How the American economy can recover from the coronavirus pandemic

To those on the front lines of the coronavirus crisis, it’s ultimately about fear. “People are terrified,” says Kathryn Lott, executive director of Houston’s Southern Smoke Foundation, a crisis relief organization for people in the food and beverage industry. “All are afraid they will lose their homes, and the terror in their voices is something I have never experienced. I have done casework for years, during natural disasters, people who have been gunned down, new mothers on the streets with infants during winter. I have never heard this.”

No one has ever heard this, the pleas for help from so many Americans rendered jobless with stunning suddenness—more than 16 million and counting as of early April. For them, the COVID-19 pandemic has triggered intertwined crises of personal health and personal finance, threatening disaster for them individually and, in the aggregate, for the country. The great challenge facing each person—and the nation overall—is overcoming the two crises together. In the modern economy there is no playbook for how to do it.

More than in any past economic collapse, U.S. consumers are at the heart of this one. Not only do they face the threat of getting sick, but they’re also getting fired or furloughed by the millions because their workplaces are being shut down to prevent others from being infected. As a result, they can’t spend, forcing more businesses to close, and so on—“an aggregate demand doom loop” says Glenn Hubbard, chairman of the White House Council of Economic Advisers from 2001 to 2003. “The problem is radiating from consumption demand by households,” says Matthew Slaughter, a CEA member from 2005 to 2007. “It’s unprecedented—an involuntary shock to consumption demand. The magnitude of it is huge.”

For consumers, the cosmic injustice of it all is head-spinning. The U.S. economy has long been consumer-driven, and over the past five years consumers have powered economic growth even more than usual, expanding America’s economy faster than those of most other big, developed economies. Consumers’ share of GDP reached a towering 68% in last year’s fourth quarter, higher than it got even in the 2006 to 2008 shopping festival that preceded the financial crisis and recession. Yet unlike then, consumers in recent years have increased their buying responsibly, saving a prudent 8% of their disposable personal income on average vs. near 0% back then. Household debt reached 99% of GDP in the last boom; at the end of 2019, it was just 76%.

Mainstream economists forecast that U.S. GDP will shrink 30% to 50% in the second quarter.
Lane Turner—The Boston Globe/Getty Images

And now, having kept the economy cruising along, consumers are suddenly under intense financial pressure. Of those who still have jobs, millions cannot work from home and must choose between risking their health (and potentially their lives) by working in grocery stores, warehouses, post offices, hospitals, and other high-contact settings, or not working.

On top of it all is a crowning irony: Because the U.S. is still fundamentally a consumer-driven economy—and can’t transform overnight—consumers as a group will have to get themselves and the whole economy out of this. 

No one knows how deep a hole they’ll have to climb out of; everything is happening too fast for official statistics to keep up. But we know this is the steepest economic plunge in modern history. More people lost their jobs in two weeks in March than in the entire 2008–2009 recession. In the Great Depression, real GDP declined for 43 months, eventually shrinking by 30%. This time, Morgan Stanley forecasts a 30% decline in the second quarter; Goldman Sachs says 34%; and St. Louis Fed president James Bullard says 50%. For now, the most important indicators to watch aren’t economic ones. They’re the weekly trends in new COVID-19 cases, number of deaths, and governors making isolation orders more stringent or lenient.

Breaking the “doom loop”

Consumers can’t bring back the economy without help. Reviving consumption is a major goal of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the many other actions by federal agencies, states, and the Fed to put more cash in consumers’ hands. But doling out money isn’t enough. “There’s the immediate loss of the job, but the bigger issue is uncertainty,” says Hubbard, who advised Senate Republicans on the CARES Act. Getting a $1,200 check, augmented unemployment benefits, and tax relief may offer some respite, but consumers won’t spend much and employers won’t hire if they’re braced for still worse to come.

That’s why the Paycheck Protection Program, an innovative element of the CARES Act that got off to a rocky start, is especially worth watching. It offers small businesses (up to 500 employees) Small Business Administration loans equaling about 20 weeks of major expenses, including payroll, mortgage, and rent. If a business gets the loan by June 30 and restores staffing and pay to pre-Feb. 15 levels, while also meeting other tests, the loan can be forgiven. The effect could be significant: Firms with 500 or fewer workers account for over half of U.S. employment. 

We will be different. We’ll make different product choices … Our hard wiring changes.

Ulrike Malmendier, University of California at Berkeley economist on how the crisis will affect consumers

In theory it’s a sensible policy response, helping to break the doom loop by giving businesses and workers certainty. Employers will know they can keep paying employees, even if there’s no work to do, confident that it won’t cost them a thing; employees will know their employer has a strong incentive to keep paying them, so they’ll be more inclined to spend. At least it’s a certainty until June 30, by which time, the policymakers hope, the pandemic will be in decline, and the economy will have turned up. 

But at least initially the program has spawned massive uncertainty among prospective borrowers and the banks through which loans are being made. The hastily written law only outlined the program, leaving the Treasury to write, at warp speed, 31 pages of regulations. The SBA was entirely unprepared to lend 10 times as much money in a few weeks as it normally lends in a year, and the amount appropriated for lending, $299.4 billion, was clearly far too little. A larger risk: Maybe the pandemic won’t be under control by June 30; either the economy will sink back into the depths when the program ends, or Congress will extend it at a cost of still more hundreds of billions.

Long-term “scars” for consumers

For the moment that’s unknowable. But we can say with some confidence how this already traumatic experience will change the behavior of shaken consumers. In the near term, those who have income will save more of it if they possibly can. The dominant feeling of consumers in an economic meltdown is loss of control, and having money put away, even just a little, gives them a feeling of more control. Of the money they spend, they’ll spend more of it on necessities, again because they feel more control when their necessities are on hand. The NPD Group, a retail research firm, has observed this shift already and says that “wrestling with necessities vs. discretionary products will play a huge role” in how retailers adjust through the pandemic.

In the longer term, the pandemic experience will change consumers for decades. “We will be different,” says economist Ulrike Malmendier of the University of California at Berkeley. “We’ll make different product choices, consumption choices, human capital choices.” This is beyond economics; it’s neuroscience. A crisis experience is deeply emotional, and “stronger emotions get anchored more strongly in our memories,” she says. “Our hard wiring changes.”

We will buy differently. “Macroeconomic crises appear to leave long-term ‘scars’ on consumer behavior,” write Malmendier and coauthor Leslie Sheng Shen in a pioneering 2018 study. They found, for example, that regardless of income, households that experience high unemployment personally or in the macroeconomy consume less, including less food, than other households. They use significantly more coupons when they shop and buy more sale items and products of lower quality, again regardless of their income. Such households also save more. Those effects fade over time but are still measurable years later.

It’s a similar story with investing. In a separate study, Malmendier and coauthor Stefan Nagel found that households’ financial risk-taking is strongly related to how well or poorly markets have performed during their lives, and again, the effects are long-lasting. “Even returns experienced decades earlier still have some impact,” they report.

One more key finding: In addition to recent experiences being most influential among all age groups, they are most powerful by far among the young, who increase consumption more during booms and cut back more during busts. They may be living on way, way less for some time.

For two groups of young people—those graduating from high school or college this spring—that’s just the beginning of the dispiriting news. College students who graduate into the labor force during a recession suffer reduced earnings for 10 years on average, and for those with the lowest predicted earnings (based on college and major), the earnings penalty may last much longer. It gets worse. Some research finds that in midlife, recession graduates on average work more and earn less, are less likely to be married and more likely to be childless, and suffer higher death rates. One researcher on this topic, Northwestern University’s Hannes Schwandt, sums up the findings thus: “The bad luck of leaving school during hard times can lead to higher rates of early death and permanent differences in life circumstances.”

If past trends from serious recessions hold true, the pandemic might alter the economy’s structure, diminishing the earning power of the labor force—potentially for years. Lack of funds will force some prospective college students to postpone or abandon their plans. If the recession is long, many of the newly unemployed may remain jobless for many months or even years, during which their skills might deteriorate and become outdated, as happened in the last recession. Even if they get jobs eventually, they may well be less valuable workers. 

Apart from its effects on workers’ earnings, the pandemic may do other lasting damage to the labor force as well. If the unlikely worst-case scenarios play out and COVID-19 kills over 100,000 Americans plus millions more worldwide, the simple shrinkage of the labor force would reduce output for years. Even without that extreme circumstance, the same factors that have caused schools to close will significantly curtail early childhood education, a proven factor in better educational achievement later in life.

Researchers have also uncovered an unexpected effect of the 1918 flu pandemic that could potentially recur: It reduced educational attainment by people who hadn’t been born yet. Americans who were born in the months after the pandemic, and thus were in utero during it, were less likely to graduate from high school than the cohorts immediately before and after them. In any long-term economic recovery plan Congress and the White House hammer out, policymakers would be wise to invest in incentives that help young people finish school.

Planning for the next catastrophe

As businesses respond to this grand-scale reordering of their world, some implications are already clear. Remote work will become mainstream, if only because so many people will have an online meeting app and know how to use it. Companies are slashing capital spending as they scramble for cash, weakening the foundation of future economic growth while also fueling a B2B doom loop in the present. They’ll diversify supply chains beyond China when demand returns, further slowing that country’s decelerating economy. 

As in all recessions, companies will learn to do more with fewer people, so the already spiking unemployment rate may well continue to rise at least briefly after this recession ends.

It’s a safe bet that many companies will compile pandemic plans for the future—surely a wise move, but if that’s all they do, they’ll be missing a crucial lesson of this experience. A global pandemic is the most predicted disaster since Hurricane Katrina, yet, now as then, businesses and governments were caught flat-footed. When the urgency of this calamity abates, it will be time to start thinking through other plausible catastrophes—a major earthquake strikes California; some group or nation detonates a nuclear bomb; a large electrical grid gets hacked and shut down. You’ll never foresee exactly what happens, but the exercise of working out the second- and third-order effects will put you miles ahead of competitors if one of these events occurs. It’s a lot of work. But remember the conclusion of Mohamed El-Erian, CEO of bond trading firm Pimco during the financial crisis: “It’s better to be prepared for events that don’t happen than unprepared for events that do.”

As we look ahead to days that will probably remain challenging, what can be offered to the supremely important, terrified consumer, the hero and victim of this saga? Only hope—based on history. Forecasts of multiplying deaths and unprecedented economic collapse come with percentages and decimal points. Yet human ingenuity, passion, and energy are beyond any economist’s ability to predict, and those are what get us through times of trial. It’s unsatisfying to say that a better future awaits us because of forces and factors that we can’t exactly describe. But we mustn’t forget that it’s true. 


3 keys to leading in a crisis

This crucible experience will be career-defining for many leaders. In any crisis—especially a historic global catastrophe in which the main factor is uncertainty—people want leaders to give them information, reassurance, and a plan. Yet this is exactly when all of those are maddeningly difficult to deliver. History says leaders will benefit by following a few principles:

1. Remember that people want to be led.

We understand in our bones the simple efficiency of it, that no group accomplishes much if no one is in charge. In a life-threatening historic crisis, we want direction more than ever. We also need a leader to be, in effect, a repository for our fears, someone who has the power to do what we cannot. The leader assumes part of our burden and helps us sleep at night. If you’re in charge—be in charge.

2. Be decisive.

In a crisis, even people who would normally be at one another’s throats accept that major decisions must be made quickly. These decisions will be debated—but after they’re made, not before. That’s a valuable opportunity for leaders. The difficulty is that just when decisions are most easily accepted, they’re hardest to make. Every leadership decision is made with incomplete information; in a crisis the problem is worse and the stakes are higher. Don’t let that fact stop you from making firm decisions.

3. Define reality and give hope.

People hunger for the unvarnished truth about their organization and its prospects, and they can sense evasion a mile away. The news in a crisis is rarely good. The leader’s art is outlining reality unflinchingly and framing it as a challenge that can be met, not as a disaster that must be endured. Effective leaders never make a promise that can’t be kept with 110% certainty; they do offer realistic reasons for hope.

Even these principles will be of limited value to any leader who hasn’t built trust and credibility. You can’t change the past, but a crisis is an excellent time to start changing the future.

A version of this article appears in the May 2020 issue of Fortune with the headline “Has the coronavirus crisis changed business? You bet it has.”

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