Like me, the last thing you wanted to hear at 8:00 AM as a college freshman was an economics professor drone on about supply and demand. Arcane concepts that only seemed practical when the local package store was sold out of the Budweiser Cans (supply) and we had to buy Michelob bottles which were two dollars more a case. Perhaps that’s the supply and demand lesson you recall from Econ 101 as well. Taking a macro view, supply and demand also refer to the broader sides of the overall economy.
To refresh, the supply side are the goods and services that are consumed. Everything from the factory that manufactures Jeep Wranglers in Toledo, Ohio, to the local deli where you can buy a bacon, egg and cheese sandwich for breakfast. The demand side of the economy represents those who procure of these goods and services; for example, the individuals, who buy the egg sandwich and eat while driving their Jeep. Additionally, the demand side includes businesses and government spending.
Before I end today’s economics lesson, there’s one more concept worth sharing. The linkage between cause and effect, and the law of unintended consequences. Since this economics lesson has gotten me nostalgic for my college days, I will pull an example from my youth. In the Commonwealth of Massachusetts, alcohol was not sold on Sunday. However, in the neighboring State of New Hampshire, it was. I mention this to illustrate how the unintended consequence of Sunday package store closures in one state, creates the motivation for consumers driving to the neighboring state to buy alcohol.
Now fast forward to today, where these basic economic concepts are ubiquitous in our daily lives, yet forgotten — or ignored — by many politicians. In March of this year, as Covid-19 cases began to rise, State and Local governments imposed varying degrees of stay at home orders. While the extent and timing of these restrictions differed, the concepts were the same; with businesses and workers separated into two distinct categories, essential and non-essential.
We all remember the headlines, the shutdown of businesses caused the economy to come to a grinding halt. Gross Domestic Product (GDP) in the second quarter of 2020, decreased at an annual rate of 31.4 percent, the largest contraction in the U.S. economy since the Great Depression. Put simply: by deliberately shutting down the supply side, the overall economy contracted. Even if the demand side had the desire to consume a product or service (e.g. get a haircut) there was no capacity in the system to allow it.
By the same token, as restrictions eased in the late spring and summer, we saw third quarter GDP expand by 38 percent, as the pent-up demand side made up for lost time. Doing the math quickly, you might think that the U.S. economy, made up more than it lost, but upon closer look, lockdowns shrunk the U.S. economy. As of September 30, 2020, the economy was 3.5 percent smaller than it was at the end of 2019, before the Pandemic hit. To put this into perspective, according to the Commerce Department, the U.S. GDP at the end of 2019 was $19.25 trillion, meaning our economy shrunk by nearly $700 billion.
As of this writing, Covid-19 cases are back on the rise, and despite the lifesaving breakthroughs in therapeutics, and vaccines on the horizon, some hospitals are at risk of reaching capacity. This means that State and Local governments from coast to coast are pulling out their six-month-old playbooks and issuing lockdown orders. But wait, didn’t we say we were going to listen to scientists? And isn’t science about learning from trial and error? So what did we learn from past lockdowns?
To answer that question, let’s go back to Econ 101 once more. If politicians and bureaucrats weren’t spending all their time campaigning for student council, and paid more attention in class, they would have learned about the aforementioned law of unintended consequences. In studying the lockdowns (the cause), and their effect on the economy, it is clear that mistakes were made. And failing to learn from those mistakes is harmful to more than just the economy.
The Sophie’s Choice determination of which businesses are deemed essential needs to be revisited; because when you close a business there are numerous downstream implications on the economy, and the livelihoods of those impacted by the lockdown. Let’s go back to the closure of barber shops. If the local barber employs 5 people, and we close their business, obviously those five people don’t go to work. Well, when they aren’t working, they aren’t going to the local deli to buy that bacon, egg and cheese for breakfast, and they likely aren’t going out for lunch either. And, by the same token, the customers who aren’t going to the barber shop aren’t going to the deli next door after their haircut. And with no revenue coming in the door, the owner of the barber shop can’t pay his/her workers or their rent, meaning we take capacity out of the demand side of the economy. Workers can’t pay bills; landlords can’t make mortgage payments; and so on.
Here’s the bottom line: Lockdowns create a vicious economic cycle. Our experiment from earlier in 2020 left our economy with a nearly $700 billion hole, and our National Debt is now equal to the size of our economy for the first time since World War II. As state and local government officials consider closing the supply side of the economy once more, I implore them to consider the unintended economic consequences of these mandates. Lockdowns don’t just harm the non-essential barber; they harm the neighboring businesses which support the local economy and count on the foot traffic from the barber’s customers.
I have yet to hear a public official acknowledge the downstream impact of “essential businesses” when you close “non-essential” ones. There is a multiplier effect of closing one business, and it may take generations to make up the ground we have lost. Don’t get me wrong, I do not mean to trivialize or ignore the magnitude of this public health crisis, but by the same token, small business owners have their life fortunes tied up in their enterprises. Before politicians institute more lockdown orders that crush those businesses, maybe they should take one more lesson in Econ 101.
Mitch Roschelle is a Macro-Economic strategist, business consultant and co-host of the NoPo Podcast.
The views expressed in this opinion piece are the author’s own and do not necessarily represent those of The Daily Wire.