Coronavirus Outbreak to Impact Entire Economy, With Some Bright Spots, Says Steven Allen

With the shutdown of businesses in a large number of cities and states and the growing amount of new coronavirus (COVID-19) cases throughout the country, job loss and a potential recession have become increasing concerns.

Steven Allen, associate dean of graduate programs and professor of economics at Poole College of Management, lent his expertise to the matter and gave us his take on the impact of the COVID-19 outbreak on the job market, government policy and the economy as a whole.

Here’s our Q&A with Steven Allen:

 

The coronavirus pandemic is already negatively affecting demand. What impact is it having on jobs and the labor market if any?

As more and more states and communities have taken steps to ban gatherings, there has ben an impact on both the private sector and government jobs. We already are seeing job losses in hospitality, retail, transportation and other service-sector jobs because people are staying home. The resulting drop in income and sales-tax revenue will make it difficult for state and local governments to maintain their payrolls, especially when some public services, such as parks and (the in-person use of) libraries, are no longer being provided.  

Steven Allen, associate dean of graduate programs and professor of economics at Poole College of Management

In addition, some workers will get sick; others will have to stay home to take care of people. Workers that do not have sick leave and are just making it from paycheck to paycheck will be facing hardship.  

If the number of COVID-19 cases in the U.S. continues to increase, what do you think the short-term and relative long-term (six months to a year) effects will be on jobs and the labor market?

This is really hard to predict without knowing how long the pandemic is going to last and how severe its consequences are going to be. The number of new cases has diminished in China and Korea, so it is possible that in another three months the worst will be behind us. Most economic forecasters are predicting a recession for at least the first half of the year, followed by a recovery in the second half.  

Which industries stand to be hit the hardest in terms of layoffs or hiring freezes and why?

The virus will have an impact on virtually every sector of the economy. The service sector of the economy is already being hit very hard. Owners and employees of bars and restaurants, theaters and retail stores face extreme difficulty in the coming months. Transportation also is taking a big hit (because people are staying home). Workers in manufacturing plants are often in close quarters, so we will continue to see factory shutdowns. Looking ahead, one of the questions becomes — will farmers plant crops this spring if they are worried about being able to get labor come harvest time?  

On the other hand, some sectors will expand. With fewer meals being consumed in restaurants, grocery stores will be busier; and, Amazon plans to add 100,000 jobs as delivery replaces shopping in stores.  

Are there certain monetary or fiscal policies or actions that could help mitigate the negative impact of this crisis currently and help lessen the impact of future similar events?

Standard macroeconomic tools such as cuts in taxes and interest rates will not be effective in this situation. Although people no doubt will like having Washington send them an extra $1,000 to $2,000, most of those checks will be saved, not spent, because most of the service economy is going to be shut down. Payroll tax cuts will help those with jobs, but will do nothing for those out of the labor force. A further problem with these approaches is that they are not targeted toward those who will have the greatest need, especially those who will lose their jobs and have no savings to tide them over.  

The Federal Reserve will need to think outside the box on financial stability. Job one will be to maintain liquidity in financial markets, just as it did in the Great Recession. But the virus poses an additional challenge. Businesses such as airlines and hotels were healthy a month ago and will be healthy again in six to 12 months. What can we do to keep them going in the interim?  Some politicians are calling for direct payments to the companies. A better idea would be to loan Delta Airlines and Marriott Hotels the funds needed to pay off loans and roll over bonds during the coming months, with the Fed accepting planes and buildings as collateral. The Federal Reserve ended up in the mortgage market in the Great Recession; it may need to back up some casinos this time around.

This post was originally published in Poole College of Management News.