When the Pandemic Creates Behavioral Changes and Economic Crisis: The COVID-19 Pandemic and the Implications for Policy Making

Abstract

The COVID-19 pandemic is no longer simply a “health crisis” but seems to have far-reaching impacts and implications as well. The pandemic has led to an unprecedented decline in consumer confidence (demand shock) as people quickly changed their spending behavior to focus on basic needs. In response, the government has taken actions to boost consumer confidence and spending through stimulus packages and other aid. This research uses a public database of private sector data with current information on consumer spending and employment and implements Abraham Maslow’s psychological theory, the hierarchy of needs, and Keynesian economics to explain consumer spending behaviors and the U.S. government’s response to the pandemic. Three hypotheses are developed and tested using regression analysis. First, the findings of the regression discontinuity show significantly higher spending in industries fulfilling basic needs than in nonessential sectors. Second, a causal relationship was found between aggregate demand, more specifically consumer spending, and employment, revealing the distinctness of the pandemic-caused recession driven by coronavirus fear. The final regression discontinuity was tested to observe the effect of stimulus checks (CARES Act) on spending and economic recovery, revealing positive impacts of boosting aggregate demand. This study provides evidence that while high-income households and individuals were the least impacted by the pandemic regarding employment, they showed the most dramatic changes in spending behavior. The study provides discussions and implications as to how to mitigate the effects of the COVID-19 recession in the U.S.