For many millennials, it feels as though the financial crisis of 2008 was barely in the rearview mirror when the coronavirus inflicted a new recession upon the entire world. With the CARES Act having already helped to soften the pandemic’s impact, new stimulus measures are being discussed in the US.
But no one is certain in what form that aid will manifest or how it will help the people on the ground. How can we prepare for an uncertain economic future?
How stimulus works
As the name suggests, a government decides to put together a stimulus package to stimulate a flagging economy. This has been done several times in American history alone. Even the younger generations will easily recall the bailouts done in the wake of the Great Recession under the Troubled Asset Relief Plan (TARP). To many, the current scenario amid the continued spread of the pandemic calls for further measures.
People behave differently in a negative climate or downturn. We start being more frugal with our money, and we redirect our spending towards essential items, deferring luxuries or experiential purchases. Most businesses tend to mirror this conservative behavior. They emphasize cutting costs, scaling back operations, maybe laying off workers, or stopping their operations entirely.
The economic theory developed by John Maynard Keynes, who extensively studied the Great Depression, holds that our economy doesn’t self-correct in these situations. Even though we all want the economy to improve, that desire doesn’t translate to a collective, organic change in behavior.
It requires intervention to prompt that change to happen. Governments can provide some combination of tax relief, low interest rates, and other incentives for spending and lending through stimulus. This can avert a downward trend and set the economy on an upward trajectory once more.
Uneven potential outcomes
But is a stimulus what people need right now? It’s been widely debated in the US but is also relevant to people living in other countries. Everyone is struggling with the pandemic, and its impact may persist for longer than expected.
It may be easier to understand things on an individual level. Is borrowing money what you need? A personal loan is simply a means to an end. Everyone’s situation is different. Some people use that money as capital to bootstrap their own business, while others use it to cover emergency expenses.
The person who finds themselves short of the cash needed to pay bills or medical expenses might be disabled in other ways. They may have been furloughed or left supporting family members who lost their own income streams. If the economy is slow to recover, they could struggle with the weight of compounded interest.
On the other hand, if you borrowed money to fund a business, there’s a good chance that you have relatively stable finances. After all, becoming an entrepreneur entails risk; the smart move is to launch your business from a secure position. Even if the road to recovery proves to be long, slow, and unpredictable, you’re more likely to survive.
Bracing for inequality
From this simple scenario alone, it’s clear that people will experience different challenges and outcomes as economies worldwide continue to struggle. And the decision to provide further stimulus is out of our hands. Policy-makers and state leaders may take varying approaches regarding the amount or form of stimulus given.
The only thing we can control right now is our preparation. For individuals, that means becoming increasingly watertight in their financial practices if they aren’t already vigilant in this regard. For instance, those who enjoy financial security can take advantage of historically low interest rates to refinance the debt or buy a home.
Many businesses have already closed as a result of the ripple effects created by Covid-19. Yet interestingly, more new ventures have been launched on a year-to-year basis, according to the US Census of business formation statistics. This means that entrepreneurs continue to see opportunities amid the negativity and turmoil.
If you’re running a business in this climate, it’s wise to address essential needs. People aren’t going to cut back significantly on food or disinfectant, for example. Alternatively, companies can be aggressive in targeting consumer segments that display a lot of discretionary spending behaviors.
No matter where we live, we face uncertainty in this age of the pandemic. It’s holding economies back and potentially driving the wedge of inequality even deeper. For most of us, the goal will be to survive for however long it takes until better opportunities emerge consistently, regardless of government intervention.