An economic model - it all starts from your average Joe
Seeing the direct impact of COVID-19 on the economy got me thinking: Can I model the impact of the lockdown from the bottom up? These are my showerthoughts in trying to answer that question
The model
The economy starts with the needs / wants of your average Joe consumer. Joe needs shelter, food, and healthcare. Joe spends his leftover money on consumer goods, hobbies, education etc. Most of those needs and wants come from enterprises that can provide those for him:
Shelter - Real Estate
Food - Grocery store
Healthcare - Hospitals / Insurance
Consumer Goods / Hobbies - E-commerce / Retail
Education - Universities / Online courses
Next, let’s think about what needs / wants of those enterprises. Just from the enterprises I listed, they depend on construction, transporation / shipping, agriculture, manufacturing, advertising, and raw materials.
Finally, we have enterprises that help those enterprises function more efficiently. Let’s call them meta-enterprises. These are industries like consulting, cloud service providers, HR software, sales software, and business intelligence tools. These are areas where we see a lot of hot B2B startups trying to enter.
If we look at the economy with this model, we can see how a lockdown causes a domino effect on the rest of the economy:
1) Lockdown occurs
2) Our average Joe has to stay at home and can’t make money, he starts to cut his costs.
3) Consumers aren’t buying, so direct to consumer enterprises make less money than usual and need to start cutting costs.
4) Direct to consumer enterprises have to freeze budgets, so direct to business make less money than usual and enterprises need to start cutting costs
5) Direct to business enterprises are also freezing budgets, so meta-enterprises make less money than usual start cutting costs
There are 2 more things to add to make this model more interesting:
- When companies cut costs, not only do they freeze budgets, but they also lay people off. This means there will be more unemployed average Joes :(. This also means that this model looks more like a cycle than a uni-directional dependency graph.
- Companies can start acting in anticipation before this chain reaction even occurs! Just the fear of not being able to make a revenue target can prompt a company to start cutting costs.
Preventing a depression
Without intervention, this model depicts a negative feedback loop where things get worse and worse: People lose jobs and spend less, companies earn less money and lay more people off, rinse/repeat.
We should brainstorm what interventions can reverse either action of the negative feedback loop:
- Give people money to spend
- Give companies money to retain their employees
We’re lucky that the U.S. Government / Federal Reserve recognizes this and is taking both measures to prevent the negative feedback loop from spiraling out of control.
Will things go back to normal?
From the way things look right now, I don’t think we’ll have a hockey stick recovery. As of today, the unemployment rate is ~15%. When the economy re-opens, a lot of people won’t have jobs and our average Joes will probably not want to spend as much as they did pre-crisis. Our average Joes might not have as much money as before, and our average Joes might’ve changed their minds about how much money they want to save rather than invest / spend. The economy will re-open with a significantly lower demand than in pre-crisis and will have to slowly grow to get back to pre-crisis demand. Fortunately, our negative feedback loop comes with a handy positive feedback loop: People start spending more, companies make more money and can employ more people, rinse / repeat. Let’s hope that happens.