash was worse for the 2008 financial crisis than for the Covid-19 crisis.
The federal government’s bailouts in 2008 worked extremely well in preventing further fallout, not only in the stock market but the economy overall. Congress’s response to the 2020 crisis was larger in scope by bailing out smaller family businesses as well as major corporations. The policies enacted by Congress are still being researched; as far as the effects on the economy go, these responses were necessary in stabilizing the economy.
4.22. The Effects of US Congressional Responses
Over a dozen laws were enacted toward the goal so we will focus on two of the more impactful ones; the Coronavirus Aid, Relief and Economic Security Act (CARES Act), and subsequently, the Paycheck Protection Program (PPP). Both the CARES Act and the PPP had their supporters and critics but in this review, the focus will be on the economic results of them that can already be ascertained.
4.2.1 Results of the CARES Act
While there was debate on how to execute it, there was no question that the public and private sectors were going to need assistance. Compromises were made and the CARES Act was passed on March 27th and offered help to the American people and businesses in a variety of ways. Immediately, economists were interested in finding out how this would affect the economy. Two parts of the Act that were the main focus for these authors would be the stimulus payments given to eligible households, and the additional $600 of unemployment insurance (UI) benefits. Some were curious about the effects on consumption after the stimulus payments were distributed. Many authors were concerned about the impacts on labor due to the increased UI benefits. Still others wanted to review the aftermath of both. One study that evaluated the stimulus payments and the UI benefits wanted to ascertain the effect on American families’ financial security. They ended up finding that without such aggressive measures nearly half of families that lost income for six months would not be able to cover expenses. It was also noted that these families were able to save from the UI benefits at times exceeding their normal income which helped them well beyond the four months it was allocated (Bhutta 2020). The combination was further attributed to being sufficient in restoring consumer spending to its pre-crisis heights (Carroll 2020).
The stimulus payment distributed by the CARES Act varied with most single adults receiving $1,200 and families with children receiving more. For the most part, economists focused on examining how these payments influenced consumption. This is a natural progression as consumption is a key player in our capitalist based economy. After the disbursement of these payments, spending increased by $0.25-$0.40 per dollar of stimulus in the first few weeks (Baker 2020). Durables spending was down from previous stimulus packages but, comparatively, there was higher spending on food and especially rents, mortgages, and credit cards during the pandemic (Baker 2020). These differences are to be expected as the crisis are obviously not the same but they do highlight an important conclusion that perhaps direct payments during a pandemic crisis could be less effective in stimulating aggregate consumption than they would be during a financial crisis.
The unemployment benefits were fiercely contested by the government and public alike. The critics of the initiative would often express concern on the possibility that the substantial increase in benefits would entice workers to remain out of the labor force, even when they were able to go back to work. Instead, it has been found that a worker would be unlikely to reject an offer to return to work at the same wage, even if that wage was lower than their UI benefits (Boar 2020). Additionally, there were no significant differences in the declines of employment between workers with higher post-CARES replacement rates than those with lower (Altonji 2020). These workers also returned to their positions at similar rates further supporting that the UI benefits did not have a negative impact on labor reentry. Even though approximately 76% of workers receiving these benefits were enjoying higher income than their regular wages (Ganong 2020), for many it was just enough to alleviate their financial concerns. In fact, a comparison of the material hardship and worrying about meeting basic needs between those who received the UI benefits and those who did not, was conducted. They found the UI benefits to have significant positive impacts on food insecurity, decreasing concern about affording basic needs, and individuals ability to pay bills (Karpman 2020).
4.2.2 Specific Results of the PPP Loan
The Paycheck Protection Program (PPP) was specifically designed to assist small businesses to maintain employment and wages while riding out the economic shock from Covid-19 and the lockdowns. Under the program, businesses were able to borrow up to 2.5 times their average monthly payroll costs. The amount spent in the first 24 weeks after the loan is originated would be eligible for forgiveness as long as 60% of the amount was spent on payroll. This acted as an incentive for firms to either hire back workers without penalty or to retain the workforce they had. It is a rather creative bit of legislation and therefore piqued the interest of numerous economists. Its calculated effects on employment is an obvious reason for their interest but finding distortions in the PPP or recommending a different approach were also common. For example, a revenue replacement program which would basically be giving small businesses money as revenue (Hubbard 2020) instead of via a forgivable loan. This would allow businesses to choose what expenses they thought were most important to their success. For various reasons, this was not the option chosen by Congress and small businesses would have to apply for the PPP. Funds would be offered through the organization’s bank and it was because of this that distortions were found in the banks ability to allocate the funds effectively and objectively (Joaquim 2020). Banks were concerned that approving firms that didn’t qualify under their pre-pandemic standards would result in default and the US Treasury would ultimately not be able to convince the majority of banks that they wouldn’t be liable. Banks are also susceptible to selection bias which would also undermine the effectiveness of the program (Joaquim 2020). Small businesses themselves were affected by being less aware of the benefits being offered to them and therefore less likely to apply (Neilson 2020). Despite all of this, the PPP has performed reasonably well. Performance estimates were deduced, specifically on US employment data, and the PPP caused aggregate employment to increase by approximately 1.4 million to 3.2 million jobs through the first week of June (Autor 2020). PPP loans also led to a 14% to 30% increase in a business’s expected survival as well as an inexplicit if positive effect on employment (Bartik 2020). There is a general consensus that the PPP saved many organizations from a year that would have resulted in bankruptcy (Elenev 2020) and that it was designed reasonably well.
4.2.3 The Government Lockdown
The lockdown implemented by the government caused an expected yet significant increase in the unemployment rate. For hourly employees working at both small and large organizations, the majority of the decline in employment happened between March 14 and 28 (Bartik 2020). This suggests that the decline was mainly due to the lockdown of non-essential businesses. More than two in five adults reported that their families suffered a job or income loss due to the pandemic (Karpman 2020) and the unemployment rate reached a record high of 14.7% in April (Zhang 2020). Non-essential workers who couldn’t work from home suddenly were mandated to remain inside without a way of bringing in income. This logically led to these workers experiencing higher declines in employment and income, higher likelihood of defaulting on their debt, and worse performance in the stock market (Schmidt 2020). Non-essential job losses were substantially larger among workers in lower paying positions causing a significant increase in income inequality during the pandemic (Forsythe 2020). Thankfully, the vast majority of individuals who were unable to go to work did receive unemployment insurance through various legislations (Sullivan 2020). This varied across the states as some did not reach a large share of their out of work residents. Low-wage workers also experienced longer periods of unemployment than their higher earning counterparts (Chetty 2020).
The lockdown policies undertaken also had devastating effects on the service industry as these were by and large considered to be non-essential. The service industry can be defined as a division of the economy that encompasses consumer-oriented, or business-oriented service driven activities. There is a lot of speculation as to the outcomes for many types of firms in this sector like restaurants, movie theatres and fitness centers. Unfortunately, there is still little empirical evidence collected besides initial data or the perspectives of small business owners as one group. However, as many of the organizations in this industry are small businesses, quite a few economists felt it prudent to examine the trends happening within them. In an effort to track small businesses perspectives, the Census Bureau conducted a survey that showed that 89.9% of small businesses experienced a negative effect on their operations due to Covid-19 (Buffington 2020). Also, smaller firms who were already financially unstable were more likely to close indefinitely and this actually accounted for a large part of the job losses suffered by employees of small businesses (Unrath 2020). These are some sobering statistics as small businesses have been a key contributor to US economic activity. Understandably, the long term effects for these firms isn’t known yet and they will continue to be studied for years to come. These lockdown procedures were not unique to the United States by any means. Many nations across the globe were implementing similar policies that would affect their economies as well.
4.3. The Effects of the Lockdown Policy on Different Nations
The COVID-19 pandemic has affected the policies that surround economic activity across the globe such as import and export activity, supply and demand issues, the support of consumer business and new fiscal policies to help promote the support of the capitalist economic structure . We are seeing countries limit the amount of goods and services that they are willing to export due to the threat of an everyone for themselves mentality. The grain producing countries for example would be in control of a Grain producing parts of the world such as the middle east and Asia started restricting the movement of grain out of their country due to increased demand and their lack of ability to supply. The pandemic has the potential to progress into something that could threaten the world economy. This in turn would threaten trade relations throughout the world. We have also seen the issues of supply and demand shocks caused by the change in willingness to trade. This change can be traced back to the threat of global food security (Falkendale,Otto and Schewe,2021).The lockdown from Covid-19 also brought the closing of many consumer based businesses that are considered non essential. This created the need for government relief packages for citizens as well as payroll protection plans for businesses were created by governments and leaders across the globe in order to slow the deterioration of local economies.
4.3.1 Import and Export Bans Caused by COVID-19
There have been many changes to international trade and international trade policies due to growing concerns over the pandemic the world is wrestling with. The trade of grain is a prime example of an export ban created by grain producing countries that has changed the supply of foods around the world. We will use this example to help explain the changes in import and export ideals and how it affects the rest of the world. At the start of the pandemic there were export restrictions placed on grains such as wheat and maize that were put in place due to many different factors that hit the horn of Africa, parts of the Middle East, Southern Asia, South America and Europe (Falkendal,Otto and Schewe, 2021).
Figure 3
The graph displayed is an example of the change in China’s exports during the start of the pandemic. The drop in the beginning of the pandemic in February of 2020 is the start and essential height of the pandemic in China.There were also issues such as locust infestations, lack of farm help, a second wave of COVID outbreaks and a dryer season that was expected damaged the total yield produced by many of these countries. (Falkedale, Otto and Schewe,2021). The issue of a shortage of farm labor and a second wave of COVID outbreaks caused many issues with many farming sectors and their ability to produce grain. Countries that employ much of their population through agricultural work have been hit the hardest and most directly by the COVID-19 pandemic and experience the largest loss of crop production (Falkendale, Otto and Schewe,2021). The lack of exports in these agricultural categories caused a supply shock as grocery stores all over the world were running out of agricultural products due to families stocking up in case of shortages that did indeed follow.
4.3.2 Supply and Demand Shocks Caused By Covid-19
There have been many supply and demand shocks in every industry as the pandemic has worn on. If we were to look at the grocery industry, we would see a large supply shock as consumer demand increased dramatically at the start of the pandemic as times were uncertain and the supply chain was fractured due to a loss of labor and export restrictions in major agricultural regions of the world such as South America, Asia, several regions of Europe to name just a few (Chanona, Mealy,Pritchard and Farmer, 2020). The demand side of the equation has seen shocks positively and negatively throughout the life of the pandemic. There have been positive shocks that include markets such as the market for groceries. The more negative demand shocks have been seen in industries where the chance of infection is much higher. Markets such as air travel, tourism and large scale industry such as aluminum production as well as energy production have been negatively affected due to lockdown policies as well as individual concern of infection in areas where social distancing is not possible (Chanona, Mealy, Pritchard and Farmer,2020). Another aspect of supply shock that is not thought of is the financial as well as the psychological toll that this pandemic has put on labor forces around the world. The spread of infection, closing of agricultural and manufacturing plants for days and even weeks in the beginning of the pandemic have set them behind to a point where the man hours needed to make up the difference are not obtainable. Therefore, these industries such as agriculture and the industry that supplies paper products are always trying to play catch up. Labor forces are also limited due to social distancing (Chanona, Mealy, Pritchard and Farmer, 2020).This pushes the supply side issues even further as factories are forced to try and produce at their normal capacity with less workers.
4.3.3 Consumer Based Business and Its Effects on the Economy
The majority of modern, world economies are all run through a consumer, capitalist model. The non essential businesses we have seen be most affected by the spread of Covid-19 are all consumer based businesses. Businesses where employees have a high chance of infection such as gyms, dance studios, barbershops and nail salons to name a few have been struck the hardest by this pandemic as they were the first to be shut down. The larger-scale businesses that were also hit include theaters, stadiums and shopping malls which were all closed due to the risk of infection as local governmental bodies decided it was what was best for their populations (Chetty, Friedman, Hendren, Stepner, et.al.). After the shutdown of these non essential businesses, the economy began to go into a contraction. This contraction is caused by the lack of consumer spending throughout the economy. There were efforts to push back against the lack of consumer spending by providing loan relief such as the pause of interest on student debt and lower mortgage rates to allow for refinancing in an attempt to lessen the bills put on the men and women who found themselves without jobs during this pandemic. There is also the offering of low interest rates to try and push the middle- to upper-income quintile individuals and families to spend money on things such as new vehicles and even new homes in order to help get the economy back on its feet. Unfortunately, due to the spread of Covid-19, many high income families lessened their consumer spending when the spending required face to face interactions in places such as those that have been discussed (Chetty, Friedman, Hendren, Stepner,et.al,2020). This lack of spending from the economic upper-income led to lay offs in the lower-income workers. This turn of events led to only modest economic returns during the local reopening of businesses. The stimulus payments did not generate the type of spending that the government was looking for to boost the overall economy of the United States except for the rise in the spending of the lower income families. Middle to upper income families did not spend the stimulus payments, but rather saved it or spent it on essential items such as food and not non essential businesses that were suffering and in turn causing economic turmoil (Chetty, Friedman, Hendren, Stepner, et.al,2020). The closing of consumer, non essential businesses caused turmoil in the current consumer based structure of not only the U.S. economy, but economies around the world.
4.3.4 Changes in Fiscal Policy During the Pandemic
The Fiscal policy changes issued by the United States such as providing stimulus packages, payroll protection plans and health care enhancement plans have been beneficial to cushioning the blow to the economy since the start of the pandemic (Monetary Fund, 2021). The first thing that is to be discussed is the stimulus packages set to help provide relief and boost consumer spending throughout the economy. Along with the increase in unemployment due to the rising unemployment rates from layoffs at the beginning of the pandemic, the stimulus plan set out by the U.S. government was very promising at the outset (Monetary Fund, 2021). We have seen that the stimulus package has not helped prop up the economy while it has been recovering from the pandemic (Monetary Fund, 2021). The stimulus package was a foothold for the economy, but only in the short term. The unemployment benefits helped out those who were forced out of their jobs due to Covid-19, however many people are now making more on unemployment than they did in their jobs. Those who are receiving unemployment have been taking in an extra six hundred dollars a week due to the CARES act. This bonus benefit creates a situation in which more than half of workers could make more from unemployment than from remaining employed. This could dampen or even derail the chances for a quick economic recovery (Gonshorowski and Greszler, 2020). This has created the issue of an inability to recover the original workforce that existed before the start of the pandemic.
The use of payroll protection plans offered by the U.S. government have helped small businesses pay their employees and keep their people employed. This will prevent consumer spending from dropping even further (Monetary Fund,2021). The correlation between consumer spending and a rising unemployment rate is a prominent relationship in a consumer driven economy. The payroll protection plan included 321 billion in loans to help small businesses as a whole as well as help retain their workforce (Monetary Fund,2021).
Lastly, the U.S. used government funding to help improve hospitals and expand virus testing. Approximately 75 billion was used to improve hospitals while 25 billion was used to expand and improve the methods used for virus testing (Monetary Fund,2021). The ideal to push for better testing and improved hospitals will help improve the overall status of the United States economy as well as the health of its population. If there is an improvement in healthcare and virus testing then people will feel more comfortable going out and spending money as they used too which will help boost consumer spending which in turn will help propel the economy in a positive direction.
4.5 Conclusion
In conclusion, the national economies as well as the world economy have suffered greatly due to the impact of COVID-19. However, the changes in fiscal policy, supply and demand structures and import and export policies during the COVID-19 pandemic have continued to push the national as well as world economies in the right direction. A large part of what has helped the world and U.S. economies recover is taking what was learned in past crises, and applying them to the 2020 crisis. One can learn quite a bit from comparing the 2008 financial crisis to the 2020 crisis. Both crises were damaging to the economies of their respective time periods, but it will take more time to see just how much the economy was affected by the pandemic. Governments and economists came up with creative and unique policies, like the CARES Act and specifically the PPP loan, to combat the effects that the pandemic would have had without them. Although the COVID-19 pandemic shocked world economies, they are slowly recovering due to the efforts of physicians, politicians, and economists.
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