This write-up is on how the economy of the United States is dealing with the ongoing pandemic. At first, how an economy can optimally deal with a crisis is discussed to build a premise. Then, the actions of the U.S. economy to deal with the economic crisis brought upon by COVID-19 are discussed.

How to Fix an Economic Crisis

During an uncertain situation such as the beginning of the coronavirus pandemic, people would tend to save their wealth, they would have to stay at home, and many people would lose their jobs. This trend would lead to fewer transactions in the economy, businesses would make less money, more people would be unemployed who could then spend less money, and the vicious cycle would continue. It would cause deflation and thus hinder the economic activity of an economy more.

Monetary Policy

The central bank would need to prevent the deflation as they work toward keeping a stable inflation rate. The central banks would lower the interest rate and create more money in the form of debt. So, people would have more access to cash as banks would lend more. In turn, there will be more transactions in the economy, which would increase demand. Thus, the inflation rate would go up. However, it is slow to act.

Fiscal Policy

The government has more influence over the economy and fast-acting tools to influence it. The government could lower the taxes and choose which taxes to fall (as there are hundreds of taxes to choose from). For example, they could reduce taxes of specific businesses that would perform poorly at this time. Another thing is that it is fast-acting. Say the government reduces the income tax, then people would feel the extra money from the next paycheck. Alternatively, it can directly hand out fiscal stimulus, in the form of cash, to people. These actions would positively motivate people to spend more. More spending will mean more people would have jobs, they would have more money to spend, and the cycle would continue. This phenomenon is called the multiplier effect.

The government can also inject more cash into the system through infrastructure spending stimulus. By spending on infrastructure also gets money in people's pockets and has the added benefit of having something of value in the end. However, the multiplier effect is not that strong here, and the services are slower to appear.

Crisis on Supply

In this pandemic, the problem is not only the lack of money to buy things, but it is also the shortage of supply. As every country had to be in lockdown, most businesses shut down, and people have to stay at home for the safety of selves and everyone; production was significantly hindered. So the governments have to shift their focus from the inflation rate to keep businesses alive. They can help companies through loans, bailouts, grants, and other ways.

Moral Hazard

Major corporations are too big to fail, and they know that. They employ tens of thousands of people and provide services crucial to the economy. Their goal is to maximize profits for the shareholders in the short term. During a boom, they could save money in an emergency fund. However, money sitting around would not be profitable. They instead spend on share buybacks to inflate the price of the company on the stock market or spend it on more profitable ventures. They do it because they do not need to. For example: after the subprime mortgage crisis, central banks around the globe were bailed out by governments. The businesses which want to be ethical would become uncompetitive and be forced to act along with the industry standards. So, the governments must find a way to maintain the services those businesses provide and also punish the shareholders and executives that facilitate this reckless behavior.

Conclusion

No government can completely control the economy; it can only be managed. They have to understand the tools they have at their disposal and use them properly. If they can maintain the stability and confidence of the people, everything will return to normal.

How is the U.S. dealing with the pandemic?

At first, a brief timeline will be given to understand the events and responses better. Then, the government response to stabilize the economy, the largest quarterly fall in GDP, and the all-time high stock performance will be explained. Lastly, the industrywise impacts of COVID-19 will be explained.

Timeline

January

1. The U.S. received the first formal notice of cases in China. (Abutaleb, Dawsey, Nakashima, & Miller, 2020)
2. A man coming from Wuhan, China, was perceived to have had brought the virus to Washington, US. However, cases have been traced back to Seatle in December. (Baker, 2020)
3. After receiving the first public question about it, Trump responded that he was not concerned about it and also said, "It's going to be just fine."
4. World Health Organisation (WHO) published a statement recommending all countries to be prepared for containment, surveillance, early detection, and case management.

29,30. President Trump was warned about the possibility of a pandemic. He was told that the pandemic could cause as many as half a million deaths and trillions in economic damages. (Lipton, et al., 2020)

1. Department of Health and Human Services (HHS) declared a public health emergency and imposed travel restrictions.

February

1. The HHS was denied $4 billion for medical supplies by the White House.
2. National Geographic reported that the U.S. had a fraction of the medical supplies needed.
3. The first death from COVID in the U.S. was reported. The same day, the Food and Drug Administration (FDA) loosened its rules related to developing coronavirus test to ramp up the production of working tests.

March

1. A national emergency was announced.
2. The Federal Reserve lowered the interest rates to almost zero. This is an expansionary monetary policy. Lower rates mean increased money supply in the economy through lending, which in turn increases aggregate demand and cause inflation.
3. President Trump urged citizens to maintain social distancing and to restrict discretionary travel.
4. The stock market hit the lowest point of the year.
5. President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, aka CARES Act. It is a $2.2 trillion fiscal stimulus. It includes $300 billion in cash payments to individuals, $260billion in unemployment benefits, $669billion in forgivable loans to small businesses, $500 billion to support large corporations, and $339.8 billion to states.

Overall, the stock market declined by over 30% in March.

April

1. In two weeks, the pandemic left 10 million people in the U.S. unemployed.
2. The IMF warned that the global economy would contract by 3% in 2020 opposed to the previous forecast that it would grow 3.3%.

In April, the number of people infected by COVID surpassed 1 million. The following graph shows the  spread of the virus in the U.S.:

May

1. George Floyd was killed, which sparked mass protests. The resulting riots damaged more than 400 businesses at an estimated cost of over $500 million. (Meitrodt, 2020) This raised concerns about increasing infections.
2. The death toll from the virus crossed 100,000 in the U.S.
3. Around 40 million are unemployed. (Fottrell, 2020)

July

1. An estimated 5.4 million citizens lost their health insurance due to this pandemic.
2. The quarterly GDP decreases by 32.9%. This the most massive quarterly loss since GDP was measured in the U.S. It is even more significant than the peak quarterly loss in the subprime mortgage crisis (8%) and the Great Depression (30%).

August

1. The total infected reached 5 million.
2. Late afternoon, the S&P 500, one of the best representations of the U.S. stock market, hit an all-time high record. The stock market did a full rebound since February when the last record was set.

Government Response

In March, stay-at-home orders were issued, and most businesses were ordered to close. The problem was not just unemployment; the productivity of the nation was fundamentally hindered. Estimates say that around $1 trillion worth of income was lost. Moreover, since businesses are closed, people could spend less anyways. This decreases the circulation of money in the economy. Both phenomenons lead to deflation. Furthermore, deflation reduces economic activity more as people would like to hold on to money more tightly. This leads to more deflation and creates a vicious circle. So, the government has to increase the inflation rate, stimulate economic activity, and control the virus.

CARES Act

It is a $2 trillion fiscal stimulus bill. The spending is shown through the diagram below:

Public Health

• This includes an allocation to hospitals, medical equipment manufacturers, and medical industries.
• Respirator producers were given legal immunity to ramp up production.
• Legal liability while treating COVID patients was also limited.
• $145 million was budgeted to promote telehealth.

Business

• Under the Paycheck Protection Program (PPP), small businesses will be given forgivable loans providing that they keep employment and fulfill other criteria. $669 billion is allocated for this program.
• Over $50 billion is allocated to the aviation industry.
• Large corporations are eligible for low-interest loans from the Federal Reserve. These loans have to be paid in 4 years; there are restrictions on high compensations and other conditions.
• Employers can defer social security tax up to 2 years.
• Retroactive tax refunds can be carried back to 5 years from 3 years.
• Employers will get a maximum of $5,000 tax credit per employee.

Individuals

• Taxpaying citizens would receive $1,200 and an extra $500 for each child.
• Limit for tax-deductible charitable contribution from 50% to 100%.
• People could get $600 per week of unemployment benefits.

Another stimulus bill is on the works. That is reported to be around $1 trillion. The focal point of the bill would be unemployment, kids, jobs, and healthcare.

Federal Reserve Responses

The Federal Reserve is the central bank of the United States. It reduced the rates to 0.00% to 0.25%. On March 17, it announced a program to buy $1 trillion worth of corporate commercial paper. On March 23, it announced quantitative easing with no upper limit, and it would buy a variety of finance market debts.

Other Responses

• Small Businesses Administration would provide disaster loans.
• All foreclosure and evictions were suspended.
• Federally held student loans were waived.
• The deadline for tax filings was extended.

Largest fall in Quarterly GDP

On 30 July 2020, the GDP of the second quarter came out to be 32.9% contraction. To put things in perspective, in 2008, during the peak of the subprime mortgage crisis, the lowest quarterly GDP was negative 8%. And in 1929, during the Great Depression, the sharpest contraction to GDP was 30%.

We know, GDP = C + G + I + NX. The change in different components is given:

• Cosumption -39%
  • Goods -11%
  • Services -49%
• Government +11%
• Investment -49%
• Net Exports -12

The spending in government increased as a huge economic stimulus was rolled out. But both export and imports fell. It shows only that the exports decreased more than the imports. We can see that the major drops were in investment and consumption of services. However, despite the fall in GDP and massive unemployment, the household income is actually increasing. Even though people have money, they cannot spend it. Due to the pandemic, most businesses have to be closed, and the manufacture of most goods had to be stopped. As a consequence, there is no place to invest in. This situation is a massive barrier to start new businesses. Even the banks have to keep their money idle. The problem is not a lack of money but having nowhere to invest.

The decline of 32.9% in GDP is an annualized rate. The GDP contracted by 9.5% in the last three months. Moreover, when the pandemic is over, the production of goods, services, and businesses could soon start. The economy could recover quite fast from this decline. There could also be a sudden massive growth when all the cash gets into the system at once and cause high inflation.

All-time High Stock Market

The stock market is performing very well this month. Even though just around two weeks ago, the value for the worst ever quarterly GDP came out. On 12 August, the S&P 500 has reached a record high level. The other indexes that indicate stock market performance indexes also tell the same story. The S&P 500 is an index of the stocks of the top 500 companies in the U.S. It is one of the best representations of the stock market.

Companies do not usually earn money regularly from the stock market. It only makes money during the Initial Public Offering (IPO). However, before going, public businesses get funding from venture capitalists and investment companies like SoftBank. Going public is an exit strategy for those investors. So, if the stock market performs well, newer companies will get more investments from the venture capitalists indirectly.

As it was said during the last topic, there is a deficit of opportunities to invest. This is why more people are investing in the stock market. It seems to be the next best alternative for the safekeeping of money. The market price to earnings ratio has increased with the influx of new investors. So, the stock prices are somewhat inflated as people now seem to have lower standards. The last record for the highest S&P 500 price was set during the month of February. So, the market may have returned to normal levels with the help of huge fiscal and monetary stimulus.

Industry-wise Impact

Home Sales

Home sales increased as people enjoyed the lowest mortgage rate in half a century. Trends showed people who work from home moved out to lower-cost cities from expensive ones.

Telemedicine

There has been a sharp rise in this industry.

Meat Industry

As of April, about 25% of the pork processing capacity was cut off. The whole industry is affected like a lot of plants had to be shut off or run at a lower capacity.

Restaurant Industry

Pre-COVID, it was projected to have $899 billion in sales in 2020. It had $30 billion in losses in March. This industry directly and indirectly employed near 20% of the population. It needed a $225 billion bailout. Restaurants have to use safe and unconventional ways to stay open.

Retail Industry

Major retail chains had to hire tens of thousands of people to keep up with the demand. However, home furnishing and clothing segments were the hardest hit. JC Penny filed for bankruptcy in May.

Tech Industry

This industry is immune to the virus. The major companies have seen steep growth in their market capital.

References

Abutaleb, Y., Dawsey, J., Nakashima, E., & Miller, G. (2020, April 4). The U.S. was beset by denial and dysfunction as the coronavirus raged. Retrieved from The Washington Post: https://www.washingtonpost.com/national-security/2020/04/04/coronavirus-government-dysfunction/?arc404=true

Baker, M. (2020, May 15). When Did the Coronavirus Arrive in the U.S.? Here's a review of the Evidence. Retrieved from The New York Times: https://www.nytimes.com/2020/05/15/us/coronavirus-first-case-snohomish-antibodies.html

Fottrell, Q. (2020, June 2). Stimulus checks are a mere Band-Aid for Americans — amid fears of an even bigger economic crisis than the Great Recession. Retrieved from MarketWatch: https://www.marketwatch.com/story/heres-how-much-trouble-laid-off-americans-are-in-and-why-1200-stimulus-checks-are-only-a-band-aid-2020-05-19?siteid=yhoof2&yptr=yahoo

Lipton, E., Sanger, D. E., Haberman, M., Shear, M. D., Mazzetti, M., & Barnes, J. E. (2020, April 11). He Could Have Seen What Was Coming: Behind Trump's Failure on the Virus. Retrieved from The New York Times: https://www.nytimes.com/2020/04/11/us/politics/coronavirus-trump-response.html?

Meitrodt, J. (2020, June 6). For riot-damaged Twin Cities businesses, rebuilding begins with donations, pressure on the government. Retrieved from Star Tribune: https://www.startribune.com/twin-cities-rebuilding-begins-with-donations-pressure-on-government/571075592/