In conditions of severe economic disruption, in a crisis that resembles a war, attending to financial indicators distracts us. We must focus (as has happened in all wars, including the American intervention in World War II) on physical quantities.
For example, let’s think about the current problem with work assignment. Suppose there are four types of jobs: A) doctors and medical personnel, B) online vendors, C) people who produce physical goods like industrial workers and D) professionals like paper writer providers, teachers, engineers, designers, etc.). The number of these workers is, at the beginning of the crisis, determined by economic demand, as well as by the supply of these professions.
What causes a shock as tremendous as the pandemic is that it totally destabilizes the new demand for these four types of work. Your current allocation is not synchronized with the necessary allocation under the new conditions. The shock exponentially increases the demand for A, similarly increases the demand for B as people opt for online shopping, the demand for C falls and the demand for D remains more or less stable.
There is one more element, specific to the pandemic. If the activities of B, C, and D continue as before, more people are likely to become infected (assuming most infections occur because people interact at work). This, in turn, will cause saturation and stress in A, to such an extent that the death rate will increase. To understand this, let’s just assume that B, C, and D stop working and producing. New infections will clearly decrease as people are forced to stay home from work. This is clearly what quarantine is trying to achieve.
The problem, however, is that if all the work stops, people will starve to death soon. Hence, the trade off or equilibrium between constant production and the spread of the disease cannot reach the extreme point of zero production. We have to find a position on the equilibrium curve or trade off that allows economic activity to continue at a modest pace until the pandemic is under control.
Let’s go back to our nomenclature of workers. A’s offer (which we would sincerely like it to increase) is more or less fixed in the short term (say, months or weeks, which is what we are dealing with). Therefore, there is not much to do beyond recovering all retired nurses and doctors, as New York City has done.
The B’s will be fine and will not lose income, as the demand for their work is growing. However, keep in mind that additional work can lead to new cases of illness. But we can’t do anything else if we don’t want all life to stop.
The key category is C. Your income will be radically affected. They are likely to lose their jobs and be left without recourse. Do we want them to be impoverished and go wandering the streets in search of work? No. Politicians and legislators should focus on convincing them not to work. In other words, these are the key people and the primary objective of public policy today: we do not want them to fall below a certain threshold of income (for reasons of both humanity and broader social interest) and we do not want them to work either, in order to slow down the rate of new infections.
The last category (D) are workers whose incomes may remain relatively unchanged, at least in the short term, because the demand for their services may neither increase nor decrease much since they can offer these services remotely. So from the legislator’s point of view they are not the most important part of the electorate now.
In this way we can formulate a much more reasonable strategy of economic policy during the pandemic: we must try to extend the increase in supply of A as much as possible, limit the work that others do (again as much as possible) and keep the workers C financially afloat unconditionally for the duration of the crisis. And, of course, we must change our focus: we have to forget about financial indicators and start looking at family income.
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