The Sudden Stop : Planet Money As social distancing kicks in and cities begin moving aggressively to contain the spread of the SARS-CoV-2 virus, the U.S. economy is hitting the brakes. Hard.
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The Sudden Stop

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The Sudden Stop

The Sudden Stop

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UNIDENTIFIED PERSON, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

CARDIFF GARCIA, HOST:

A sudden stop - that is how economists are referring to the massive decline in economic activity that is now happening throughout the world in response to the coronavirus pandemic.

STACEY VANEK SMITH, HOST:

Measures to deal with the pandemic, measures that were once unthinkable, are coming to parts of the U.S. Big festivals and conferences have been canceled. Sports leagues have suspended their seasons. Restaurants and bars in a lot of places are shutting down. Retail outlets like Apple stores and Nike stores are closed. And here in New York, all Broadway plays and public schools are closed.

GARCIA: This is all part of a national and global strategy called social distancing, which is meant to slow the transmission of the virus and stop this public health crisis. By keeping people away from crowds, hopefully, fewer people will catch the virus, and the public crisis will turn out to be temporary.

VANEK SMITH: But that is also what makes fighting the economic decline caused by social distancing so hard. A ton of economic activity relies on people getting together, and all of this activity is coming to a sudden stop in the U.S. just like it has in other countries. I'm Stacey Vanek Smith.

GARCIA: And I'm Cardiff Garcia. This is THE INDICATOR FROM PLANET MONEY. Today on the show, we are going to look at the possible economic damage that the sudden stop could directly inflict on the U.S. economy and why, if policymakers don't deal with this collapse the right way, it also might leave behind indirect damage that would take years to recover from.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

VANEK SMITH: How bad could things get for the U.S. economy? One of the clearest attempts to answer this question was written last week by Pierre Gourinchas, an economist at Berkeley. And Pierre says, first of all, he totally agrees with the public health experts. Social distancing is important to prevent unnecessary deaths from the virus.

PIERRE GOURINCHAS: And from the economic side, the question is if you do that, are you creating any kind of long-lasting damage to the economic fabric of the country that then will create some problems down the line?

GARCIA: Pierre put together a simple model of what could happen. In this model, economic growth will be 50% lower in the first month of the collapse than if there had been no pandemic and then 25% lower in the second month. But then after the second month, the pandemic is over. That's the model.

VANEK SMITH: And Pierre says he really does think that such a massive collapse is possible. In fact, the collapse could easily last longer than two months, he says, so this model might even be an optimistic scenario.

GARCIA: And even just that short amount of time when the economy is in such a deep, catastrophic collapse - just two months - would have a devastating effect. For this whole year, where you had 10 normal months along with these two horrific months, the economy would still end up being 6% smaller this year than it was last year.

GOURINCHAS: The 2008 crisis is still in everyone's, you know, mind. We remember that time. Those were terrible times in terms of economic activity. In 2008, the U.S. economy contracted by 4.5% So we're looking at something that, on the baseline, relatively optimistic scenario, is going to dwarf this.

GARCIA: That's right. Remember the recession of 2008 and 2009, when the unemployment rate went all the way to 10%, the crisis that took the better part of a decade to recover from? Well, in that recession, the economy shrunk by about 4 to 4.5%. So Pierre saying that the fallout from the coronavirus pandemic this year could be even worse than that. But look; that is not a prediction for what is going to happen - not at all. It's just a model of how bad things realistically could get, and Pierre thought it was important to offer this model to focus people's minds on what is happening.

VANEK SMITH: And Pierre adds the economy can make up for some of that lost economic activity once the pandemic is over. Economists will debate how much of that can really be recovered versus how much is lost forever, but what really matters is to get the economy back to growing as fast as possible once the pandemic is over.

GARCIA: Yeah, and here's the thing. Pierre describes the economy as this big, interconnected network - banks lending to businesses, businesses paying workers, workers paying their rent and buying stuff from other businesses and so on. And if you want the economy to recover fast after the crisis, all of the connections in that network have to be preserved during the crisis because the risk of the pandemic is not just that some economic activity will be immediately lost. We know that's going to happen. The risk is also that these connections holding the economy together will fall apart. And if that happens, those relationships will be hard to rebuild, and that will delay the economy's ability to recover.

VANEK SMITH: To understand this, Pierre says, let's say you're a worker who gets laid off by your business.

GOURINCHAS: So now you're unemployed. So you're unemployed now. You might respond to that by cutting down dramatically whatever it is that you are spending. Maybe you won't be able to pay your rent. You'll have to try to move to a smaller place. So you're cutting down your spending, so the sales of some other businesses are going to get hurt. And we get this sort of feedback going from one link in the network getting amplified and further down propagated down the economic system.

GARCIA: And this logic also applies to businesses themselves, Pierre says. They also have networks that can start to deteriorate. They're shutting down now, so they can't sell anything to make money. But they still have bills to pay, too, like their rent. So maybe they go to their banks to borrow money to pay the rent and maybe keep paying their workers until the crisis is over.

GOURINCHAS: Well, they might have problems refinancing a credit line with their bank. The bank might just say, no. We're not renewing that because we're not seeing you selling anything, so we're cutting down your credit line. So now you have to repay. So you can't do that, so now the business is going bankrupt. Now the bank may in turn have non-performing loans, and they'll be piling up, so the bank may be in trouble. So now you have a financial crisis on top of everything else. These are the kinds of amplification and feedback loops that we can try to avoid.

VANEK SMITH: These broken networks, these negative feedback loops, would not just prevent the economy from recovering to its potential after the pandemic is over. They would also shrink the economy's potential itself because rebuilding the networks, those relationships, would take time.

GARCIA: On the other hand, if policymakers can find ways to keep people employed and paid through the crisis and if they can find ways to prevent businesses from having access to credit shut-off, then those networks have a chance of staying resilient until the crisis is over. And if so, then the economy can jump-start right away once the coronavirus pandemic is behind us or at least once it's contained. Workers can go right back to work in the jobs that they were already doing. Businesses will be able to pay their suppliers, and they'll keep their relationships with banks.

VANEK SMITH: Plus, Pierre says the temporary nature of this crisis - or at least everyone hopes it's temporary - actually provides an opportunity for policymakers.

GOURINCHAS: If you know the crisis is going to be very short-lived, you don't want to destroy all this network of relations. You want to preserve it so that it can restart again. If the crisis were going to be a permanent crisis, a very long-lasting crisis, there would be much less of a need to do that because you couldn't just preserve these relationships.

GARCIA: So far, the Federal Reserve has taken steps to support the financial system in the hopes that credit stays cheap and accessible for businesses who need to borrow money, and the president and Congress are negotiating for the best ways to support workers and businesses. And to preserve those networks that underpin the economy, they'll need to act fast because the sudden stop isn't coming. It's already here.

This episode of THE INDICATOR was produced by Darius Rafieyan. Our fact-checker is Brittany Cronin. Our editor is Paddy Hirsch. THE INDICATOR is a production of NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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