To put it plainly, we need one another. The economy is interrelated — as captured by the circular flow diagram, a core economic model.
We need businesses. Businesses create jobs for households and they provide the goods and services households need, such as toilet paper, groceries, movies, etc. Alternatively, businesses need employees and consumers, which are provided by households.
The coronavirus is showing the impact of a decrease in customers for a variety of businesses such as movietheaters, travel-related industries such as hotels and airlines, restaurants, etc. This decrease in consumption is similar as to what occurs in a recession, but this time, the process has been greatly speeded up as a result of the quarantine and self-isolation measures needed to help slow transmission of the coronavirus.
If a business has a steep decline in customers, it has drastically decreased revenue, which negatively affects profits.
With a lot fewer customers to serve, a business will lay off its employees, leaving them with decreased income. These employees are now able to spend less in the overall economy and this in turn affects businesses even further by reducing their customer base even more.
Before the coronavirus, households consumed about 70% of U.S. real gross domestic product. In the fourth quarter of 2019, households consumed $13,410.4 billion in final goods and services out of $19,220.490 billion of all the final goods and services produced in the U.S.
It is important to note that it was businesses in the U.S. that produced the $19,220.490 billion of all the final goods and services produced in the U.S. and it was households that provided the labor to produce those final goods and services.
So, you see, we do need one another; firms need households and households need firms.
With the proper health measures, the coronavirus will pass, but what will become of our economy?
Our basic economic infrastructure needs to be there. We need to be able to pick up where we left off before the pandemic as much as possible.
Business resources need to stay intact, which includes people being able to cover their rent. In addition, they need already-trained and experienced employees to get their businesses up and running as quickly as possible once their doors are open for business once more.
At the same time, consumers need money to spend on products made by businesses. The consumers, who are going to spend, are the ones who live paycheck to paycheck, and these are the people who are employed in service industries such as restaurants and hospitality businesses.
So, it is important to remember that one person's spending becomes another person's income. The consumer's spending becomes the business' income.
When it comes to helping the economy survive this pandemic, it is not a case of which ones need help: the firms or the consumers. It is not “either/or”; it is both. The businesses, small and large, need to survive as do the employees, who are also the consumers.
It is at dire times such as these that we need help from our institutions such as the federal and state governments to help coordinate the response to the pandemic and the economy by being able to inject funds into the economy to keep it afloat. By doing so, the government debt will increase, which is the cost, but the economic recovery from the pandemic will be accelerated, which is the benefit. If the recovery is accelerated, normal market activity can keep the economy growing without further help from the government or prolonged suffering the way we had during The Great Depression.
Hence, the need for expansionary fiscal policy, which includes tax cuts and subsidies and increases in government spending. If our businesses and consumers are unable to survive today, there is no tomorrow and no long run for them.
Heather L.R. Tierney is assistant professor of economics at the Doermer School of Business, Purdue University Fort Wayne.