Thoughts on Closing and Reopening the Economy

In my Macroeconomics class I have a silly way for the students to remember the components of aggregate demand, or spending, in the economy. Consumption by households, which makes up somewhere between 65 and 70 percent of spending in a typical economy, is like an offensive lineman. Big. Predictable. But not simple. It is the major engine of the economy. And, really, for the first time in our history, we shut it down in response to the Coronavirus.

The only other time consumer spending was shut down it was in response to the Great Depression. And that wasn't government agencies telling households to stop spending. It was households' logical response to crushing economic forces.

Government hasn't ever really shut down the mighty force that is household spending. In response to the attacks on the U.S. in 9/11 we were encouraged to keep living our lives as normally as possible, or else the terrorists would win. The Vietnam War persisted and American households spent pretty much normally. In World War II there were price controls and rationing, which is about as close as we've ever seen to ordering closed the spigot on consumer spending. More on that in a moment. In World War I, households' conservation efforts were voluntary.

So this is an extraordinary moment, and for as frustrated as I am at the "open the economy" rallies I might need to appreciate those frustrations as a reaction by some Americans at something unprecedented. Only Americans with memory of the early 1940s can recall a time when the government ordered people to curtail their spending.

Clark Howard's offers an analogy: the United States has put the economy into a medically-induced coma. It strikes me as an apt analogy. And it runs contrary to what Americans did to solve other crises. In other crises, instead of shutting down the economy, we used it to power through problems too great to fathom.

The American Civil War is a wonderful illustration of this. The Union states were such an economic powerhouse that its factories and railroad network could support an army of two million men, putting that force in the field against a Confederate force that was maybe one-third as large. Those brave men in blue were supported by an impressively modern economy. The financial apparatus supporting that mobilization effort was a modern-day beast. Congress wrote volumes of legislation modernizing the nation's money supply, banking system, and means by which government borrowed money through bonds. And when the war was done, an industry was left in place that knew better than ever how to produce and distribute both clothing and food. The bonds savers had bought were redeemed, with the proceeds supplying hungry capital markets with abundant loanable funds. The economy made Union victory possible, and then the victory made the economy grow like never before.

World War II offers us a similar picture. Americans made sacrifices in their spending to support our military as well as the forces of several other Allies. We built landing craft sufficient for our use and the British. We built trucks sufficient for our use and the Soviets. Planes, too. The American Jeep made the U.S. the most mechanized force in military history, and it was used by French and British troops, too. Liberated French citizens in Normandy were astounded at the liberators' ability to have so many of those Jeeps, and were even more astounded by the volumes of empty gasoline cans that littered the French countryside.

Our raw and awesome economic power made victory in those conflicts possible. Our conflicts since World War II have had ambiguous endings, so claiming that our economy made victory in those efforts is naive. Yet, the economy sustained American power in our conflicts since 1945. And it's sheer might may have shielded Americans from having to make mightier sacrifices than we did in the Korean and Vietnam Wars. That economic power might have made it possible to wage a war on terror with an all-volunteer military force.

So, we have shut down the means by which we've achieved greatness, and I'm coming to appreciate the profoundly gloomy undertones this represents to many Americans who aren't as optimistic as I am. I have confidence that our economy can rebound, though I know it will take time. And the recovery will present us with chances to address economic problems left unaddressed when things seemed to be going so well.