"The current economic decline of individual countries is like nothing that has ever come before."
"The current economic decline of individual countries is like nothing that has ever come before."
The present dire situation of workers, medical personnel and small-and medium-sized businesses around the world has provided a stark demonstration of perhaps the most paradoxical element of economics’ law of supply and demand, viz., while demand can quickly respond to an order or incentive to either decrease or increase, supply can respond slowly or not at all. The damage to an economy becomes much greater when the order to decrease demand and the need to increase supply require immediate or expeditious compliance.
The current economic decline of individual countries is like nothing that has ever come before. The Great Depression, the 2008-2009 financial crisis and other major downturns were the results of specific economic occurrences such as the collapse of the US stock market (1929) and the bursting of the US home mortgage bubble (2008).
But the current downturn is what lawyers term sui generis: It has been a non-economic event. With the issuance of stay-at-home orders by their governments, people in many countries have had to stop working (unless they have Work From Home arrangements with their employers) and purchasing goods and services from business establishments. In the process demand has been—and continues to be—killed. And it all happened so quickly.
We now turn our attention to supply in particular to the capacity of supply to deal adequately with the negative movements generated by the COVID-19 pandemic. The pandemic can be contained—and the lockdown can be terminated—only if governments can field enough ventilators, respirators, ICUs (intensive care units) and adequately garbed medical personnel. But the governments of the countries where COVID-19 has exacted the highest tolls—the US, Italy, Spain, the UK and France—have manifested their inability to provide their hospitals and frontliners with enough PPE (personal protective equipment), masks, gloves and enough ICUs equipped with ventilators and respirators. At this point, four months after the Wuhan outbreak, lack of physical equipment and medical personnel remains the general—and poignant—plaint.
In an ideal world, governments and business communities would quickly have gotten together to get the manufacturing establishments to retool and step up their production of ventilators, respirators, PPE and other medical personnel requests. This was done. But this is not an ideal world. Because of the attendant circumstances—the urgency of the demand and the enormous production volumes involved—the supply side of the equation is only just beginning to fulfill its part of the demand-and-supply equation. In the meantime, millions of people have been infected with COVID-19 and hundreds of thousands have succumbed to the virus around the world. And the lockdowns are still in place.
Governments can, with the stroke of a pen, destroy demand, as they have done in response to the coronavirus pandemic. But governments can order the rapid delivery of physical goods—equipment, investments and supplies—for whose production facilities are not yet in existence. But that cannot be obeyed quickly; there is a time lag.
For demand stroke of a pen can make things happen. That is not the case with supply; the frontliners and everyone who cares about them wish that that were the case.