Laurence Ball
The crisis has left deep scars, which will affect both supply and demand for many years to come.
Blanchard (2012)
The Covid-19 pandemic in the US has led to volumes of initial claims for unemployment and unemployment rates not seen since the Great Depression period, pushing the economy into a recession. As policymakers map out potential recovery paths, much of the debate tends to focus on short-run and medium-run implications. Can we hope for a ‘V-shaped’ rebound, at least once vaccines have been widely distributed, or will it take a long time between economic decline and subsequent recovery akin to a ‘U-shaped’ rebound or worse (Baldwin and di Mauro 2020, An and Loungani 2020)? What has received less attention are the potential long-run implications. History tells us that economic crises like the current one can alter consumer behaviour in the long-run – beyond the effects captured by standard economic variables such as current employment and employment prospect, current income, and wealth. The most famous example might be the Great Depression and the lingering “mood of pessimism that for a long time affected markets” (Friedman and Schwartz 1963). But even looking back at the Great Recession of 2008, we have observed that the crisis had long-term effects on consumer demand. Consumption was slow to return to pre-crisis levels, not only in absolute levels, but also relative to the growth of income, net worth, and employment (Petev et al. 2011, De Nardi et al. 2012, Fatás and Summers 2016). If standard life-cycle consumption channels, such as time-varying financial constraints, as well as explanations building on loss of worker skills or low private investment (Hansen 1939, Blanchard and Summers 1986, Delong and Summers 2012, Summers 2014) fail, what, then, explains the lasting effects of economic crisis on consumer demand?