There is little doubt that the global economy is in recession, which is defined by the IMF as growing less than 2% a year. Looming on the horizon is the even darker threat: global depression, which is characterized by a decline in real GDP exceeding 10% in more than one major economy and lasting for two or more years. This is the specter that governments are trying to stave off. In the U.S. and Europe, they are moving faster and throwing more resources at it than they did in response to the global financial crisis. The question is whether they will succeed. The answer hinges on knowing what stands between the current recession and a more catastrophic depression.
The economic ravages caused by Covid-19 began with a disruption of supply that quickly weakened demand. It turns out that much of the economic impact of Covid-19 is due to the very measures needed to control the pandemic. When cities are locked down and people stay home to avoid contact with others, all economic activities in industries involving people in close proximity come to a halt. Consumer spending crashes because people are either too fearful or unable to go out and spend. As a consequence, businesses are in jeopardy; their revenues are drying up faster than they can cut costs, and many will have no choice but to lay off workers or even shut down.
The current recession will turn into a depression if business closures and layoffs spread unchecked, changing a temporary dip into a total collapse of demand that derails the economy. A self-reinforcing feedback loop will then lock revenue-starved companies and salary-starved households into a destructive, downward spiral—a global depression.
What stands between the current recession and a global depression is the survival of the business sector. Government efforts must therefore focus on supporting the business sector with policies that are direct, timely and effective. Tax holidays, rollover of loans, and suspension of payments of interest, rent and fees are a start.
What is really needed is for governments to help pay a portion of salaries so companies don’t have to lay off their workers as revenues dwindle. This will break the link between the initial decline in demand and a much more devastating economy-wide crash. Large companies and small businesses need help equally. Bernie Sanders and his comrades may rail against such a policy as a case of government of bailing out big businesses, but what they don’t understand is that large companies are key customers for many small businesses. And if big companies go down, small businesses will go down with them. And while giving every adult American $1,200 may be an expedient and certainly a popular measure for President Trump, it doesn’t do much to help households whose breadwinners are rendered jobless.
Time is running out. Job losses are rising rapidly. The U.S. Department of Labor reported March 26 that jobless claims that week rose to a record 3.3 million, up from 282,000 the week before. Ireland went from nearly full employment in February to losing an equivalent of 48% of all new jobs created in the last five years in March, according to Dublin’s Economic and Social Research Institute.
Governments may be throwing the kitchen sink at the problem, but the outcome depends on how, when and where the money is spent. The survival of the business sector is our best hope in warding off a global depression. We must ensure that it does.
forbes.com