Economics in the Time of COVID-19

The new coronavirus (COVID-19, to be technical about it) is both something new and something old. As usual, this pandemic is both an aggregate demand and an aggregate supply shock. That makes it difficult to address with standard macroeconomic tools. As Richmond Federal Reserve Bank president Tom Barkin said, “central banks can’t come up with vaccines.” But this pandemic is really, really different. 

The fact that it has hit China first and hardest makes it something new since China has, in recent decades, become the ‘OPEC of industrial intermediate goods’. Manufacturers around the world rely on parts and components made in China – many of them made in the hardest-hit provinces. While the disease seems to be subsiding in China, the Chinese manufacturing miracle has not yet returned to its miraculous volume of production.  Moreover, the virus has hit three other leading members of Factory Asia – Japan, Korea, and Singapore. The virus-related disruptions in these East Asian nations alone will cause “supply chain contagion” in virtually all nations’ manufacturing sectors.