Executive Summary
There is no doubt that the intensity of the coronavirus shock — the depth and speed of the fall in output — is unparalleled and frightening. And it will leave a structural macroeconomic legacy if economies don’t return fully to their old growth trajectory or rates. But it’s a long way from a macroeconomic shock — even a severe one — to a structural regime break, such as a depression or a debt crisis. The authors map four paths that lead to a structural regime break, using historical examples to illustrate each, and explain why they believe each scenario is unlikely for the U.S. right now.
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There is no doubt that the coronavirus is driving a macroeconomic meltdown around the world. In the U.S. and elsewhere, heavy job losses will likely drive unemployment figures to levels not seen since the Great Depression. Fiscal efforts to contain the crisis are pushing deficits to levels last seen during World War II. Both developments have spurred fears and commentary that the crisis is spiraling into either a depression or a debt crisis.
But is it too soon for such pessimism? The intensity of this shock isn’t in question — the depth and speed of the fall in output is unparalleled and frightening. And coronavirus will also leave a structural macroeconomic legacy if economies don’t return fully to their old growth trajectory or rates. But it’s a long way from a macroeconomic shock — even a severe one — to a structural regime break, such as a depression or a debt crisis.
Price stability is the parameter to watch — it’s the key to a favorable macroeconomic regime. A break such as a depression or a debt crisis is marked by a shift to extreme deflation or inflation, respectively, and thus a breakdown of the normal functioning of the economy. Over the last 30 years, the U.S. economy has enjoyed falling, low, and stable inflation, which in turn, has driven low interest rates, longer business cycles, and high asset valuations. But if price stability falters, there would be massive consequences for the real and financial economies.
So, knowing that, how worried should we be?
The Four Paths to a Structural Regime Break
Policy and politics are what stand between a severe crisis and a structural regime break. Persistently inadequate policy responses — rooted either in an inability or a political unwillingness — are what fail to stop the negative trajectory of a crisis-ridden economy. We’ve mapped four paths that lead to a structural regime break, using historical examples to illustrate each.
1. Policy Error
The first path to a depression occurs when politicians and policymakers conceptually struggle to diagnose and…
Read More: The U.S. Is Not Headed Toward a New Great Depression
