How Should the Economy Combat Coronavirus? (Part 1)

During the time that the coronavirus has been in the United States, the stock market has been in constant flux. Thousand point drops multiple days in a row, followed by a huge jump back up from the Dow. After looking at all of these jumps, I would like to take a second to explain why the FED rate cut has had little impact on combatting the coronavirus, and why stocks jumped up due to news on a government stimulus package.

Both of these are going to involve an explanation of some macroeconomic ideas, which I will start with.

The macroeconomy of the United States is explained through a diagram called the Circular Flow Model. This model is a visual representation of how money, capital, and other things transition from different sectors of our economy. In general, there are four different sectors: Households, the Factor market, Businesses, and the Product market. These four are all in flux with one another, and they are constantly working together to put out products consumers will purchase, keep businesses operating, pay wages to laborers, etc. (Underneath is a visual of the Circular Flow Model)

So, what happens when one part of this circular flow is disrupted? The easiest way to explain it is that it is like when someone has a clogged artery. When one of the sectors is unable to perform their task, the circulation of the economy slows down or stops, which can lead to terrible economic consequences for everyone.

Now, how does this apply to our current-day situation with the coronavirus? The coronavirus is the thing that is causing the clogging in the circular flow, and has led to a giant increase in people applying for unemployment, stock drops, and possible business closures. The virus impacts every sector of the circular flow, but I will start at households and go from their to show the effects of the virus.

With states implementing stay at home orders, consumers are now limited to spending their money on only necessary things such as groceries (food), doctor visits, drugstore visits, etc. This limitation by state governments is a good thing in order to slow down the virus, but it reduces the amount of consumption in other areas, restaurants, bars, activities outside the house, and many others. This reduction in spending by households hurts the Product market, because businesses are unable to sell their products and services to consumers because of the limitations on travel and activity put on households (If you are following what I am saying with the actual picture of the model in this post, we are moving clockwise). Since businesses are unable to sell stuff in the Product market, they are bringing less revenue which makes it harder to purchase what the model calls “factors of production”. Factors of production are the resources and labor needed in order to continue providing that good or service to the public. One of these reductions is in labor costs, which then in turn hurts households, because they can now not purchase as much as they used to. This cycle continues on until something breaks the chain and gets the economy back on the right note.