As much as we all hate to admit it, this coronavirus stuff isn’t going anywhere anytime soon, at least not for the next few weeks, possibly even months. And as it continues and businesses and social events are shutting down, we have to understand that the economy will undoubtedly be affected. However, it may not be worth all the panic.
Now, you might be asking, ‘How can that be, I’m going to be off work for a while and will be without a paycheck? And businesses are closing; some may never reopen.’
And I understand that. You will be affected, as will plenty of businesses, even with the help of the government. Industries and markets such as food and travel will suffer more than most.
So the fear is that because some businesses and people will be making less, the entire economy will fall as national spending decreases. But that isn’t necessarily true.
First of all, this will not last forever, nor will we be unable to recover from it. And it certainly doesn’t mean the market as a whole is going to come crashing down around us within the span of a few months.
To understand this, we have to look a little closer at economics and realize that while spending in some areas may definitely decrease, it may be somewhat offset as spending in other areas increase.
Take COVID-19 related spending, for example. Restaurants, bars, sporting events, and most entertainments in many states are becoming unavailable to the public. In addition, people are afraid of leaving their homes and are pretty much staying there, except for work and necessities.
But people are still spending their money. All you have to do is look at all the empty shelves in most groceries to realize this. Spending on foods with a long shelf life, toilet paper, house cleaners, bottled water, and hand sanitizer are through the roof.
And as schools, classes, and in-office meetings are being canceled, e-learning services, high-tech video conferencing devices, and online courses are being bought up at extraordinary rates.
Online entertainment is also skyrocketing. Those who didn’t have time or never considered it before are suddenly subscribing to online video channels, Netflix, Hulu, Disney+, and so many more.
Think about how many families you know that usually go on spring break. And yet this year, they are unlikely to, even if they had planned to just a few weeks prior. That money is now being spent elsewhere, maybe putting in a new game room upstairs, buying an elliptical, or getting a new pool installed.
And since we can’t go out to eat, people are buying more groceries and even teaching themselves to finally cook. The rates of online cooking classes and shows have gone through the roof in recent weeks.
So as you can see, money is still being spent; it’s just being done so in places that may have been a little more neglected before.
Another thing to consider is Nobel Prize-winning economists Milton Freidman’s ‘permanent income model of consumption.’ Freidman initially states that “permanent consumption spending is a function of permanent income.”
But what does that really mean?
Essentially, he says that everyone has was he calls a “permanent income” or an expected income during a certain amount of time. Based on this amount of earned income, most consumers budget their funds to allow for a specific type of lifestyle or “permanent consumption.” As long as things go as planned, you roughly spend x amount on food, y on entertainment, z on utilities, etc.
When short-term changes happen, Freidman says most people adjust their wealth to compensate. For example, in times of extra income or when yields are higher than expected, families tend to increase their wealth by either saving, paying off debt, or both. On the opposite end, when incomes fall short of the norm, people decrease their wealth by spending their savings, adding to their debt, or both.
Friedman makes the case that changing their budget, or the amounts spend in certain areas, is often the last resort.
So, in this case of decreased spending due to COVID-19 and its economic effects, most consumers won’t actually change how much they are spending, albeit in different industries. Instead, they will dip into their savings, take out a loan, or both. And with the government giving out stimulus packages, this is even more likely.
In the long run, jobs will return, businesses will reopen, and spending will soon be right back where it was.