Shutdown: How Covid Shook the World's Economy

by Adam Tooze

In analyzing a shock, economists like to disentangle changes in supply from changes in demand.4 The distinction matters because different causes require different remedies. If production, employment, and income contract because of a supply shock, then what is required to restore economic activity is an adjustment in the way we produce, deliver, and consume goods and services. This is what economists tend to call a “real” adjustment. If the problem is inadequate demand, then the system of production and distribution can remain as it is. What we need to do is to stimulate more spending by loosening budget constraints, for instance, through lower taxes, government spending, or easier credit.