Predictions of rapid bounceback in output & employment after social distancing lifted, depend on no one having lost income in the meantime. If loss of income during quarantine period leads to reduced spending by any economic units, lifting distancing measures won't reverse that.

The way recessions work is that when a unit - household, govt, business - loses income beyond certain point, exhausts buffering capacity (liquid assets, available credit) and has to reduce own current spending. Creates positive feedback in which fall in spending feeds on itself.

This is amplified as expectations of future income also adjusted downward. As decline in income lasts longer, desired as well as actual spending falls.

Important dimension of this is business investment, which is strongly dependent on expectations of future sales.

Once this process is underway, simply fixing whatever problem caused the initial fall in income and/or expenditure is not enough. Whatever initiated it, fall in spending is self-perpetuating.

Financial distress - defaults, declining asset values, tighter credit constraints - may initiate or amplify this process. But imo its role is often exaggerated, with implict or explicit claims that finance is *the* source of instability. Real economy is unstable on its own!

Mainstram economic theory excludes these kinds of feedback loops by assuming 1) that expecations are fixed - there is a true future distribution of outcomesknown to all agents; and 2) units can in general spend their whole future income in any period.

If you have these assumptions (which are incorporated into many forecasting models) then it's natural to expect a rapid bounceback after coronavirus contained. Both lifetime incomes and beliefs about them are unchanged, so post-crisis spending should be basically unchanged also.

(Or even higher, to make up for consumption deferred during crisis. Against this, there is some modest loss of lifetime income during the shutdown period. But the redcued spending from that should be spread over all future time.)

But in the real world, unemployed workers will not be able to resume old spending once crisis is over. Businesses that have shut down will not be generating incomes for workers or owners, or carrying out investment. State/local govts will have cut spending.

The old Keynesian assumption that household spending is a function of current period income is obviously an oversimplification. But it is a much more useful and realistic simplification than the modern alternative that household spending is a function of all future income.

(I know some people get annoyed when criticisms of orthodox economics get brought into discussions of current crisis. But I think the difference in models really matters for what economic outcomes seem reasonable or plausible, thus for kinds of policy we need.)

In real world, current reductions in income are already leading to reductions in spending, above and beyond those required by crisis itself. State-local budget cuts are a very important and underapprecaited part, but also at household level and presumably in business investment.

These are quickly going to burn through the buffering capacity of most economic units, and unless very aggressive action taken, will lead to downward shift in expectations of future incomes. All this will reduce spending, thus output and employment, after crisis.

If you just got laid off from your job at a restaurant, does that have affect your beliefs about whether you'll have a job six months from now? I'm pretty sure it does!

Once we understand recessins as self-perpetuating postivei feedbakcs between income and expenditure, I think the default hypotehsis for what happens after restrictions lifted should be - in the absence of aggressive stimulus - closer to no bounceback, than to full bounceback.

Remember, after Great Recession there was no return to trend whatsoever. When growth resumed, it was at slower rate than before. Crisis may have been triggered by collapse of the housing bubble and financial meltdown, but resolving those did nothing to restore lost income.

To me, the widespread beleif that a deep downturn during lockdown period should be followed by a period of equally rapid growth, is as clear an illustration as you could ask for of why economic theory matters, and the real and harmful effects of today's macro orthodoxy.

Another point is need to maintain concrete social relationships involved in production, most importantly between workers and businesses. Businesses social organisms not just loci ofproduction. When they close, or workers laid off, recreating those relationships is slow & costly.

By the way: if you're wondering whether people really think this way, here is a quote from the Governor of the Central bank of Iceland which somebody just sent me. (Icelandic source here: https://kjarninn.is/frettir/2020-03-26-thurfum-nu-oll-ad-faera-fornir/)

This is precisely the idea that income is fixed independent of current spending, that I am criticizing in this thread. And where did Governor Jonsson get this idea? Well, he got a PhD in economics in the US. So I don't think the economic profession can entirely escape blame.