This Isn’t Your Usual Demand-Shock Recession

by Michael J. Hoffman

In the last month, the coronavirus pandemic, known officially as COVID-19, has caused social and economic havoc in the US and the rest of the world. Last month, the US economy lost a total of 701,000 jobs while the unemployment rate shot up to 4.4 percent from 3.5 percent. The decade-long trend of job gains has come to an end, but one question remains: are these signs of a typical recession? The answer is complicated, unfortunately.

Austrian economists have long warned that a recession has been inevitable ever since the Federal Reserve began its quantitative easing program following the 2008 financial crisis. However, while we may be in the midst of a reduction in what mainstream economists call “aggregate demand,” we are also seeing a significant supply-side shock. The former typically has deflationary tendencies, while the latter causes price inflation. A supply shock is simply an event which impedes the ability for supply chains, or the structure of production, to maintain the allocation of capital and labor so that they can produce a given level of output.

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