Snap-Back and Gone-Forever Goods: Understanding the COVID Recession’s Economic Winners and Losers

This week the International Monetary Fund (IMF) released its World Economic Outlook Update for 2020 and 2021.  If numbers could be ugly, think the Oz’s Wicked Witch of the West here, about as ugly as macroeconomics gets in the real world: sneer, green face, chin wart and all. The IMF numbers project a plunge of global GDP of -4.9% with a nosedive of -8.0% in the both the U.S. and advanced economies overall. 

I am not a macroeconomist, about as micro as it gets actually.  But occasionally I play one in the classroom. And I wanted to share a few thoughts about the recession we are now in–from a microeconomist’s perspective—that might help us to consider who is going to truly suffer in the downturn, and who may skate through fairly well.  And after understanding this, I’d like to emphasize how the recession is likely to specifically affect higher education, and why.

The current recession (depression?) is unlike those preceding it, because things had been humming along fairly well until COVID showed up.  Whereas recessions are typically caused by a supply-side shock (like a big jump in energy prices) a demand shock (like a loss in consumer confidence), or by imbalances or mismanagement in the financial sector, this one is different.  Due to the impending COVID pandemic, businesses, except for essential ones, simply had to shut down. People were essentially forced to stop buying things they actually wanted to buy.

My main contribution here is to categorize different types of goods and services in ways that will help us better understand the economic situation we are in.  I will do it across two dimensions.  First is the distinction between purchases of what I’ll call “Snap-Back” goods and services and those that are “Gone Forever.”  In the Snap-Back category are things that we couldn’t buy during the heaviest COVID lock-down period, but these purchases were simply delayed.  There is good reason to think that as the economy begins to open up, purchases of these items might even be higher than normal due to pent-up demand.  Even during COVID, things like household appliances break or need fixing, and because over the long run purchases tend to even out, buying less now means buying more later.

“Gone Forever” goods and services, in contrast, are just like the term suggests: gone forever.  Like me, you may have foregone several haircuts during shelter-in-place because you didn’t want to get (or give) coronavirus to your barber.  But when it becomes safe to go back to the barber chair, you’ll still only get one haircut.  The rest of your haircuts disappeared into the economic ether; they were (mutually beneficial) transactions that COVID—what we might call the “invisible anti-hand”—prevented from happening. 

The second distinction is more standard and will be familiar to anyone who has studied introductory economics.  These are the differences between goods with low versus high income elasticity.  To those untutored in navigating the dense forests of economic jargon, income elasticity measures the percentage increase in purchases of a good when incomes go up by 1%. It measures how sensitive purchases of different items are to changes in income.  

Economic booms and busts cause average incomes to rise and fall.  As a result, businesses that sell a good or service that people purchase during good times and bad, like haircuts and toothpaste, are more insulated from recessions.  Businesses that sell the Fountain Powerboat 32 Thunder Cat speedboat (see below, retail price $400,000), and other goods whose sales depend on people having a lot of money on their hands, fare poorly in a recession. 

We can array different types of purchases in a simple 2 x 2 matrix based on whether they are “Snap-Back” vs. “Gone Forever” and whether they are High vs. Low income elasticity.  It then becomes easy to see which industries are in the most trouble in 2020.  They are the Gone Forevers with a High income elasticity, which are shown in the red upper-left box in the matrix.  These are industries related to services like air travel and tourism. The flight you were going to take on that business trip in April?  Gone forever, and Delta knows that it’s never going to get it back.  Same thing with all the times you and your spouse didn’t dine out together during COVID—once restaurants fully open, you’re not going to make up for it by going out umpteen nights in a row when the vaccine comes out (although you may feel like it).    That Uber ride you didn’t take last week—gone forever.  Same with the concert you might have attended, the massage you wish you’d enjoyed, and the club soccer season your 12-year old missed this spring: gone, gone, gone.  And because these goods have a high income elasticity, it means that when you lose your job during the recession, you and others like you are even less likely to buy these things.

The Gone Forever and Snap-Back distinctions between different goods and services can also help dictate appropriate government relief responses. The permanently lost revenue of the former better justify cash grants. Loans may be more appropriate for the latter because they could be repaid from compensating future revenue increases.

The blue boxes in the lower-left and upper-right corners describe goods and services that will be more moderately affected during the recession.  These are goods that either are Snap-Back goods with a High income elasticity like automobiles, furniture, and home appliances, or Gone Forever goods whose Low income elasticity means that they will remain in demand during the recession, such as haircuts, public transportation, and fast (or cheap) food like McDonald’s and Top Ramen. 

We all know about firms that have thrived during COVID, such as Amazon, whose stock price has screamed past $2700 with the burgeoning demand for its home delivery during the pandemic.  But some industries that have been hit, such as clothing, computer sales, and even non-COVID-related medical, vision, and dental services, have reason to be optimistic.  Not only do these goods services and services tend to have a Low income elasticity, they are Snap-Back goods: Many folks might have avoided going out to shop for a new laptop during the lock-down, but computers depreciate just as fast during a pandemic as in normal times (maybe faster as they are Zoomed to death?), and their essentiality and need for replacement just as great.  In large part, their purchases are merely delayed.  Probably like me, your shoes are getting worn out; with the relaxing of restrictions, I’m eager to get to the shoe store to buy a new pair of Skechers.

This brings us to my own beloved industry, higher education.  Today higher education administrators spend their best time hand-wringing, and their worst time beating their heads against the wall, trying to plan complicated online and hybrid strategies to deliver their product fall semester.  But there is reason for optimism.  Income elasticities are relatively low for higher education, just slightly greater than 1.  What this means is that the data show college-bound kids keep going to college even in recessions.  (They may be even more likely to go to graduate school if they can’t get a job.) And yes, there will be college freshmen who decide to take a “gap year” this fall (although who knows what they will do instead since they can’t travel.)  And some will drop out for a semester or a year.  But how many of those students won’t actually graduate from college eventually?  Very few.  And when the vaccine is inevitably developed, and the pandemic recedes into the background, the surge of students will be as great in the future as the decline was this year.  The smartest administrators will not only plan for delivering education during the pandemic, but will develop capacities to meet the surge in demand for higher education when the pandemic fades.

Bruce Wydick is Professor of Economics at the University of San Francisco and author of Shrewd Samaritan: Faith, Economics, and the Road to Loving our Global Neighbor (2019), available from HarperCollins/Thomas Nelson. Follow Across Two Worlds on Twitter @BruceWydick.

• ← How You Can Help a Local Small Business Survive COVID-19
• How Much Does this Operation Make Kids Smile? →