By Dr. Giuliano Bianchi
The COVID-19 pandemic has drastically altered the world’s economic situation leading many economists to predict that it will have as significant an impact as the great depression of the 1930s. As such, many of the field’s fundamental principles must be reconsidered for the coming years, including several which received less attention in recent years since learnings from the Great Recession have superseded them. In order to properly educate students and managers about the relationship between economic theories and practical implications on the hospitality industry, such shifts must be incorporated into macroeconomic courses and executive education programs so to better reflect the current economic realities facing firms and their leaders.
De-emphasizing the learnings from the 2008 financial crisis
Until March 2020, what kept economists awake at night was the fragile recovery from the 2008 recession, the biggest financial crisis since the Great Depression (Blanchard & Johnson, 2013). The case study of the 2008 financial meltdown has been part of standard undergraduate programs (Colander, 2010) which enabled instructors to draw practical links between traditionally abstract macroeconomics theory and the hospitality industry’s contemporary challenges.
From a pedagogical point of view, it is worth illustrating the contraction of aggregate consumption with an industry-related example. For instance, in the hospitality industry, the drop in income was reflected in a contraction of the occupancy rate, average daily rate, and revenue per available room in hotels across most of the world (Alonso-Almeida & Bremser, 2013). The COVID-19 crisis has already put the 2008 crisis – and its substantial fallout – on the back-burner. Students and managers need to understand the current situation (Colander, 2010), which means that the 2008 financial crisis could be part of an economics “history” course but perhaps no longer play a central role in an undergraduate macroeconomics course for hospitality management students since this industry is largely recognized to be one of the most severely impacted by the current crisis.
Emphasizing aggregate supply analysis
Unlike the 2008 financial crisis, the COVID-19 crisis has impacted not only aggregate demand but—and this is the novelty—also aggregate supply. The consequences of a drop in aggregate demand are very well-known. Aggregate demand was at the heart of Keynesian theory, which emerged from the ashes of the Great Depression. Keynes stormed into macroeconomics theory by refuting the application of Say’s Law (at least in the short run). Where Say’s Law focuses on supply, Keynes argued that aggregate demand was more important. In short, according to Keynesian theory, aggregate demand generates aggregate supply (and not vice-versa).
Reflecting the Keynesian approach, most macroeconomics courses taught in hospitality management schools examine the construction of the so-called IS-LM model which is a mathematical representation of Keynesian theory. While the IS-LM model analysis is still valid, the COVID-19 crisis also requires the study of aggregate supply as production costs have also been affected. In the hospitality industry, for example, not only have guests stopped traveling (demand side) but also, the industry has had to deal with social distancing that impacts the cost structure and therefore the supply side.
The contraction of aggregate supply has no precedent, at least in the recent past. To include aggregate supply, the educator needs to leave the context of the (Keynesian) short-run analysis and more strongly embrace a medium-run analysis. The medium run is the period of time needed to bring the economy up to the level of production determined by supply (Blanchard & Johnson, 2013). The medium-run analysis has of late played only a marginal role in traditional undergraduate macroeconomics courses. Amid the current situation, however, there is a need to reinforce such analysis in order to better contemplate the effects of supply.
Incorporating the medium-run model
The impact of COVID-19 on aggregate supply also requires the introduction of new elements traditionally not part of an undergraduate macroeconomics course in hospitality management education. In fact, the COVID-19 crisis brought Say’s law back into vogue. As mentioned above, this new element needs to be incorporated into the medium-run model. Traditionally, the medium-run analysis is presented through the use of a graphical analysis.
Today, educators need to not only cover the medium run in greater depth via a simple model combining price setting and the wage setting equations, but also by adding extra components such as labor productivity. It is, nonetheless, undeniable that COVID-19 has impacted the productivity of workers and, as such, assuming that it holds constant (as standard undergraduate textbooks generally suggest) is no longer accurate. Such changes would provide a more nuanced and refined model for analyzing complex macroeconomic conditions and their impact on, for example, the labor-intensive hospitality industry.
References
- Alonso-Almeida, M. del M., & Bremser, K. (2013). Strategic responses of the Spanish hospitality sector to the financial crisis. International Journal of Hospitality Management, 32, 141–148.
- Blanchard, O., & Johnson, D.R. (2013). Macroeconomics (6th ed.). Pearson.
- Colander, D. (2010). Introduction to Symposium on the Financial Crisis and the Teaching of Macroeconomics. The Journal of Economic Education, 41(4), 383–384.
