Stimulus Packages: Panacea for Economic Collapse Due to COVID-19

Dr Mayengbam Lalit Singh *

It is very interesting to experience correlation between the phenomenon of economic disease and recent biological disease, COVID-19.

Previous article “COVID-19: Possible Agent to the End to Economic Globalisation” mentions the impact of the disease on economies across the countries. The present article deals with possible remedy (policy) for economic ailment due to pandemic COVID-19.

When we retrospect in the history of economics, there were two major economic collapses (depression). The first one was the Economic Depression in 1929 where major manufacturing industries were shut down. The first reason behind the economic depression was high population increase in the USA that led to high increase in demand for manufactured goods.

In order to meet the demand, so many industrial units mushroomed. There were high speculations for profit motives which led to huge investments in manufacturing sectors. More and more workers were employed to produce in large scale.

All this created a deflated bubble for supply of manufactured goods which overcame volume of demand. As a result, the entire volume of manufactured goods could not be sold and hence the downturn of business motives of investors. It affected synchronously on all industrial units, then economic collapse with shutting down of industries and investments along with mass unemployment.

The best example we can witness is “Modern Times, 1936” by Charlie Chaplin. Classical economists with their theory “Supply creates its Own Demand” failed to explain the economic collapse.

In order to correct this, the government introduced huge stimulus packages which comprised direct governmental investment to industrial units, public expenditures. These policies motivated demand, production, and supply to revive slowly and then back to normality.

The second economic collapse was the Great Depression that took place in 2008 in the financial sector in the USA. There was a huge boom in the housing sector in the USA before 2008 which led to financial sectors (both public and private banks) investing in the housing sector. There were reports of many citizens who could not build houses due to low earnings but they expected their own homes.

Pulled up by demand, the construction sector built apartments and started selling in coordination with these financial houses (banks). These banks lent their money to these low earning groups of people with elastic recovery periods at minimum or zero interest rates.

Such housing sectors are quite lumpy in other words it takes a long time for full recovery. Deflated bubble in the housing sector swept away funds that were to be infused into manufacturing and other sectors. However, default of repayment by loanee in the housing sector crashed the financial sector and other sectors too in chain form. With fusion of more than US$ 600 million brought the economy back to normality.

Economists predict present economic recession in 2020 which is not similar to the previous recessions we had witnessed before. Main reasons of economic recessions in previous decades were ailment in certain economic sectors and its outbreak in other sectors. However, the main reason for the present one is pandemic COVID-19 which affects entire production, demand and supply chain in the economy.

Another distinguishing feature is that there is restriction on the meeting among people or workers in the present recession, whereas in the past recession there was no restriction on the meeting among people. Without meeting among workers, it is very difficult for the economy to survive again.

When we look into its impact, daily wage earners are the worst affected group in the society since they are deprived of their daily jobs due to the disease. So, types of stimulus packages in present the context will be predicted different from the stimulus packages injected during the previous recessions.

The foremost sector for stimulation should be the health and pharmaceutical sectors where the government should introduce and test drugs that can cure this pandemic disease. This could revive the condition for working people and hence the entire economic sectors. At present, people are locked in their homes so that it can prevent the spread of this disease.

This makes shutting down of production of goods and services at maximum level. At this critical juncture, direct injection of money supply to the accounts of people will not revive demand and supply chains, since store houses and shopping centres are empty.

In order to avoid this, it is advisable that government authorities should distribute daily needs (basic food, health and clothing items) to each household so that it can prevent the gathering of people. Since the economies are under hardship of recession, productions are the bottom level.

In order to avoid of crippled production, the government can channelize money in the household production where workers need not go to industrial houses, instead they can start production and assemble basic consumers’ goods in their houses. Authorities can collect these from respective households and disperse.

Or in order to revive catering industry, the government can channelize funds to catering centres to prepare and distribute food to each household instead of channelizing in the bank account of households.

However, the respective government except for Kerala has not yet announced stimulus packages. It is expected that many state governments will follow what Kerala government initiates.