Some very welcome humility from the economists on the IGM forum. They are asked whether we should think of this as mostly a demand shock or mostly a supply shock, and a lot of them refuse to take the bait.
Alesina says, “This is a new situation. We don’t have a clue.”
Duffie says, “For me, this is just too hard to entangle.”
Eichengreen says, “As someone who’s estimated lots of models designed to distinguish supply and demand shocks, good luck identifying them.”
Hall says, “I’m certain that the answer is totally uncertain.”
Schmalensee says, “Too early to call, I think. Workforce disruptions will affect demand as well as supply.”
There are others who are willing to try to pick one or the other. But some pick supply and some pick demand.
Of course, I think that the AS-AD paradigm is the wrong place to start. See my book.
Also, Tyler Cowen raises the possibility that the economy will suffer from a fragile financial system, which was fostered and joined by governments.
Arnold, I think your book is great!
But there’s a typo in the Amazon blurb, of >> off:
“are often of-the-mark, and unconvincing.”
This echoes Tyler’s uncertainty:
https://marginalrevolution.com/marginalrevolution/2020/03/what-is-the-proper-fiscal-response-to-the-coronavirus.html
Yet he’s confused:
1) I still am not sure how much we want to keep people on the job, as opposed to keeping them away from the workplace (but still being paid?).
In general we DO want to keep them away from the office workplaces, far more than the mfg places, and likely even the transport sectors. While a truck driver is a bigger negative effect risk, if he IS a carrier, being in the truck most of the time is almost as good as being at home.
Tyler’s conclusion:
let’s do everything we can on the public health front.
That means keeping them away from aggregating at work, or out of work group places like a bar.
There is very little chance of a “fragile” financial system will cause any suffering. All the Big Banks know how to whine for a Big Bailout. It’s certain that the Covid-19 outbreak is enough of an excuse to, literally, excuse the moral hazard bailout they’ll ask for and get, if they “need” it, before many important voters suffer.
So how should we think? This is a period of exceptional destruction, and in need of extra creativity, especially in firm creation and reorganization — and low interest rates combined with unexpected tax cuts could help with the creation of new companies, more quickly, to aid in the specialization adjustments needed.
This is more likely to be centered in the services sector rather than the usual source of economic weakness, manufacturing.
If it is centered in services many of the traditional measures of weakness may not work as well this time as they have in previous cycles.