Question

OK so here's a breaking news announcement from the Michigan Lt. Gov.:

Effective at 3PM, we are temporarily shutting down bars, restaurants, and other establishments to prevent the spread of COVID-19.

Someone responded: This should be a county by county decision, not a Lansing decision. Not every county has a case of the virus.

In a few words: (1) explain the logical problem with this statement and (2) identify the economic concept associated with the problem that would result from each county deciding on its own to close bars/restaurants or not.

Answer 1

1) On March 12, the World Health Organization declared that the virus is now a pandemic and President Trump announced a 30-day ban on all travel from the EU to the U.S. One thing is sure: COVID-19 is the quintessential ‘black swan’. Two key features of black swans are that their occurrence is highly unlikely and their impact is very big, which was also the case for the 9/11 terrorist attacks in 2001 or the global financial crisis of 2008-09.

2) As fears grow about the impact of the covid-19 virus, financial markets have slumped. Now there are signs that the virus is moving from traders’ screens to the real economy. No one will know the true economic impact for some time, because official statistics are published with a lag: the first estimate of gdp growth in the current quarter, for instance, will not appear until April 29th. Analysts cannot wait that long. So they are turning to “real-time” data, mainly produced by the private sector, on everything from transport use to social-media activity. None of these measures is reliable by itself, but together they give a decent impression of what is going on.

It is not all doom and gloom. So far there are few indications—either from weekly jobless claims or from company announcements—that joblessness is rising. Worries that broken supply chains would stoke inflation also look overdone, for now at least. Data to the beginning of March from State Street PriceStats Indicators, which measures inflation daily, suggest that inflation has been on a steady downward trend since the beginning of the year (though in recent days food prices have inched up, perhaps pointing to the effects of stockpiling). Railway and trucking volumes appear to be holding up. There is some evidence of lower electricity demand, perhaps as people miss work, though the figures are volatile.

• Loss of economic activity as cos down shutters

• Loss of income as people lose jobs

• Fall in exports due to global shutdown

• Production disruption in many sectors

The U.S. economic picture was very bright with unemployment at a 50-year low, strong wage growth, and record optimism among small businesses, until COVID-19, the novel coronavirus came to the U.S. Now the virus is widespread causing the central bank to adjust its target range for the federal funds rate to 0% – 0.25% to support the economy. This move will disproportionately impact low-income earners with minorities likely bearing the brunt of the economic impact of coronavirus, as a recession is likely to ensue.

There is a very real risk of families losing income and businesses of all sizes suffering, as a result of the negative impact COVID-19 will have on slowing economic growth. Even with a drop in the federal funds rate, which is a short-term interest rate at which banks lend money to one another when their reserves fall short, it typically lowers interest rates on various types of loans, including mortgages and credit card debt.