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Seven Ways the Pandemic Changed Economics
Economics has changed since COVID began. This is true both of the field itself and also the way that instructors are teaching students.
At this year’s EconEd, an annual conference and community built by instructors coming together to improve the teaching of economics, Justin Wolfers discussed seven ways that the pandemic has changed economics. In addition to being a scholar and economics instructor at the University of Michigan, he is also the author of Principles of Economics, which teaches students foundational economics that help them to make better decisions in their own lives.
Check out the different ways economics has changed, and some tips about how to talk about and teach economics, in a world where learning about theoretical widgets no longer makes sense.
1. The era of big data has arrived. The items we use every day, from our cell phones to credit cards, are being used to track consumer spending in a way that’s far more advanced than the methods we’ve used in the past -- like BLS data. For example, our work habits are being tracked by the likes of ADP, which can check on the amount of payrolls processed, and Google, which can track your location and discover whether you are physically going into the workplace.
The implication on teaching: Big data changes what we think about economic theory. Whereas before we used it to “fill in” when data was missing, now economic theory is a framework for interpreting data. Economic theory should now inform measurement. Inflation is an example, with data showing that it doesn’t appear to have changed much. But if you think about how much money it would take to live the same quality of life as a year ago -- it’s clear that it has.
2.Economics must extend beyond the market. We lost nearly a trillion in output from COVID-19, but the costs extend beyond that. Costs should include, among other things, mental health, long-term health damage, and premature death.
The implication on teaching: We need to move beyond the widget factory. Everyday decisions are economic decisions, and non-market choices are central to economics, like childcare, education and whether we work from home. We’ve seen these decisions play out during the pandemic in macro policies in the lives-vs.-livelihood debate, where we question just how much we should stay on lockdown to benefit our health if it comes at a cost to the economy.
3. Interdependence is pervasive. What we do impacts other people, what other people do impacts us. If you catch COVID, it could harm me or my friends.
The implication on teaching: We should emphasize interdependence in teaching. The standard way of interdependence only analyzes it through the market, but we need to show a richer sense of it.
4. Aggregate demand and aggregate supply shocks are not so different. The initial impetus of COVID was a supply shock. But it set in motion an aggregate demand shock, which has a lot of implications.
The implication on teaching: The sharp distinction between supply and demand may not be as sharp as we once believed. Because of that, the aggregate demand/aggregate supply framework may not be as useful as we once thought. It may be time to rethink how we teach the role of aggregate demand and aggregate supply analysis in analyzing the business cycle.
5. Unconventional monetary policy is now conventional. The interest rate has been at or near zero for over a decade and the Fed said they would keep the nominal interest rate at zero until 2023. Also, the Fed abandoned open market operations in 2008.
The implication on teaching: We need to change how we teach monetary policy to emphasize the tools the Fed actually uses. For example, the “floor framework” now sets interest rates.
6. The economy is resilient, yet flawed. The economy has been more resilient than most of us would have imagined. Food supply has remained robust and production lines have been repurposed and have evolved. Alcohol companies, for example, began producing hand sanitizer. But the economy is also flawed, because prosperity is fragile and insurance is imperfect. Shocks can be both large and far too frequent.
The implication on teaching: We should teach a realistic version of economics, by teaching about the economy that students observe instead of stylized frictionless models. We should teach them about an economy where people and businesses adapt, and that the economy has adapted to changing circumstances.
7. Economics has never been more useful. Basic economic principles have guided policy debates, and economics has helped make sense of the world. Our students will graduate into a fragile economy and the tools of economics can help them navigate their new normal.
The implication on teaching: We should continue to teach useful economics so that students can see the role they will play in the economy and help them make better decisions. At a time when the stakes are high, what we teach them matters, and we can use economics to help to transform their lives.
To see Justin’s presentation during EconEd, click here. For a full list of panelists and sessions, click here.