More COVID-19 Economics

The economy’s outlook has changed dramatically over the last week, so let’s talk about it.

First, undoubtedly you have heard of people running to the store to buy toilet paper. The other day I was at Target down in Centerville, and the toilet paper aisle had just a few rolls left. Hopefully you drew a parallel to bank runs. A few people panicked and rushed to the store, just like in a bank run people rush to get withdraw their money. But remember, banks and stores only have a limited supply of cash and toilet paper. Even if you’re not worried, if enough other people are then you might not get what you need. So now you have an incentive to run as well. Fortunately, our retail industry is not dependent on the stock of toilet paper to survive. But the banking industry does depend on deposits, so bank runs have widespread effects.

Should we be worried about the economy? We should be cautious. There are a few signs that the economy will recover quickly. It’s likely (though not guaranteed) that warmer weather will contain transmission. While some industries have been hurt, it’s also likely that the government will intervene. There is a chance of a worst-case scenario where a few of today’s problems continue to cause problems in the future. But we are really in an unknown situation here.

Today I released a video explaining the differences between today and 2008. As long as the virus is contained (wash your hands!) we should be better than 2008.