Easier to break than to build - Hysteresis with COVID-19

This collapse is not the result of a financial crisis. It is not even the direct result of the pandemic. The collapse is the result of a deliberate policy choice, which is itself a radical novelty. It is easier, it turns out, to stop an economy than it is to stimulate it. 
- Adam Tooze, Foreign Policy Voice

The one thing you learn as a child, it is much harder to build, then to destroy.  Blocks, Legos, Lincoln logs, it is all the same. You can work on something for hours, but taking it apart or giving it a whack will reverse all of the work quickly. 

Why would we think that it will be different for a complex system like an economy, yet here we are with a pandemic and an imposed destruction (lockdown) of an economy. There are policies to offset or lessen the impact of this imposed or controlled slowdown especially with monetary policy, but we have no idea whether we can put it back to together or what new shape we will see in six months. 

There are different types of recession which will have different response to a shock. The Great Financial Crisis was a banking liquidity recession. Most recessions are inventory adjustments. Many recessions are associated with balance sheet adjustments. Some are associated with tight money or poor policy choices. This is the first one where we lockdown an economy and then try and offset the effects with liquidity. 

What we do know is that there is a particular problem with macroeconomies that go into steep and long recessions, hysteresis, the fact that temporary setbacks can have permanent effects and non-reversible adjustment paths. Economies are path dependent and a lockdown shock will change the growth path around the globe.

Keynes believed that in aggregate economic systems are not self-adjusting, and Marshall argued the same thing for a market, "if the normal production of a commodity increases and afterwards diminishes to its old amount, the demand price and the supply price are not likely to return, as the pure theory assumes that they will, to their old positions for that amount." 

Systems will not go back to the old days. There will be industries that will be harmed to such a level that they will not be able to return to the past. The energy market, airlines, leisure and retail will be all change to name a few. Regardless of current market gains, the process of sorting between winners and losers should be ongoing. There is no self-adjustment and no quick fixes.