B1 Intermediate US 26 Folder Collection
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if you're worried about the economic
toll of the coronavirus crisis you're
not alone
it's scary there is no clear forecast
and each country's experience will be
different here's what we do know a
steady flow of money goods services and
the people to make them flow is
essential to a healthy economy and that
flow is severed right now by life
savings stay-at-home orders recession is
inevitable but what kind of recession it
will be and what recovery might look
like is still unclear to help imagine
what could happen authors from Boston
Consulting Group point out that
recessions and their recoveries come in
various shock shapes these are
determined by how hard a crisis hits the
supply side of an economy that's an
economy's inputs capital like machinery
factories software labor or workers plus
productivity or how we use labor and
capital productively the heart of the
supply side is hit the more credit is
interrupted meaning less money is
injected in the form of loans to
businesses and individuals to fuel
investment and the more difficult it is
for productivity to recover from best to
worst we have V U and L recession shock
shapes the V shape is a one-time dip if
credit can continue to flow productivity
and labor are less affected you can see
that growth dips but recovers to its
pre-crisis level and rate B U shape is
much more costly credit flow is
disrupted and growth drops precipitously
never rebounding to its pre-crisis path
the rate of growth recovers see how the
slopes are the same but a large gap
between the old and new paths represents
one-off damage to the economy
supply-side the L shape is the worst
credit is severely disrupted not once
but perpetually and there is very little
new investment this economy never
recovers its prior output path and the
rate of growth also declines the crisis
leaves permanent structural damage to
the economy supply-side
these examples represent crises that
started in the financial sector
disrupting credit flow in this capital
growth we have some off-the-shelf
policies for dealing with these however
we are now in uncharted territory with a
double risk of a financial system shock
and an epic freeze of the real economy
the households firms and government that
deliver real physical goods and services
countries have no existing playbook for
dealing with this double shock months of
necessary social distancing raises the
risk of both types of problems which can
feed off each other in dangerous ways
for example a prolonged crisis can drive
up real economy bankruptcies of everyday
people in firms making it harder for
financial systems to manage and a
financial system crisis would starve the
real economy of credit which could
cripple investment and ultimately growth
in this combined crisis capital does not
grow pushing the economy towards a
u-shape not good however we can head off
a you or l-shaped recovery and lessen
the intensity of the crisis how
primarily innovation on the medical side
vaccines treatments and capacity
innovations are needed to save lives and
end the economic damage caused by social
distancing on the economic side in
addition to a vigorous and efficient
policy response we will need policy
innovations for example in the u.s. the
2 trillion dollar stimulus bill is just
a start we will need innovative ways to
deliver that money to those who need it
since never before have policymakers had
to help such large numbers of firms and
households for example the so called
discount windows that allow unlimited
access to funding for the financial
sector could be replicated for
households and firms in the real economy
so that they can stay afloat
zero-interest bridge loans to households
and firms a moratorium on mortgage
payments for residential and commercial
borrowers these are potential solutions
that could help make a real difference
the economic goal is to keep our shocks
shape closer to a V and further away
from a u or an L
speedy well-executed medical and policy
innovations are our best hope to save
the most lives and avoid permanent
economic damage
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Understanding the Economic Shock of the Covid-19 Crisis

26 Folder Collection
Seraya published on May 25, 2020
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