After the Government-Engineered Recession, How Soon Will the Economy Return to Normal?

The arrival of COVID-19 has brought with it an unprecedented and uncertain situation in many ways. One uncertainty is that because the disease is novel, we don’t know its future trajectory. Another uncertainty is how rapidly governments will move to lift restrictions on economic activity. That is something government officials can choose. Yet another uncertainty is how the economy will respond to changes in government mandates. This is an unprecedented economic situation, because it is the first time government has deliberately engineered a recession to be imposed on a healthy economy.

The current economic downturn is not the result of COVID-19; it is the result of government policies to try to slow the spread of COVID-19. The economy was in great shape prior to the spread of the virus beyond China’s borders, and when it began to spread, governments mandated the closure of substantial segments of their economies. Governments forced the closure of profitable businesses and mandated that gainfully employed people give up their jobs.

Because a government-engineered recession in a healthy economy is unprecedented, there is some uncertainty as to how rapidly the economy will recover once the mandated restrictions are lifted. There is also uncertainty about how rapidly those restrictions will be lifted, but setting that aside, if all restrictions were lifted today, how long would it take for the economy to spring back to its old self?

A government-engineered recession is not entirely unprecedented. Double-digit inflation in 1979-80-81 led the Federal Reserve to slow down on monetary growth, leading to a recession in 1982-83, but in that case, the economy had an unhealthy combination of high inflation and high unemployment that the government-engineered recession was designed to address. In the current situation, the economy was healthy and government policy deliberately undermined it. The rapid recovery from the earlier recession suggests some reason to be optimistic that there will be a rapid recovery from this one.

If, once restrictions are lifted, people return to their old patterns of economic activity, the recovery should be rapid. Some businesses will not recover due to financial losses suffered during the closure, and some people, living paycheck-to-paycheck, will be unable to dig out of the hole that government mandates put them in. But, many individuals, justifiably fearful of the contagious virus, will not return to their old patterns of economic activity even though they could.

The recovery depends in part on governments allowing economic activity to resume, but also on people choosing to resume their old economic activities. Just because restaurants are open again does not mean that people will patronize them. Many people do seem restless and ready to return to their pre-COVID-19 lifestyles, providing some optimism regarding the economic recovery, even if new COVID cases continue, as they surely will.

Governments have never engineered a recession to be imposed on a healthy economy before, so forecasting the trajectory of the recovery is more of a conjecture than is usual in economics. I am optimistic, but not overly confident that my optimism is justified. My lack of confidence partly is due to the uncertainty about how people will react to loosening restrictions, but also to my thought that government officials, who love to dictate to their subjects, will continue to be excessive in their restrictions on economic activity. Government policies put us in this recession, and government policies can keep us there.