THE COVID-19 CRISIS
Francisco M. Gonzalez
Department of Economics
University of Waterloo
2/41
Chetty et al. (2020)
Chetty et al. (2020) build a database that tracks economic
activity in real time for the U.S.
they report daily statistics on consumer spending, business
revenues, employment rates, and other key indicators
disaggregated by ZIP code, industry, income group, and
business size
publicly available at https://www.tracktherecovery.org/
3/41
the initial impacts of COVID-19 on economic activity were
largely driven by a reduction in consumer spending
source: Chetty et al. (2020)
4/41
consumer credit and debit card spending
source: https://www.tracktherecovery.org/
5/41
consumer spending fell primarily because high-income
households lowered their spending
source: https://www.tracktherecovery.org/
6/41
spending reductions were concentrated in services that
require physical interaction
source: https://www.tracktherecovery.org/
7/41
employment fell by 8.260 million workers (= 5.65%)
between Dec. 1, 2007 and Dec. 1, 2009, and by 8.953
million (= 5.64%) between Feb. 1, 2020 and Oct. 1, 2020
2008 2010 2012 2014 2016 2018 2020
132,000
136,000
140,000
144,000
148,000
152,000
156,000
160,000
Th
ou
san
ds
of
Pe
rso
ns
Employment Level
Source: U.S. Bureau of Labor Statistics fred.stlouisfed.org
8/41
labor turnover, total non-farm, Jan. 1, 2007 to Oct. 1,
2020, Job Openings and Labor Turnover Survey (JOLTS)
1
3
5
7
9
11
13
15
Ja
n-
07
Oc
t-0
7
Ju
l-0
8
Ap
r-0
9
Ja
n-
10
Oc
t-1
0
Ju
l-1
1
Ap
r-1
2
Ja
n-
13
Oc
t-1
3
Ju
l-1
4
Ap
r-1
5
Ja
n-
16
Oc
t-1
6
Ju
l-1
7
Ap
r-1
8
Ja
n-
19
Oc
t-1
9
Ju
l-2
0
m
ill
io
ns
o
f p
er
so
ns
hires separations quits
source: https://data.bls.gov/pdq/SurveyOutputServlet
9/41
employment for high-wage workers fell by much less and
recovered much more quickly
source: https://www.tracktherecovery.org/
10/41
U.S. evidence from Chetty et al. (2020)
1 the initial impacts of COVID-19 on economic activity were
largely driven by a reduction in consumer spending
2 consumer spending fell primarily because high-income
households lowered their spending
3 spending reductions were concentrated in services that require
physical interaction, which suggests that high-income
households reduced spending mainly because of health
concerns rather than reduced income
4 as businesses lost revenue, they passed the shock on to their
employees, particularly low-wage workers: employment for
high-wage workers fell by much less and recovered much more
quickly
11/41
CANADA
12/41
household saving rate in Canada, quarterly
0
5
10
15
20
25
30
Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
pe
rc
en
t
source: Statistics Canada, Table: 36-10-0112-01
13/41
spending reductions were concentrated in services that
require physical interaction
1.2 8.0
-79.2
-58.6
-16.9
-80.0
-70.0
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
Household
appliances
Audio-visual,
photographic and
information
processing
equipment
Transport
services
Accommodation
services
Personal care
ch
an
ge
in
co
ns
um
er
sp
en
di
ng
fr
om

Q
1
20
20
to
Q
2
20
20
(%
)
source: Statistics Canada, Table: 36-10-0107-01
14/41
Canada employment, Jan. 1, 2020 to Oct. 1, 2020
employment fell by over 200 thousand workers (= 1.07%) between
Jan. 1 and Oct. 1
14.5
15
15.5
16
16.5
17
17.5
18
18.5
19
19.5
m
ill
io
ns
o
f p
er
so
ns
source: Statistics Canada, Table 14-10-0026-01
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COVID-19 employment change, Jan. 1 to Oct. 1, 2020, by
gender & class of worker, thousands of persons
18.2 27.5
94.7
-104
-219.8
37.9
-262.9
5.3
TOTAL EMPLOYED PUBLIC SECTOR
EMPLOYEES
PRIVATE SECTOR
EMPLOYEES
SELF-EMPLOYED
males
females
0
source: Statistics Canada, Table 14-10-0026-01
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COVID-19 employment change, Jan. 1 to Oct. 1, 2020, by
gender & sector, thousands of persons
18.2
108.20
-90.10
-219.8
-18
-201.9
ALL INDUSTRIES GOODS SERVICES
Males
Females
0
source: Statistics Canada, Table 14-10-0026-01
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COVID-19 employment change, Jan. 1-Oct. 1, 2020,
goods-producing sector, thousands of persons
-6.90 -0.30
6.90
50.50 58.10
11 3.4
5
-2
-35.3
AGRICULTURE FORESTRY,
FISHING, MINING,
QUARRYING, OIL
AND GAS
UTILITIES CONSTRUCTION MANUFACTURING
Males
Females
0
source: Statistics Canada, Table 14-10-0026-01
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COVID-19 employment change, Jan. 1-Oct. 1, 2020,
Canada, declining services, thousands of persons
-5.20
-66.50
27.20
-2.40 -4.20
-81.80
-6.00
-19.6
-1.8
-44.8
-2.9 -24
-129.3
-30.6
WHOLESALE AND
RETAIL TRADE
TRANSPORTATION
AND
WAREHOUSING
BUSINESS,
BUILDING AND
OTHER SUPPORT
SERVICES
HEALTH CARE AND
SOCIAL
ASSISTANCE
INFORMATION,
CULTURE AND
RECREATION
ACCOMMODATION
AND FOOD
SERVICES
OTHER SERVICES
(EXCEPT PUBLIC
ADMINISTRATION)
Males
Females
0
source: Statistics Canada, Table 14-10-0026-01
19/41
POLICY RESPONSE
20/41
policy evaluation (Chetty et al. 2020)
State-ordered shutdowns and reopenings of economies had
little impact on economic activity
stimulus payments increased spending among low-income
households sharply, but not in those consumption
sub-categories that would benefit the businesses most affected
by the COVID-19 shock (i.e., those requiring in-person
interaction)
loans to small businesses had only small impacts on
employment, likely because they benefited businesses that
were not planning to lay off many workers
21/41
stimulating aggregate demand and providing liquidity likely
averted a demand-driven recession on top of the COVID
supply shock recession
but the remaining shortfall in spending and employment in the
short run was driven primarily by health concerns
the evidence suggests that economic recovery from a
pandemic requires restoring consumer confidence by
addressing health concerns
it also highlights the value of social insurance to low-income
people who have lost their jobs
22/41
ensuring a robust recovery (Stiglitz, 2020)
mitigating aggregate demand shortages (e.g., 2007-2009
financial crisis)
adverse effects on balance sheets of hourseholds, firms and
banks
increase in uncertainty may induce precautionary behavior
avoiding debt spirals and bankruptcy cascades (e.g., 1997
East Asia crisis)
managing supply chain problems (e.g., wartime interventions)
23/41
neither markets nor governments are good at resolving
distributional conflict
COVID-19 crisis has revealed multiple market failures
(inability to respond quickly, e.g., to the production of masks,
medical equipment, etc.) and government failures (e.g., some
recovery packages lack transparency)
decisions about who gets money and on what terms will have
a profound distributive impact (e.g., Stiglitz is concerned that
banks and large businesses are the winners and low-income
individuals, states and higher education institutions are the
lossers)
24/41
effective federal funds rate, Jan. 1, 1970 to Nov. 1, 2020,
monthly
0
2
4
6
8
10
12
14
16
18
20
19
70
-0
1-
01
19
72
-0
1-
01
19
74
-0
1-
01
19
76
-0
1-
01
19
78
-0
1-
01
19
80
-0
1-
01
19
82
-0
1-
01
19
84
-0
1-
01
19
86
-0
1-
01
19
88
-0
1-
01
19
90
-0
1-
01
19
92
-0
1-
01
19
94
-0
1-
01
19
96
-0
1-
01
19
98
-0
1-
01
20
00
-0
1-
01
20
02
-0
1-
01
20
04
-0
1-
01
20
06
-0
1-
01
20
08
-0
1-
01
20
10
-0
1-
01
20
12
-0
1-
01
20
14
-0
1-
01
20
16
-0
1-
01
20
18
-0
1-
01
20
20
-0
1-
01
pe
rc
en
t
source: https://fred.stlouisfed.org
25/41
Fed’s balance sheet before and after the financial crisis
source: Foerster, A. and S. Leduc: “Why is the Fed’s
balance sheet still so big?” FRBSF Economic
Letter 2019-16, June 3, 2019
26/41
before the crisis, the Fed’s balance sheet was roughly 870
billion dollars, or about 7% of GDP: currency in circulation
was its biggest liability, short-term Treasury securities were its
biggest asset
after 2008, reserves grew to over 40% of Fed liabilities, about
as much as currency in circulation, and mortgage-backed
securities became a significant share of the Fed’s securities
as of March, 2019, the size of the Fed’s balance sheet was
about 3.9 trillion, or about 18.5% of GDP
27/41
Fed’s total assets, Dec. 18, 2002 to Nov. 4, 2020, weekly
0
1
2
3
4
5
6
7
8
20
02
-1
2-
18
20
03
-1
2-
18
20
04
-1
2-
18
20
05
-1
2-
18
20
06
-1
2-
18
20
07
-1
2-
18
20
08
-1
2-
18
20
09
-1
2-
18
20
10
-1
2-
18
20
11
-1
2-
18
20
12
-1
2-
18
20
13
-1
2-
18
20
14
-1
2-
18
20
15
-1
2-
18
20
16
-1
2-
18
20
17
-1
2-
18
20
18
-1
2-
18
20
19
-1
2-
18
tr
ill
io
ns
o
f U
.S
. d
ol
la
rs
Federal Reserve System - total assets
source: https://fred.stlouisfed.org
28/41
monetary base ≡ currency in circulation plus reserve
balances, Jan. 1, 2005 to Sept. 1, 2020, monthly
0
1
2
3
4
5
6
20
05
-0
1-
01
20
05
-1
1-
01
20
06
-0
9-
01
20
07
-0
7-
01
20
08
-0
5-
01
20
09
-0
3-
01
20
10
-0
1-
01
20
10
-1
1-
01
20
11
-0
9-
01
20
12
-0
7-
01
20
13
-0
5-
01
20
14
-0
3-
01
20
15
-0
1-
01
20
15
-1
1-
01
20
16
-0
9-
01
20
17
-0
7-
01
20
18
-0
5-
01
20
19
-0
3-
01
20
20
-0
1-
01
tr
ill
io
ns
o
f U
.S
. d
ol
la
rs
monetary base currency in circulation
source: https://fred.stlouisfed.org
29/41
Bank of Canada assets, Jan. 1, 2008 to Oct. 1, 2020,
monthly (source: https://www.bankofcanada.ca)
0
100
200
300
400
500
600
20
08
-0
1-
01
20
08
-0
8-
01
20
09
-0
3-
01
20
09
-1
0-
01
20
10
-0
5-
01
20
10
-1
2-
01
20
11
-0
7-
01
20
12
-0
2-
01
20
12
-0
9-
01
20
13
-0
4-
01
20
13
-1
1-
01
20
14
-0
6-
01
20
15
-0
1-
01
20
15
-0
8-
01
20
16
-0
3-
01
20
16
-1
0-
01
20
17
-0
5-
01
20
17
-1
2-
01
20
18
-0
7-
01
20
19
-0
2-
01
20
19
-0
9-
01
20
20
-0
4-
01
bi
lli
on
s o
f C
an
ad
ia
n
do
lla
rs
Treasury bills Government bonds repos
collateralized loans other assets Canada mortgage bonds
30/41
Bank of Canada liabilities, Jan. 1, 2008 to Oct. 1, 2020,
monthly (source: https://www.bankofcanada.ca)
0
100
200
300
400
500
600
20
08
-0
1-
01
20
08
-0
8-
01
20
09
-0
3-
01
20
09
-1
0-
01
20
10
-0
5-
01
20
10
-1
2-
01
20
11
-0
7-
01
20
12
-0
2-
01
20
12
-0
9-
01
20
13
-0
4-
01
20
13
-1
1-
01
20
14
-0
6-
01
20
15
-0
1-
01
20
15
-0
8-
01
20
16
-0
3-
01
20
16
-1
0-
01
20
17
-0
5-
01
20
17
-1
2-
01
20
18
-0
7-
01
20
19
-0
2-
01
20
19
-0
9-
01
20
20
-0
4-
01
bi
lli
on
s o
f C
an
ad
ia
n
do
lla
rs
bank notes government deposits settlement balances
other deposits other liabilities equity
31/41
Bank of Canada’s balance sheet, billions of Cad dollars
the Bank of Canada total assets increased from 122.856
billions as of Feb. 1, 2020 to reach a peak of 542.905 billions
in July 1, 2020, falling to 525.021 billions in Oct. 1, 2020
as of Oct. 1, 2020, Government of Canada bonds (268.738
billions), Treasury bills (70.184 billions) and repos (155.096
billions) added up to over 94 percent of total assets
as of Oct. 1, 2020, settlement balances (303.454 billions),
government of Canada deposits (106.176 billions) and bank
notes in circulation (103.601 billions) added up to over 97
percent of total liabilities
settlement balances (reserve balances) increased from 0.250
billion in Feb. 1, 2020 to 303.454 billions in Oct. 1, 2020
32/41
settlement balances act like loans from financial
institutions to the Bank of Canada
when the Bank of Canada buys assets, it borrows from
financial institutions by crediting them with a deposit of
settlement balances in their accounts at the central bank
from the perspective of financial institutions, settlement
balances are safe, earn interest and can be used to settle
transactions with other financial institutions daily
the Bank of Canada can sell assets back to financial
institutions once the crisis is over — shrinking their deposits
of settlement balances — or hold assets until maturity —
using the proceeds to lower settlement balances
33/41
ECONOMIC RECOVERY
34/41
Krugman (2020)
Friedman’s (1964, 1993) plucking model analogy: the
economy is like a string on a musical instrument — recessions
are negative events that pull the string down, and after that it
bounces back; the deeper the recession, the faster the recovery
that follows, but you can only pluck the economy in one
direction; bigger expansions don’t lead to bigger recessions
Dupraz, Nakamura & Steinsson (2020) provide a formal
plucking model of fluctuations and argue, like Friedman, that
U.S. data is roughly consistent with the plucking model
Reinhart and Rogoff (2008) argue that financial crises are
followed by relatively slow and painful recoveries
35/41
U.S. history since 1970 suggests two types of recoveries:
fast (troughs: 1970, 1975, 1980, 1982)
slow (troughs: 1991, 2001, 2009)
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
50.0
52.5
55.0
57.5
60.0
62.5
65.0
Pe
rc
en
t
Employment-Population Ratio
Source: U.S. Bureau of Labor Statistics fred.stlouisfed.org
36/41
fast recoveries followed severe monetary tightening
1960 1970 1980 1990 2000 2010 2020
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
Pe
rc
en
t
Effective Federal Funds Rate
Source: Board of Governors of the Federal Reserve System (US) fred.stlouisfed.org
37/41
slow recoveries have followed private sector overreach
1990-1991 recession: overbuilding of commercial real estate
2001 recession: overinvestment in telecommunications during
the dotcom bubble
2007-2009 recession: households’ debt accumulation during
the housing market bubble
38/41
Krugman’s hypothesis: key issue is whether obstacles to
recovery are externally or internally generated
if obstacles to recovery are externally generated, then recovery
tends to fast, once obstacles are removed (e.g., once interest
rates were lowered in 1982)
if obstacles to recovery are internally generated (e.g.,
overextended private sector), then recovery tends to be slow
note the key role of information: fast recoveries require that
economic agents believe/know that the relevant obstacles to
recovery have been removed; conversely uncertainty may delay
economic recovery
39/41
economic recovery after the COVID-19 crisis
Krugman points out that a problem with formal economic
models of crises is that they lack (endogenous) dynamics
health concerns will end (when?) but until then, both the
epidemic and its economic consequences evolve endogenously
(endogenous) policy response explains why we have not seen
evidence of either large demand shortages or financial panics
cyclical versus structural effects: whether policy makers
should aim at maintaining current employment relationships
between workers and firms depends on whether new normal
after COVID-19 will be fundamentally different
40/41
references
Chetty, Raj, John N. Friedman, Nathaniel Hendren, Michael
Stepner, and the Opportunity Insights Team: “The economic
impacts of COVID-19: Evidence from a new public database built
using private sector data,” Harvard University, November 2020.
Dupraz, Stephane, Emi Nakamura and Jon Steinsson: “A plucking
model of business cycles,” August 2020, unpublished manuscript
Friedman, Milton: “Monetary Studies of the National Bureau,” in
The National Bureau Enters Its 45th Year, New York, NY: National
Bureau of Economic Research, 1964, 7–25, 44th Annual Report,
available at http://www.nber.org/nberhistory/annualreports.html
41/41
Friedman, Milton: “The ”Plucking Model” of Business
Fluctuations Revisited,” Economic Inquiry, April 1993, 171-177
Krugman, Paul: “Economic recovery after COVID-19,” Princeton
Bendheim Center for Finance webinar series, May 15, 2020
Reinhart, Carmen and Kenneth Rogoff: “Is the 2007 U.S.
sub-prime financial crisis so different? An international historical
comparison,” January 2008, NBER working paper No. 13761
Stiglitz, Joseph: “The U.S. response to COVID-19,” Princeton
Bendheim Center for Finance webinar series, April 27, 2020