Economic Realities and Consequences of the COVID-19 Pandemic—Part II: The Economy and Fiscal Policy

As of March 2020, the U.S. economy has almost certainly entered a recession. Market estimates of the output contraction in the second quarter of 2020 range from 10 percent to 30 percent at annual rates. Similarly, the unemployment rate is expected to rise sharply, going from 3.5 percent in February to anywhere between 6 percent and 13 percent during the second quarter. The following back-of-the-envelope calculations put these numbers into perspective: Gross domestic product (GDP) was about $21 trillion dollars in 2019. If a third of the economy shuts down for a month, this implies around a $600 billion loss in output. The current labor force is about 165 million workers; if the unemployment rate climbs to 10 percent this would translate to roughly 11 million new unemployed workers. How is the economy coping with the shutdowns? On the positive side, large sectors of the workforce are telecommuting; basic services, such as utilities, are fully operational; and many transactions and interactions are being conducted online. Importantly, these are all interrelated. For example, online transactions work because internet and postal services are running. On the negative side, the health care sector is at risk of being overwhelmed and the health care policy response has been slow due to a lack of “nimbleness”: a combination of the barriers placed by regulation and a dependence on Economic Realities and Consequences of the COVID-19 Pandemic—PART II: The Economy and Fiscal Policy