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* A take on the economics of the virus * [1/12]

The first-order effect is a drastic fall in labor (L) for one quarter (hopefully no more). GDP doesn’t fall from trees, less L means less Y. Inevitably. Only a small fraction of labor at work can be substituted by labor from home.
Fiscal or monetary stimuli at t do not change the resource constraint when there is a binding L constraint.

Focus policy right now on responding to the health emergency, funding health care, producing ventilators. Not on the stock market or the macroeconomy.
For macro, worry about t+1, t+2, ...

If economy can offset lost production now by people working nights and weekends in the next few quarters, can stabilize GDP over 1-2 years. Then, focus of policy is on easing *intertemporal substitution*.
Fiscal policy: US tax return deadline (and payments) extended from April 15, 2020 to April 15, 2021. Not a tax holiday, just a 1-year delay on filing and payments. Consider delaying payments on as many tax commitments as possible.
Budget policy: borrow through public debt. This is the time to run deficits, and plan for huge surpluses next year that pay the debt down. For people that face trouble borrowing to intertemporally substitute, help them overcome those credit constraints.
Regulatory policy: Lift restrictions on businesses working on weekends and opening at night. Consider reforms to overtime pay requirements. Plan 24h public transport, public schools open through the summer. Anything to let us work round the clock once quarantine is over.
Monetary policy: lower i to lower cost of intertemporal credit. Lend to the economy through LOLR. IMF and cross-border swap lines for international credit. Goal is to prevent shutdown of firms at t that would be solvent at t+2 but have trouble intertemporally substituting
What about inflation? If L has a binding upper bound, then we are in a rationing economy. Like in war times. The price system is less informative, so worry less about inflation.
What kind of recovery? There is a similarity between a virus shock in a services economy and a weather shock in an agricultural economy. If so, expect V-shaped recession, quick bounce back, as in XIX centuuy. Goal is to have bounce overshoot, making up for the lost quarter
Ultimate effects of crisis: if instead of one quarter, fall in L is for 2 or 3 quarters, then we are in big trouble. The longer it is, the less scope for intertemporal substitution, the worse is the cumulative loss n output and welfare. It could get very very bad.
In terms of economic mechanisms and theories: think neoclassical rather than Keynesian. More about intertemporal subsitution, less about aggregate demand or inflation. More about real economy, less about finance. Very different from Great Depression and Great Recession.
Finally, a crucial word of humility. It is a new shock, it is a *big* crisis, it is affecting the whole world. Policymakers would do well to try many things, from many different perspectives. This is just one of them, to complement others.
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