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Consider a scenario where consumer confidence remains low until a virus such as COVID-19 is contained. In this scenario, containment is defined as being achieved once a vaccine is manufactured and distributed in 12-18 months after shutdown. Assume the following criteria:

  • A synchronous eradication effort amongst all states/countries in a system is highly unlikely.
  • Countries remain in a long-term suppression phase - a metaphorical game of "whack-a-mole" as researcher Ed Yong describes, where the threat of spread continues to pop up in various regions due to the virus's novel ability to remain undetected in many carriers, new strains arriving seasonally, duration of immunity remains unknown, etc. rendering "easing" of lockdown restrictions a non-option.

What are the effects on a sudden economic shutdown in a capitalistic system for a prolonged period of time like 12 months? 18 months?

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  • $\begingroup$ Highly depends on how quick research can show if patients develop immunity and if the economy can be drip fed with certified immune antibody carriers. Obviously massive amounts of fiscal stimulus are on the cards, but state control in great abundance. $\endgroup$ – Frank Apr 6 '20 at 5:44
  • $\begingroup$ This question is probably too broad. If governments did nothing to compensate, it would be disastrous. However, every single government has taken measures to reduce the effect. Since not every country behaved i the same way, generalisations about what will happen is extremely difficult. $\endgroup$ – Brian Romanchuk Apr 7 '20 at 14:28
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In the most optimistic case, there will be a difficult 12-18 months, followed by a return to normal. The factories are still there, but most things are just put on hold in the mean time. That return to normal will involve some changes (e.g. commercial real estate will hurt as many workers continue working remotely), but it could be that the economy loses no real productive capacity. There would be a big increase in public and private debt, but basically it would be like stepping back a few years to a time that was fairly peaceful and productive, just less wealthy.

In the most pessimistic case, all the physical stuff remains, but all the social stuff (contracts, org charts, institutional knowledge etc.) crumbles and has to be rebuilt. Your local bar goes under, and your local economy loses the knowledge currently embedded in that bar's operations/management. Although the building and bar stools remain, the business can't be spun up smoothly because running a business just isn't that easy. It would be sort of like landing on an abandoned alien planet, finding a lot of empty factories, and trying to get them operating again.

Then there are all the political-economy issues. Government debt, political instability, and all the rest. As a general rule, the unscrupulous are best positioned to take advantage of a crisis, so we have reason to expect some degradation of political institutions costing us future productivity.

These are some pretty wide bands on the range of possible outcomes: from "Dang, it's going to take me an extra couple years to pay off my mortgage!" to "Holy Hell, how did this turn into post Soviet-collapse Uzbekistan?!" Of course the truth is going to be somewhere in the middle.

What I can say pretty confidently are these very general points:

  • There will be shifts in what sectors get resources/attention. People will buy more rubber gloves and chest freezers and will spend less money on something else.
  • There will be shifts in political coalitions. People will spend more attention to public health issues (and maybe less on national parks). Consequently, lobbying groups will become more/less important.
  • There will be a recovery period. Once we're back to work, people will be trying to pay down their debts for a while and will delay that vacation they might otherwise have taken.

The first two points are barely predictions at all. Change is constant in markets and politics. The real question is "how dramatic will these shifts be?" My prediction: they'll be big enough to be measurable, but not so big that the world we end up with is unrecognizable compared to what we started with.

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