Professor Spence confused epidemic growth and economic growth today in his Princeton Brunnemeyer talk, I thought, and absolutely failed in explaining his unusual “Doubling Days” graph, which was central to his presentation. I really still have no idea what he meant, and when the moderator asked him, he himself couldn’t explain it.
He had five stages of the effects of the epidemic on growth, which also seemed confused to me. Here’s my redo:
1. Epidemic grows speedily. It has few direct effects until the public realizes, or the government.
2. People get scared and start responding. The citizenry stop going to restaurants. The government imposes travel restrictions. The citizenry gets worried about a recession adn stops spending and businesses stop investing. The economy has a sharp downturn.
3. In some countries, the government imposes very strong measures— lockdowns– that are extremely costly,and the economy collapses. (not South Korea, not Taiwan, not Sweden).
4. The epidemic spreads. People take voluntary extreme cautionary measures— universities go to online classes and send studetns home, offices go online, small busienss owners decide to shut downa and take a long vacation. This hurts the economy a lot, regardless of government lcokdown. This is what happened in Sweden.
5. Recession hits because of (3) and (4). We are just starting to get there, I think. Even if the epidemic suddenly ended, the recession would still occur. Many businesses have died of covid19 and it takes a couple of year for those resources to be reallocated in some new business. Bankruptcy proceedings are still going on in the courts.
6. Longterm effects of government policy hit— inflation or high taxes from the earlier high spending, people permanently leaving the labor force and staying on government welfare payments, etc.
It is important to note that the direct effect– people getting sick and dying— is small, in direct material terms. When old people die, that actually helps GDP per capita considerably.