Economic Crisis With and Without Lockdown

World economy has already been hit by recession owing to the corona virus crisis. Various estimates show that a deeper recession is looming large. Much of the reason behind the recession is accredited to draconian measures such as complete lockdown opted by the governments around the world to contain the contagion. Nevertheless, reckoning that the recession could have been completely avoided if these measures were not placed would be a biased analysis. But, if not for the lockdown, severity of the recession would not be the same.

As a first stage of recession, complete lockdowns have ensued negative supply shock, which means sudden halt in supply of goods and services in the economy. As labor force are following stay at home order, productions have plunged. We have already passed through the first stage and are in its climax. The second stage is characterized by depletion in people’s savings as their expenditure on daily necessities continues but there is a blockage in flow of income. As a result, a negative supply shock will lead  to a demand shock. With reduction in demand, producers will respond by reducing their supply, resulting into layoff of more labor and capital, thus worsening the economic downturn both in terms of severity and longevity. The lengthier and more severe the recession, the longer it will take to bounce back.

Without lockdown, recession would occur in a different manner and would be less intense. We would be witnessing initial effect on demand side and not the supply side. With government urging people to maintain social distancing and providing guidelines for safety measures as an alternative to punitive lockdown, labor force would still be active and supply would not be halted. There would not be a break in circular flow of income between households and firms. There would be continuation in supply of goods and services and we would avoid negative supply shock. Instead, the economy would be experiencing demand shock manifested as reduction in demand for services whose acquisition requires having to contact a significant number of people such as services provided by restaurants and cinema halls. In response to lower demand, these businesses would then have to run under capacity resulting into reduction of total output in the economy.

We would be experiencing contraction in economic output in both the cases. However, in the first case (with lockdown), a large negative supply leads to even larger demand deficiency, making the economic recession worse.  Whereas, in the second scenario (without lockdown), the economic crisis would be less intense than the one in the first case. The extension of lockdown will further plummet the economy into deeper recession which otherwise could have been prevented. Therefore, we have to find an alternative model to the lockdown or else alongside corona virus crisis, we will face an added burden of having to deal with abysmal economic crisis.

Now that you have read that, below is a short video on how economic crises affect the lives of ordinary people.

Ashesh Shrestha

Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.