The authorities are advising the public to practice social distancing and self-quarantine as measures to slow the spread of the virus and help healthcare systems not to be too overwhelmed.

It doesn’t take an economist to figure out that as you restrict movement and travel, you also restrict economic activity. Salt Bae into the mix lower oil prices and the result is potentially a recession.

The thing about a recession is that it’s a self fulfilling prophecy. Lower economic activity spurs fears of recession which causes people to cut back on spending which further exacerbates reduced economic activity.

It’s a vicious cycle, much like postponing your morning workout to the evening because you’re sleepy and then you’re too tired from work so you push it to the next morning. The next thing you know people are calling you chubbs and asking you about that “floatee” around your waist.

Aggregate Demand (AD) is the total demand for all finished goods and services produced in an economy. Over the long-term AD is equal to GDP. Therefore, to determine the impact of any measure on economic activity we can look at its impact on the components of the AD equation.

If you’re like me, once you hear the term “equation” your eyes glaze over and your mind starts to wondering thinking about if there is a Law and Order binge-a-thon on tv. “Doh beat-up”, the math real basic because I could only operate at a form 3 level anyway.

AD adds the amount of consumer spending (C), private sector investment (I), government spending (G), and the net of exports (X) and imports (M). One of the most important expressions in economics is AD = C + I + G + (X – M). I also like “ceteris paribus” but that’s a different discussion.

Keynesian economics (named after my British homie John Maynard Keynes) is a school of economic theory which states that the total spending in an economy determines the level of output, employment and inflation. Too little spending lowers output and results in unemployment. Too much spending chasing too few goods leads to inflation.

Therefore, governments can raise economic activity by stimulating demand through measures that increase its own spending, makes conditions favorable for consumer spending and private sector investment or encourages exports more than imports….and vice-versa, like Barrington Levy.

Activity spurs activity. In economics that’s called the Multiplier Effect. I could write a whole post on the multiplier but instead here is a simple example:

The government needs votes so they hire you to build a box drain in your neighborhood for the 4,000th time and pay you $100. You take that $100 and put it in the bank because you know better than to keep it in a mattress. The bank keeps on-hand what it is required to by law (10%) and lends the rest ($90) to Karen to open a premium toilet paper stand. Karen takes that $90 and pays Drupatee for TP supplies who puts the money in her bank. Drups’ bank lends out 90% ($81) to Jerome to set up his water cart empire on the highway and so on and so forth. Thus $100 has multiplied and sent ripples throughout the economy. The multiplier also works in reverse.

So while staying at home and avoiding each other is definitely a good idea to thwart the spread of the virus, it’s definitely going to infect the economy. Who knows, maybe the symptoms will only be “mainly, mild.
..mainly…mild…MAINLY…MILD” like the doctor lady in the news conference yesterday said the virus is.

Although, GDP growth as at Sept 2019 was already 0.9% and at Christmas businesses were complaining about slow sales. Therefore, if we all reduce the “C” in the equation then businesses may be forced to reduce the “I”, which could translate into job losses which would further reduce AD. In addition, our overvalued exchange rate already makes “(X – M)” a “locho” part of the equation.

So if the government doesn’t have the funds to pick-up the slack with “G”, then the economy would be another casualty of this virus. Just like my vacation plans.

TANA

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