April 21, 2020

If the economy is the pipe and money is the water, then COVID-19 is the junk clogging up the system. In our latest faculty essay examining the COVID-19 pandemic, Elliott Professor of Economics and Business Saranna Thornton explains the cause and effect of the country’s current economic instability and reflects on lessons learned for the future.

Saranna Thornton headshotby Saranna Thornton

I’ve been a plumber for almost thirty years, but the pipes I study—and used to help repair—don’t carry water. They carry money.

As a macroeconomist who used to work for the U.S. Senate Budget Committee and the Federal Reserve Board, I study the flow of money through the economy and how this monetary flow affects economic growth, unemployment, inflation, and other important macroeconomic variables.

Since early January when the news of a coronavirus epidemic spilled forth from China, I’ve been focused on how the spreading disease will affect the U.S. economy. The truth is that almost everything that has happened to the economy in the last three months was entirely predictable.

You needn’t be a journeyman plumber to know what would happen if someone cooked up five pounds of bacon on your stove and then poured the leftover grease down your sink. The pipes would clog, water would cease to flow through the system, and you’d be left holding the plunger.

The impacts of the COVID-19 pandemic have clearly clogged up the pipes of the U.S. economy.

On February 2, I wrote a quiz question for the students in my ECON 303 Intermediate Macroeconomic Theory class, asking them to analyze the impacts of a large number of quarantined U.S. workers on the labor market.

The answer, as you know from the data on new unemployment claims filed in the last two weeks of March and the first week of April, is 17 million newly unemployed individuals out of the 152 million U.S. workers who were on non-farm payrolls. Adding in unemployed independent contractors who are not eligible to file unemployment claims, the U.S. unemployment rate has most certainly increased to a level not seen since the Great Depression.

Understanding how the pipes of the U.S. economy are connected made it easy to predict the impacts of the novel coronavirus.

Simply, U.S. Gross Domestic Product (GDP) is the amount of new goods and services produced within our borders in a given time period. Macroeconomists often categorize GDP based on who is buying it—e.g., individuals, businesses, governments, and foreigners. The consumption component of GDP, or items purchased by individuals, is typically about two-thirds of the total. Spending on services such as tourism, restaurant meals, sporting events, concerts, and medical care accounts for 69 percent of consumption and 47 percent of all GDP.

Significantly, most services are provided in environments that promote the spread of COVID-19 because they do not allow for social distancing. We are suffering in part because our economy produces most of the things we need so efficiently that we are able to spend vast amounts of our incomes on luxury service items such as March Madness, spring break travel, youth sports leagues, and nights on the town.

If we try to live our lives as we did before the pandemic began, we would exponentially increase the number of COVID-19 cases in our communities, overwhelming our hospitals, morgues, and cemeteries, and endangering the lives of millions of health care personnel. The nature of COVID-19 and its drain on health care resources is such that more economic activity now means much more death and morbidity later, with the end result being a vicious cycle of even more economic contraction. The disease is far worse than the cure.

If we are observant, however, we can extract key lessons from this pandemic that will help us better prepare for the future. The most important lesson is prevention—no need to worry about the damage from clogged pipes if you make sure they don’t get clogged in the first place.

Saranna Thornton, Elliott Professor of Economics and Business

Saranna Thornton and students reading a Wall Street JournalIf we are observant, however, we can extract key lessons from this pandemic that will help us better prepare for the future. The most important lesson is prevention—no need to worry about the damage from clogged pipes if you make sure they don’t get clogged in the first place.

In response to the terrorist attacks of 9/11, the U.S. government created the Office of the Director of National Intelligence (DNI) to oversee and coordinate the work of all U.S. intelligence agencies. The DNI’s mandate includes all threats to national security, including pandemics and other health threats. Unfortunately, because a major threat like this pandemic was thought to be a remote possibility by some, the DNI’s pandemic response team was weakened and unsupported over time. The job of pandemic response is fundamental not only to U.S. national security but also to the country’s economic stability and, therefore, must be elevated in importance.   

Another important takeaway is that quick action is critical when the next threat arises. Our government knew enough about the threat of COVID-19 to act in the first weeks of January. Hand-washing, social distancing, and increasing the production and stockpiling of medical supplies should have begun then. Likewise, Congress and the President should have approved an economic relief program in early January so that by early March relief checks and business loans could have been rolling out. The lesson here is that a swift, early response is crucial to mitigating the long-term effects of economically disruptive events like COVID-19.

As we all work together to unclog the pipes from COVID-19, let’s use the lessons of this pandemic to prepare for and to fight the next one.

Elliott Professor of Economics and Business Saranna Thornton holds a B.A. in economics and in government (with honors) from Colby College, an M.P.A. from the University of Texas at Austin, and a Ph.D. in economics and public policy from Carnegie Mellon University. Dr. Thornton’s work has been published in numerous economics and higher education journals such as Journal of Economics and Business, Women in Higher Education, and the University of Southern California Review of Law and Women’s Studies.

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