What a magnetized iron screwdriver can teach us about the post-COVID economy
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There’s a scientific demonstration you may have seen in grade school, in which an iron nail or screwdriver is transformed into a temporary magnet by striking it repeatedly with an actual magnet. It demonstrates “hysteresis,” a term meaning “delayed” or “lagging behind” in both physics and economics. We won’t delve deeply into the science of why that works here, but the concept itself is important to understanding the economic damage caused by COVID-19.
“If you’re holding a piece of iron, the piece of iron itself is not likely to be magnetized,” said Elizabeth Green, a condensed-matter physicist at the National High Magnetic Field Laboratory in Tallahassee, Florida. “But when we do start applying an external parameter, in this case, an external magnetic field, we can start magnetizing this piece of iron, and if we remove that external field, the iron will still remain magnetized.”
It shows how once a piece of iron has been magnetized by something external, it will remain magnetized even when the thing that caused the change is gone. “Nature is lazy,” Green said. “It likes to stay in a particular state, it does not like change. So when we change the direction of this external field, what happens is everything lags behind.”
That idea holds true in physics and economics alike. “Hysteresis says, you have a big shock, like a recession, and then you fix what caused the recession … but the workers are still affected,” said Danny Yagan, an associate professor of economics at the University of California, Berkeley, who has studied employment hysteresis. After an economic shock, Yagan said, “people are worried and businesses are worried that the jobs and customers won’t be there, and so they dip [their] toes back into the water slowly.”
In October, the U.S. economy still had about 10 million fewer jobs than it did in February, before the pandemic hit. By the time vaccines get to everyone, it’s likely that there will be people who have been out of work for a year, drawing down their savings to pay for food and rent.
“So think of a restaurant coming out of COVID, and it’s deciding how much of their waitstaff to rehire,” said Yagan. “The restaurant owner might say, there are millions of families that are dealing with layoffs right now. They’ve dipped into their savings, they’ve drawn them down to pay for rent, food … and now that they’re getting back to work, they’re not spending in a restaurant.”
Because of that, the restaurant owner might choose to hire back some, but not all, of the waitstaff. Then, as the economy rebounds further, more people will start spending at restaurants again, which then will encourage the restaurant owner to hire more waitstaff back. “And then those waitstaff go and spend all that money on other restaurants, and then you get back in this virtuous cycle. But it just doesn’t happen instantaneously,” Yagan said.
Remember the iron screwdriver. Even after the magnet is gone, the effect lingers. “In economics,” Yagan said, “you have a recession. You know, subprime mortgages explode or COVID-19 shuts down the economy. Then once we fix subprime mortgages or we solve COVID, the economic effect lingers.”
COVID-19 Economy FAQs
With a slow vaccine rollout so far, how has the government changed its approach?
On Tuesday, Jan. 12, Health and Human Services Secretary Alex Azar announced changes to how the federal government is distributing vaccine doses. The CDC has expanded coronavirus vaccine eligibility to everyone 65 and older, along with people with conditions that might raise their risks of complications from COVID-19. The new approach also looks to reward those states that are the most efficient by giving them more doses, but critics say that won’t address underlying problems some states are having with vaccine rollout.
What kind of help can small businesses get right now?
A new round of Paycheck Protection Program loans recently became available for pandemic-ravaged businesses. These loans don’t have to be paid back if rules are met. Right now, loans are open for first-time applicants. And the application has to go through community banking organizations — no big banks, for now, at least. This rollout is designed to help business owners who couldn’t get a PPP loan before.
What does the hiring situation in the U.S. look like as we enter the new year?
New data on job openings and postings provide a glimpse of what to expect in the job market in the coming weeks and months. This time of year typically sees a spike in hiring and job-search activity, says Jill Chapman with Insperity, a recruiting services firm. But that kind of optimistic planning for the future isn’t really the vibe these days. Job postings have been lagging on the job search site Indeed. Listings were down about 11% in December compared to a year earlier.