Aggregate Demand, Aggregate Supply, and the 2020 Novel Coronavirus Pandemic

Danny Quah
4 min readMar 20, 2020

On Friday 13 Mar 2020, Greg Mankiw entered in his blog 7 key policy suggestions on the economic situation and the current Coronavirus pandemic. All the points are excellent and, in my view, should right away be taken on board, adjusting only to different national economy circumstances. (For instance, not all nations have Dodd-Frank; and others are yet more stringent. How different nations adapt the last point will be interesting.)

However, one thing I might add to Mankiw’s extreme good-sense recommendations is that the economy’s supply side needs support as well. Low interest rates, and liquidity and lender of last resort services help businesses, but are they sufficiently targeted and do they act sufficiently quickly?

It certainly matters that fiscal and monetary policies can support the economy through maintaining aggregate demand. Re-focusing those policies can also provide social insurance better to protect the worst-off in society. But if aggregate supply collapses — both in the immediate short-term and after — the fact that you’ve maintained your population’s nominal spending power only makes prices rise and empties out supermarket shelves faster. Then you get rationing and panic buying; queuing and congestion that worsen infection rates at airports and travel terminals; supply-chain links dropping value packets thereby shifting back even more the aggregate supply curve.

In the nightmare scenario, trucks are left abandoned on highways, and meat and vegetables rot in supermarket holding lots because no one is around to reboot the robots to put away those groceries.

Without a working supply-side infrastructure, consumers will be left wandering the landscape unable to buy what they need, however much spending power they carry in their pockets.

Toilet paper will run out in stores for different reasons (some of them behavioural, I’m sure). But adding to all those is that toilet rolls and other similar goods bear high ratio of bulkiness and physical material relative to economic value. You can’t run their supply systems at panic turnover rates and still remain profitable. Of course, those systems work fine if people behave sensibly, i.e., if the toilet-paper usage curve is flattened.

(CGTN Video: Feeding 1.4bn people under quarantine)

With 1.4bn people in China now under quarantine conditions, McDonalds gets hot meals to Beijing households within 20 minutes of their placing the order on their smartphone. On Singles Day every year, with the system running half a million orders per second at zero downtime, Alibaba delivery drones get purchases into Chinese customer hands within 10 minutes of the buy button-press.

However, in the rest of the world, outside of some well-designed island-nation, city-states, that kind of infrastructure is not available. Governments should be thinking about putting such logistics and technologies to work as soon as possible, using what capacity social distancing currently affords still.

Beyond that, yet other supply-side ideas should drive government policy: lift restrictions as much as possible on businesses shifting to flexible hours and help workers by providing them improved tools for distance working. Do not cut off anyone’s electricity, Internet, or smartphone data if they run late on payment. These are indispensable for workers in today’s marketplace. Help people with their Netflix or other media services, so that at the margin they choose to stay home comfortably and sensibly, rather than go out to crowded public places.

For reasons of aggregate demand and social insurance, guarantee paid sick leave to workers. But if spillovers and externalities describe aggregate demand, so too do they characterise aggregate supply, especially at a time of Coronavirus: employees who are ill but still feel compelled to come in to the workplace run the risk of infecting yet other employees. Against this, there’s the possibility of slacking and moral hazard, but the margin of tradeoff argues, it seems to me, to err on the side of long-term prudence and the health of the workforce.

Increase the possibility for inter-temporal substitution in both work and payments.

The economy can have its most vulnerable suffer terrible deprivation because poor people have little money to spend. Or, what spending capacity there is buys nothing, because there is nothing to buy. Either way, powering up the supply side has got to be part of the policy strategy to get the economy going again.



Danny Quah

Danny Quah is Dean and Li Ka Shing Professor in Economics at the Lee Kuan Yew School of Public Policy, NUS.