Just a month ago, restaurants across the nation were closing their doors (at least to in-house dining). Pick one in your city and think about the ripple effects of its closing: It’s not just the restaurant owners whose income has fallen. The shutdown is also affecting the earnings of the staff, the food and alcohol distributors, the bakery, the linen service provider, the paper products supplier, the cleaning service, and the marketing agency that created ads for the restaurant. Plans with an architectural firm for a remodel are on hold, as is the contract with the general contractor and selected sub-contractors.

The waiters, waitresses, and kitchen staff have stopped buying clothing and household furnishings. The farmers have stopped buying farm equipment. The marketing agency has laid off its staff, who have cut back their unnecessary spending. The beer manufacturers are dumping their beer and spending less on marketing.

Some of these families have children who will delay going to college because of finances. Or they’ll switch from a distant four-year private college to the local community college in order to live at home.

Welcome to what we economists call multipliers. This abstract concept has become frighteningly real in the last two months as the COVID-19 pandemic erodes our economic well-being, not just our public health, infecting every part of the economy, not just some of our bodies.

The macroeconomic multiplier lesson teaches that an increase in a component of economic spending (say consumption, business investment, or government spending) is amplified through its effect on additional expenditures so that the total impact is much, much larger than the initial impact or change. (Sometimes it is smaller, but that’s a different lesson.) The economics literature is full of debates about the size of multipliers for government spending and tax policy, but the discussion is generally treated as an inside ballgame discussion for those who work in policy. No longer.

Today we are each witnessing the multiplier effects of shutting down parts of our economy. Like in my example, we hear on the news, read in the paper, or observe in our family and neighbors the multiplier effect at work.

And it’s not just restaurants forced to close doors. Hundreds of other industries are shutting down or drastically shutting back—live entertainment, non-essential retail stores, non-essential healthcare, manufacturing, and professional services. Consider the multiplier effects of those shutdowns. The owner of a small law firm may close up shop because the banker wants him to put up his home as collateral for a loan to keep his staff on payroll. The barbershop will never reopen, unable to manage the rent. Printers will close without orders from marketing departments. State and local governments will add workers to the unemployment ranks as taxes fall short of budget projections. And that’s before governments calculate how the stock market decline impacts required pension fund payments, spending that will crowd out payments for local schools.

Even as an economist, I cannot fully fathom the true depths of economic disaster we are facing. Yes, 2008’s financial crisis was tough, especially on families who lost their homes and livelihoods. Ditto the loss of manufacturing jobs in the US due to automation and the outsourcing of work to lower-cost nations. Each downturn had causes and potential policies that fit the rule book.

The depth and speed of this economic crisis are breaking all the rules. It has led to Europe’s worst slump since WWII. A decade’s worth of US job growth disappeared in two weeks. Another notable example? California – where the car is king – has 75% less driving, according to a UC Davis study.

The US Federal Reserve is doing everything it can to keep credit available and avoid a financial crisis as we had in 2008. But there will be so many “dead” loans on banks’ books (i.e., those with a low probability of being repaid) that we may yet have a financial crisis at the other end of the pandemic or Japanese-type malaise.

Fiscal policy, unfortunately, is late and not nearly strong enough. Furthermore, clumsy federal and state regulatory processes and systems have delayed its impact and big businesses who have access to other sources of money are deploying lobbyists to grab an unfair share of available funds.

What Not to Do!

There are three huge mistakes we can make right now.

One is re-opening too much of the economy before public health tools and systems are in place to box-in virus outbreaks as we venture outside our boxes.

The second is appeasing the far-right, who will argue that this level of government spending will “crowd out” private sector spending. Nothing could be farther from the truth. Government spending only crowds out private sector spending when we are at or near full employment. We are on a long journey to full employment and the tunnel is so long that there’s not even a glimmer of light. We can afford the debt, as well, as interest rates will remain low for a long time (yet another economics lesson).

The third mistake is to use tax cuts or payroll tax cuts in place of direct spending to address our depression-like economy. Much of the impact of a tax cut on an economy is reduced as people often save it. And tax cuts mostly help middle and upper-income groups; but low wage workers, many of whom do not pay taxes, have been most hurt by the pandemic.

What To Do: Leverage the Multiplier of Government Spending

Businesses are starting to open. That good spending will ripple through the economy. In the end, however, how quickly we recover will be about how we replace the fall-off in private sector spending from frightened consumers, still unemployed workers, and businesses who see no reason to invest.  Government spending, because of its huge positive multiplier effect, best fills in this gap.

Direct government spending lifts the economy. Improving public infrastructure, providing for free college for all but the wealthy, making massive investments in federal research (the type that fueled our growth last century), along with productive public health investments—all are types of government spending that can help us escape of our current mess.

So many mistakes have worsened our nation’s experience with the pandemic. Let’s not add more.