Zhenhao Tan
BSc Mathematics with Economics, UCL
With the rapid spread of the coronavirus pandemic in the US and the grim case projections for the country's most populous states, Governor Andrew Cuomo of New York has spent significant time in the limelight. Praised for his rapid response while holding his ground against President Donald Trump's fickle policy-making and relentless twitter propaganda, Mr Cuomo has always been an outspoken critic against the Trump administration's agenda of pushing for a speedy restart of the Economy.
One very memorable quote of Mr Cuomo countering the economic arguments against a general quarantine has been replicated below:
“Real death is real, right? Economic death is not death. It's economics. Real death is real death. You're dead, I'm dead, somebody else is dead. They don't come back up, there is no Lazarus here. The economy, we can figure out, right?”
Characterizing the closure of businesses as "economic death", Mr Cuomo creates a contrast between widespread business closure and human death. By drawing this distinction , the Governor suggests that the existential crisis that puts thousands of SMEs in New York State, which PPP has failed to protect, (NY times, 2020) is of lesser concern than the apparent surge of death that is related to the ongoing pandemic due to the alleged non-permanence of business closures.
But the consequences of "economic death" can be quite permanent and difficult to rectify. For the thousands of SMEs that account for more than half of private sector employment in New York (Dinapoly, 2019, p.3 ), many will not see the end of this pandemic. In a 2019 Patch article written by Adam Nichols, 100K small businesses have permanently closed in New York.
The shelter-in-place order means that firms will experience a dramatic decrease in demand. With an influx of customers visiting their location screeches to a halt, SMEs lacking the multiple sales channels of big companies essentially see their revenues freefall to zero. Little is left for SMEs to cover fixed costs, and for almost half of the businesses that were already in financial hardship before the pandemic, (Dinapoly, 2019, p.3) there will be little to fall back on to keep them afloat. But would these firms reincarnate in a new shell? Unlikely. SMEs that tried unsuccessfully to stay in business often depleted the private savings of their owners. Now, without a source of income and with a massive dent in savings, the disillusioned business owners are more likely to save than invest in a new venture, even if they have the means to.
With such widespread business closures, low consumption levels are likely to be the new normal for a long time. The supply reduction caused by firms going out of business would keep the price level afloat despite the free falling demand, pushing the economy into a deflationary spiral. This would cause a further fall in consumption due to the decreased income caused by layoffs. As a by-product of business closures, insolvent businesses defaulting on mortgages and loans would make the collapse of financial markets a very real possibility, as happened during the 2008 Financial Crisis. From the experience of the 2008 crisis (Rudebusch, 2009), the usefulness of monetary policy is likely to be limited, and there will be a need to resort to more unconventional policy tools. What is worse, this might even trigger a new wave of nationalism across the globe, with historical precedence going as far back as post-WWI economic hardship fuelling the rise of fascism in Germany and as recent as Donald Trump blaming US financial risk on China.
As you can see, "economic death" has an impact that ripples far beyond economics. What Governor Cuomo did not consider is that behind the abstract concept of businesses, there are real people. These are people who rely on these businesses to afford them a decent life and to whom such economic death could also cause real death. Thousands of unemployed not only lost their income, but also their healthcare coverage (Canadian Broadcasting Company, 2020). The US has the highest per-capita-PPP-adjusted medical expenditure of the entire world (OECD, 2018), meaning that it would be difficult for those unemployed to afford even basic healthcare. Putting this under the backdrop of an ongoing pandemic, this caused a worrying phenomenon: n ow unemployed and out of insurance, many people would not seek medical attention even if they are unwell because they fear the high cost it would incur.
Thus, it would be a gross overgeneralization to describe current policy against the coronavirus pandemic as simply as sacrificing GDP figures to save lives. Such an attitude will have harmful long-term consequences that goes beyond falling GDP.
References:
‘Coronavirus and the woes of small business owners’ [Letters to the Editor], New York Post [online], Available at: https://www.nytimes.com/2020/05/05/opinion/letters/coronavirus-small-business.html
Dinapoly, Thomas O., ‘Small Business in New York State: An Economic Snapshot’, Office of The New York State Comptroller, March [Online]. Available at: https://osc.state.ny.us/reports/economic/small-business-nys-2019.pdf
Nichols, A., ‘Coronavirus Forces 100K NY Small Businesses To Close Permanently’, Patch, May 22[Online]. Available at: https://patch.com/new-york/new-york-city/coronavirus-forces-100k-ny-small-businesses-close-permanently (Accessed 28 May 2020)
Organisation for Economic Cooperation and Development, Health Expenditure and Financing, Country Report, viewed 28 May 2020, Statistics Database
Panetta, A., 2020. ‘Why millions of Americans are losing health coverage during COVID-19 pandemic’, Canadian Broadcasting Company, May 14 [online]. Available at: https://www.cbc.ca/news/world/us-health-insurance-woes-1.5567896
Sloan, A., 2020. ‘Trump’s demonization of China puts U.S. in financial peril’, The Washington Post, May 22 [online]. Available at: https://www.washingtonpost.com/business/2020/05/22/trumps-demonization-china-puts-us-financial-peril/
Rudebusch, Glenn D., 2019. ‘The Fed's Monetary Policy Response to the Current Crisis’ ,Reserve Bank of San Francisco, May 22 [online]Available at: https://www.frbsf.org/economic-research/publications/economic-letter/2009/may/fed-monetary-policy-crisis/