Impacts of COVID 19 on the Economy Article Essay

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Closed by covid-19 Paying to stop the pandemic

The struggle to save lives and the economy is likely to present agonising choices

Editor’s note: The Economist is making some of its most important coverage of the covid-19
pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it,
register here. For more coverage, see our coronavirus hub
PLANET EARTH is shutting down. In the struggle to get a grip on covid-19, one country after
another is demanding that its citizens shun society. As that sends economies reeling, desperate
governments are trying to tide over companies and consumers by handing out trillions of dollars
in aid and loan guarantees. Nobody can be sure how well these rescues will work.
But there is worse. Troubling new findings suggest that stopping the pandemic might require
repeated shutdowns. And yet it is also now clear that such a strategy would condemn the world
economy to grave—perhaps intolerable—harm. Some very hard choices lie ahead.
Barely 12 weeks after the first reports of people mysteriously falling ill in Wuhan, in central China,
the world is beginning to grasp the pandemic’s true human and economic toll. As of March 18th
SARS-CoV-2, the virus behind covid-19, had registered 134,000 infections outside China in 155
countries and territories. In just seven days that is an increase of almost 90,000 cases and 43
countries and territories. The real number of cases is thought to be at least an order of magnitude
greater.

Spooked, governments are rushing to impose controls that would have been unimaginable only a
few weeks ago. Scores of countries, including many in Africa and Latin America, have barred
travellers from places where the virus is rife. Times Square is deserted, the City of London is dark
and in France, Italy and Spain cafés, bars and restaurants have bolted their doors. Everywhere
empty stadiums echo to absent crowds.
It has become clear that the economy is taking a much worse battering than analysts had expected
(see Briefing). Data for January and February show that industrial output in China, which had been
forecast to fall by 3% compared with a year earlier, was down by 13.5%. Retail sales were not 4%
lower, but 20.5%. Fixed-asset investment, which measures the spending on such things as
machinery and infrastructure, declined by 24%, six times more than predicted. That has sent
economic forecasters the world over scurrying to revise down their predictions. Faced with the
most brutal recession in living memory, governments are setting out rescue packages on a scale
that exceeds even the financial crisis of 2007-09 (see leader).
This is the backdrop for fundamental choices about how to manage the disease. Using an
epidemiological model, a group from Imperial College in London this week set out a framework
to help policymakers think about what lies ahead. It is bleak.
One approach is mitigation, “flattening the curve” to make the pandemic less intense by, say,
isolating cases and quarantining infected households. The other is to suppress it with a broader
range of measures, including shutting in everybody, other than those who cannot work from home,
and closing schools and universities. Mitigation curbs the pandemic, suppression aims to stop it in
its tracks.
The modellers found that, were the virus left to spread, it would cause around 2.2m deaths in
America and 500,000 in Britain by the end of summer. In advanced economies, they concluded,
three months of curve-flattening, including two-week quarantines of infected households, would
at best prevent only about half of these. Moreover, peak demand for intensive care would still be
eight times the surge capacity of Britain’s National Health Service, leading to many more deaths
that the model did not attempt to compute. If that pattern holds in other parts of Europe, even its
best-resourced health systems, including Germany’s, would be overwhelmed.
No wonder governments are opting for the more stringent controls needed to suppress the
pandemic. Suppression has the advantage that it has worked in China. On March 18th Italy added
4,207 new cases whereas Wuhan counted none at all. China has recorded a total of just over 80,000
cases in a population of 1.4bn people. For comparison, the Imperial group estimated that the virus
left to itself would infect more than 80% of the population in Britain and America.
But that is why suppression has a sting in its tail. By keeping infection rates relatively low, it leaves
many people susceptible to the virus. And since covid-19 is now so widespread, within countries
and around the world, the Imperial model suggests that epidemics would return within a few weeks
of the restrictions being lifted. To avoid this, countries must suppress the disease each time it
resurfaces, spending at least half their time in lockdown. This on-off cycle must be repeated until
either the disease has worked through the population or there is a vaccine which could be months
away, if one works at all.

This is just a model, and models are just educated guesses based on the best evidence. Hence the
importance of watching China to see if life there can return to normal without the disease breaking
out again. The hope is that teams of epidemiologists can test on a massive scale so as to catch new
cases early, trace their contacts and quarantine them without turning society upside down. Perhaps
they will be helped by new drugs, such as a Japanese antiviral compound which China this week
said was promising.
But this is just a hope, and hope is not a policy. The bitter truth is that mitigation costs too many
lives and suppression may be economically unsustainable. After a few iterations governments
might not have the capacity to carry businesses and consumers. Ordinary people might not tolerate
the upheaval. The cost of repeated isolation, measured by mental well-being and the long-term
health of the rest of the population, might not justify it.
In the real world there are trade-offs between the two strategies, though governments can make
both more efficient. South Korea, China and Italy have shown that this starts with mass-testing.
The more clearly you can identify who has the disease, the less you must depend upon
indiscriminate restrictions. Tests for antibodies to the virus, picking up who has been infected and
recovered, are needed to supplement today’s which are only valid just before and during the illness
(see article). That will let immune people go about their business in the knowledge that they cannot
be a source of further infections.
A second line of attack is to use technology to administer quarantines and social distancing. China
is using apps to certify who is clear of the disease and who is not. Both it and South Korea are
using big data and social media to trace infections, alert people to hotspots and round up contacts.
South Korea changed the law to allow the state to gain access to medical records and share them
without a warrant. In normal times many democracies might find that too intrusive. Times are not
normal.
Last, governments should invest in health care, even if their efforts take months to bear fruit and
may never be needed. They should increase the surge capacity of intensive care. Countries like
Britain and America are desperately short of beds, specialists and ventilators. They should define
the best treatment protocols, develop vaccines and test new therapeutic drugs. All this would make
mitigation less lethal and suppression cheaper.
Be under no illusions. Such measures might still not prevent the pandemic from extracting a heavy
toll. Today governments seem to be committed to suppression, whatever the cost. But if the disease
is not conquered quickly, they will edge towards mitigation, even if that will result in many more
deaths. Understandably, just now that is not a trade-off any government is willing to contemplate.
They may soon have no choice. ?

The second article :

The Economist, Jul 23rd 2020

Macroeconomics
Governments must beware the lure of free
money
Budget constraints have gone missing. That presents both danger and opportunity
IT IS SOMETIMES said that governments wasted the global financial crisis of 2007-09 by failing to
rethink economic policy after the dust settled. Nobody will say the same about the covid-19
pandemic. It has led to a desperate scramble to enact policies that only a few months ago were
either unimaginable or heretical. A profound shift is now taking place in economics as a result, of
the sort that happens only once in a generation. Much as in the 1970s when clubby Keynesianism
gave way to Milton Friedman’s austere monetarism, and in the 1990s when central banks were
given their independence, so the pandemic marks the start of a new era. Its overriding
preoccupation will be exploiting the opportunities and containing the enormous risks that stem
from a supersized level of state intervention in the economy and financial markets.
This new epoch has four defining features. The first is the jaw-dropping scale of today’s
government borrowing, and the seemingly limitless potential for yet more. The IMF predicts that
rich countries will borrow 17% of their combined GDP this year to fund $4.2trn in spending and
tax cuts designed to keep the economy going. They are not done. In America Congress is debating
another spending package. The European Union has just agreed on a new stimulus funded by
common borrowing, crossing a political Rubicon.
The second feature is the whirring of the printing presses. In America, Britain, the euro zone and
Japan central banks have created new reserves of money worth some $3.7trn in 2020. Much of this

has been used to buy government debt, meaning that central banks are tacitly financing the
stimulus. The result is that long-term interest rates stay low even while public-debt issuance soars.
The state’s growing role as capital-allocator-in-chief is the third aspect of the new age. To see off
a credit crunch, the Federal Reserve, acting with the Treasury, has waded into financial markets,
buying up the bonds of AT&T, Apple and even Coca-Cola, and lending directly to everyone from
bond dealers to non-profit hospitals. Together the Fed and Treasury are now backstopping 11% of
America’s entire stock of business debt. Across the rich world, governments and central banks are
following suit.
The final feature is the most important: low inflation. The absence of upward pressure on prices
means there is no immediate need to slow the growth of central-bank balance-sheets or to raise
short-term interest rates from their floor around zero. Low inflation is therefore the fundamental
reason not to worry about public debt, which, thanks to accommodative monetary policy, now
costs so little to service that it looks like free money.
Don’t fool yourself that the role of the state will magically return to normal once the pandemic
passes and unemployment falls. Yes, governments and central banks may dial down their spending
and bail-outs. But the new era of economics reflects the culmination of long-term trends. Even
before the pandemic, inflation and interest rates were subdued despite a jobs boom. Today the
bond market still shows no sign of worrying about long-term inflation. If it is right, deficits and
money-printing may well become the standard tools of policymaking for decades. The central
banks’ growing role in financial markets, meanwhile, reflects the stagnation of banks as
intermediaries and the prominence of innovative and risk-hungry shadow banks and capital
markets (see article). In the old days, when commercial banks ruled the roost, central banks acted
as lenders of last resort to them. Now central banks increasingly have to get their hands dirty on
Wall Street and elsewhere by acting as mammoth “marketmakers of last resort”.
A state with a permanently broader and deeper reach across the economy creates some
opportunities. Low rates make it cheaper for the government to borrow to build new infrastructure,
from research labs to electricity grids, that will boost growth and tackle threats such as pandemics
and climate change. As societies age, rising spending on health and pensions is inevitable—if the
resulting deficits help provide a necessary stimulus to the economy, all the more reason to embrace
them.
Yet the new era also presents grave risks. If inflation jumps unexpectedly the entire edifice of debt
will shake, as central banks have to raise their policy rates and in turn pay out vast sums of interest
on the new reserves that they have created to buy bonds. And even if inflation stays low, the new
machinery is vulnerable to capture by lobbyists, unions and cronies.
One of monetarism’s key insights was that sprawling macroeconomic management leads to infinite
opportunities for politicians to play favourites. Already they are deciding which firms get tax
breaks and which workers should be paid by the state to wait for their old jobs to reappear. Soon
some loans to the private sector will turn sour, leaving governments to choose which firms fail.
When money is free, why not rescue companies, protect obsolete jobs and save investors?

However, though that would provide a brief stimulus, it is a recipe for distorted markets, moral
hazard and low growth. Fear of politicians’ myopia was why many countries delegated power to
independent central banks, which wielded a single, simple tool—interest rates—to manage the
economic cycle. Yet today interest rates, so close to zero, seem impotent and the monarchs who
run the world’s central banks are becoming rather like servants working as the government’s debt-
management arm.
Free markets and free lunches
Each new era of economics confronts a new challenge. After the 1930s the task was to prevent
depressions. In the 1970s and early 1980s the holy grail was to end stagflation. Today the task for
policymakers is to create a framework that allows the business cycle to be managed and financial
crises to be fought without a politicised takeover of the economy. As our briefing this week
explains, this may involve delegating fiscal firepower to technocrats, or reforming the financial
system to enable central banks to take interest rates deeply negative, exploiting the revolutionary
shift among consumers away from old-style banking to fintech and digital payments. The stakes
are high. Failure will mean the age of free money eventually comes at a staggering price.

Part 2 : ANSWER 2 QUESTIONS BELOW :

You are the president of the United States. During your administration the economy is doing very well, low unemployment and inflation, strong growth, interest rates close to zero, and a huge trade deficit with the rest of the world. Suddenly, a virus appears and the economy shuts down because you need to protect your people. This action which is necessary has a big impact in the economy, mainly in the labor market and in the GDP.

1. How can you explain this situation to the citizens? They are very well informed, so they prefer a technical explanation based on the AS-AD model.

2. How are you going to tackle this situation? Are you going to take a Keynesian approach or a Neoclassical approach? Why?

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Explanation & Answer

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1

Impacts of Covid-19 on the Economy

Student’s Name
Institution Affiliation
Instructor’s Name
Course Date & Number
Date of Submission

2
Impacts of Covid-19 on the Economy

Article 1
Closed by covid-19 paying to stop the pandemic
The struggle to get a grip on covid-19 is shutting down the whole global; one country after the
other demands that its citizens shun society. It has led to economic deterioration, and the
desperate government is trying to tide over consumers and companies. It is crystal clear that the
measures to condemn the disease are perhaps intolerable and will shut down the economy. The
virus behind covid-19 is spreading at a high rate and registering a high number of over 134,000
infections outside china in over 155 territories. The government of every nation is rushing to
impose control that will help curb the spread of the virus; these measures have worsened the
economy more battering than analysts had expected.
Moreover, the modelers found that if the virus is left to spread, it will cause around 2.2m deaths
in America. They concluded that two- weeks of quarantines of infected households would
prevent half of this population. Also, peak demand for intensive care and national health services
will be overwhelmed. Suppression has a sting in its tail; many governments are opting into it as
the advantages worked well in China and kept the infection ra...


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