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ABSTRACT
This short note has one main ambition. It seeks to provide students with a very simple macroeconomic framework to deal with the short-term economic impact of the COVID-19 pandemic. The explanation for the unprecedented magnitude of the recession over a short span of time is to be found in the peculiar form of the shock due to the various lockdowns. Indeed, the 2020 crisis is specific in that it involved two recessive shocks simultaneously: a demand shock superimposed on a supply shock. This model is original in that although it is driven by demand it is capable of dealing with supply issues without entailing any additional technical difficulties.
Acknowledgements
We are grateful to the anonymous reviewers for their very constructive comments and to the editor, Louis-Philippe Rochon, for giving us the opportunity to improve the first version of this article. We also thank Christopher Sutcliffe for his attentive reading of the manuscript. Of course, we are responsible for any remaining errors.
Disclosure Statement
No potential conflict of interest was reported by the author(s).
Notes
1 Using cellular phone data on customer visits, Goolsbee and Syverson (Citation2021) show that the lockdown is not responsible in the United States for most of the decline in consumer traffic:
Comparing consumer behavior over the crisis within the same commuting zones but across state and county boundaries with different policy regimes suggests that legal shutdown orders account for only a modest share of the massive changes to consumer behavior (and that tracking county-level policy conditions is significantly more accurate than using state-level policies alone). While overall consumer traffic fell by 60 percentage points, legal restrictions explain only 7 percentage points of this.
2 Obviously this second simultaneous impact does not concern China since it was the first country to implement lockdown measures.
3 The standard equilibrium condition in a static environment, Y = C + I + G + (X–M), is now expressed in a more dynamic context, thanks to the expression of all variables in terms of capital. It makes full sense to divide investment by the capital stock since I/K gives the gross rate of capital accumulation, a variable that is essential in a Keynesian dynamic logic. For the other variables, it may seem a little odd, but we have to keep in mind that this effort is necessary to preserve the equilibrium condition.
4 Here, we consider an increase in the propensity to save only. If we had used a consumption function including an autonomous component, we could have modelled the increase in savings differently: not as an increase in the propensity to save out of disposable income, but as a decline in autonomous consumption. Nevertheless, it is difficult to measure empirically a change in autonomous consumption, while it is easier to have access to data on the propensities to save. Moreover, a consumption function with an autonomous component would have entailed undesirable complications to our reasoning.
5 In a certain sense, we observe the Keynesian paradox of thrift: an increase in the propensity to save (here, constrained increase because of the lockdown) leads to a drop in national income, so that the amount of saving is not increased.
6 Although the accumulation rate in is still positive, it must be remembered that it is the gross accumulation rate. When depreciation is removed the net accumulation rate becomes negative.
7 In a Washington Post article (The COVID-19 recession is the most unequal in modern U.S. history) published on 30 September 2020, Heather Long and her co-authors gather some striking facts on the unequal consequences of the crisis. For example, ‘the shift to remote work strongly favored more-educated workers, with as many as 6 in 10 college-educated employees working from home at the outset of the crisis, compared with about 1 in 7 who has only high school diplomas.’ Beyond the use of teleworking, inequalities also concern the rise in unemployment:
By the end of the summer, the downturn was largely over for the wealthy — white-collar jobs had mostly rebounded, along with home values and stock prices […] Employment for low-wage workers was still down more than 20 percent in August from the summer before and around 10 percent for middle-wage workers.
8 For example, to study the immediate consequences of the subprime crisis, Wunder (Citation2012, p. 183) stated that
the consumption decisions of the top and second highest quintiles may account for much of what is happening in the economy today. Together these top two quintiles accounted for 70 per cent of the GDP controlled by households. A small change in the propensity to consume of these quintiles may lead to dramatically large swings in aggregate demand.
9 For emerging countries with no real Welfare State, the shocks will thus be greater, especially for informal workers.
10 The increase in σ may also be attributable to discretionary stimulus packages. Even though automatic stabilizers are more important in Europe than in the United States (Dolls, Fuest, and Peichl Citation2012), the U.S. response to the pandemic has led to a strong increase in current transfers, notably thanks to lump-sum checks.
11 Across countries, the differences in the levels of the σ parameter may stem from undistributed profits: theoretically, if we consider that households receive distributed profits (dividend and interest incomes), the complement to 1 for σ points to undistributed profits. Consequently, the higher levels of σ for the United States or the United Kingdom seem to come from higher dividend payout ratios.
12 In our model, the compensation effect could lead to the absence of a clear increase in the slope of the saving function. But, here, we use annual data, and the rise in the propensity to save is very important during the months under lockdown, while the rise in current transfers may take some time.
13 Hourly productivity is roughly stable, but employment productivity is declining because of the fall in hours worked.
14 While overall employment dropped by only 1.8 per cent in France between 2019 and 2020, full-time equivalent employment fell by 10.5 per cent. Partial activity managed to maintain workers in employment during the pandemic. But, the productive consequence is that employment productivity has declined by 5 per cent, thus allowing for an increase from to
. By contrast, the United States saw a surge in its unemployment rate from 3.7 per cent to 7.9 per cent, because of the absence of public support for partial activity, and the destruction of jobs resulting from the pandemic (−6.26 per cent between 2019 and 2020). These statistics also come from the Ameco database (authors’ calculations from FETD and NETN series for respectively full-time equivalent employment and total economy employment, and UVGD series for nominal gross domestic product, and ZUTN for unemployment rates).
15 While the United States chose to deal with the crisis with higher transfers to households, the French government decided to distribute higher transfers to firms, but neither solution creates growth in the very short run. The French path tries to preserve employment and sustain firms’ survival through financial support in the medium run, while the U.S. path accepts a rise in unemployment, but opens the way to a consumption-led recovery thanks to stimulus checks.
16 At the time of writing, these changes were still calculated with projections for 2020.
17 The stimulus package announced by French government in September 2020 engages an effort in public investment, but only for 2021 onwards. French sub-performance is also linked to the country’s specialization in touristic activities, the fall in which accounts for a substantial part in its drop in exports.