“I believe we’re going to have a massive shortage of goods,” she said. “Two weeks ago I told people this was coming. The big problem was economists don’t understand how global supply chains work, how intertwined and interconnected they are.” It is an issue she said would particularly affect pharmaceuticals and electronics.
Macroeconomic policies can’t really do anything about supply shocks like those. But it’s possible that supply shocks can bleed into demand shocks, and there economic policy can help.
Tara Sinclair, who studies business cycles at George Washington University, compares it to a grocery store. A store with no goods on the shelves has a supply problem, while a store with full shelves but no customers has a demand problem. And it is generally easier to boost short-term demand than short-term supply.
But supply problems can bleed into demand problems, and vice versa.
“If first the store is empty of products, and then people don’t go to the store anymore and they lose their jobs, they can’t buy anything,” Ms. Sinclair said. “That’s what we’re risking here.”
In parts of Italy, for example, where outbreaks of the virus have disrupted daily life, tourism is slowing and restaurants and stores are reportedly empty as people seek to avoid exposure. That could result in waiters and store clerks who endure a drop in income, which could in turn feed back into less demand for all sorts of products, and a weaker economy.
Similarly, businesses might go bankrupt if the financial markets freeze up and they cannot get access to credit, meaning otherwise sound businesses end up laying off employees or closing down.
The role for economic policy, in that sense, wouldn’t be to solve the supply shock, but to try to prevent that initial supply shock from triggering a demand shock.