Will the recovery be V shaped, quickly roaring back to the previous level? It does that every January 2 after the long Halloween-Thanksgiving-Christmas-New Years slowdown, and it did in 1984. Or will it be an agonizingly slow U or L shape, as the recovery from 2008 turned out to be?
I had early hope for a V, but a fear that shuttered businesses and permanently fired people would turn it into an L. Those take much more time to reorganize. Hence, lots of blog posts advocating a more nuanced policy than a blanket lockdown.
But now I think it’s clear the virus will not end with a sudden all-clear, like January 2 or an air raid. If, as we all hope, the current unbelievably costly lockdown does its job, we will in a month or two emerge with the curve bent, a stable or declining number of cases. But the vast majority of the population will still not have been exposed. We will not have “herd immunity” — and a good thing too as 1% of the herd will not have died to get there. And cases both home and abroad will not be zero.
Nothing short of a cheap, effective, incredibly safe vaccine given to just about everyone on the planet will change that.
That means the virus is ready to reemerge promptly. All it takes is one person to travel to a town, go to a restaurant or club meeting, wait two weeks, and you have an outbreak all over again. We will have hotspots and flare-ups needing intense testing, contact tracing, local lockdowns, travel restrictions, and so forth — if our bureaucracies are finally up to the task of doing anything competently.
On the individual and public health level this means almost all of us — who have not gotten it or don’t trust that you can’t get it again — will be practicing some sort of social distance for a long time. And, getting to the point, this all suggests a period of very slow economic activity. I don’t want to call it “recession” as that word implies simple lack of aggregate demand, the Keynesian uni-causal story. No amount of printed or borrowed money will get the social distance economy going again.
Ross Douthat nicely sketched a picture of the coming economy in the Sunday NYT:
Life at half capacity: Right now our institutions must survive while essentially closed — with few or no customers, moviegoers, travelers. But soon they will have to figure out how to reopen while maintaining the social distancing that semi-normalcy requires.
… fewer people will come out, and because there will be rules governing how many people can come in.
…the scenes at some grocery stores right now, the line of people six feet apart waiting to come inside and shop, may become a permanent feature of the semi-normal landscape. Churches will hold services with every other pew occupied. Restaurants will seat every other table. Planes could fly without a single middle seat occupied. Sports may resume without spectators, relying on TV revenue alone.
Ross doesn’t fully draw the economic conclusions of this vision. Such grocery stores can only serve a fraction of the number of customers, yet need more employees and still have to pay the rent. Such restaurants make half as much money yet still must pay the rent. Such airlines still pay the pilots, flight attendants, fuel, and larger cleaning and disinfecting crews. This is not a sustainable economy — at today’s prices.
Ross turns to the government
And since the flow of money and custom and attendance won’t come close to what existed just a month ago, any government response will have to be calibrated to a half-capacity world — where institutions are technically open for business, but they still need help to stay alive.
I have bad news. The government is also a limited resource. We cannot go on for months on end with the government paying half the bill of everything. Just who is buying all those government bonds? With what income? A trillion dollars a month adds up.
The answer is, this is an enormous negative supply shock, together with a big shift in demand. If only half the seats can be filled, running an airline just got twice as expensive. If only half the tables are filled, running a restaurant just got twice as expensive. Those prices have to double. Which in turn, will drive customers away, towards driving (RV sales should go up), cooking at home, fancy takeout, and so forth.
There is likely also to be a shift towards precautionary savings. I think lots of people and businesses have figured out that keeping some cash or money market investments around is a good idea, and overall appetite for risk is going to be lower. I diagnosed markets as suffering from a panicked demand for cash last month. But the standard business cycle mechanism of lower “risk appetite” makes a lot of sense. The shift towards a desire for safe investments may also keep markets low for a long time. This is the standard business cycle mechanism. (Don’t think about saving vs. investment. Think about desire for risky vs. safe investments. Business cycles are about risk premiums.)
Torsten Slok writes by email (summarizing gated DB research) suggesting
Increase in precautionary savings for households… More space between seats at restaurants, cinemas, sports events concerts, conferences, trains, buses and airplanes. Fewer people traveling on vacation and going out… Older generations staying at home, less willing to put parents in retirement homes. Limits on the numbers of people un supermarkets, more online shopping, more online doctor visits. Fewer people going to fitness centers, doing group sports. More people driving their own car to avoid public transportation.
Aside. This could be the kiss of death for public transport in the form of busses and trains. If there is anything that cannot stand a doubling of its cost, and attendant decline in demand, that’s it.
Less business travel.. more video conferencing… fewer buybacks, lower dividend payouts [more equity less debt]
and, I am not alone worrying
more supply of government bonds, increasing risk of a debt crisis.
Policy will face the usual cruel tradeoff: The more help you give the unfortunate, the more disincentives, and the slower the recovery. Noah Williams writes perceptively of unemployment expansion (which, whatever its faults, is probably the best of the government’s responses — better than cash payments to everyone which will arrive late summer, better than bailouts for airline stock and bondholders, and municipal bond holders)
the program is poorly designed. It provides incentives for employers to lay off workers. In the future—assuming the pandemic restrictions are lifted before August—it will discourage people from returning to work.
The current federal relief package extends unemployment benefits to 39 weeks, plus additional payments….Under the new expansion, the average replacement rate across states would increase to roughly 116 percent
You’re running a business. You have some cash around, and could keep people on, at least at reduced hours and health insurance. If you fire them, though, they can get 116% of their salary from the government, and Obamacare. It’s a no brainer.
There is good news in this however. It means that much of what looks like unemployment may really be furlough. The people and employer know where each other is and can snap back more quickly.
39 weeks of 116% of salary though gives people little incentive to answer that phone call. Especially while schools are closed, day care is closed, and gardeners aren’t allowed to come around.
Moreover, there is already a shift in demand — to cleaning crews, online services, and so on. Paying people to sit at home makes sense in the lockdown. But much less in life at half capacity — and rapidly changing — economy.
This seems heartless, but it is brainless to ignore that there is always a tradeoff between help and incentives. The last recession and half-hearted recovery was a chaos of bad incentives. Noah:
In general, unemployment-benefit programs try to balance insurance with incentives, seeking to provide relief when needed while also offering motivation to look for work. States typically require recipients to search for a job. Setting the replacement rate well below 100 percent is usually a strong encouragement for them to do so.
Covid-19 presents unusual circumstances because unemployment has been enforced by government decree. Much of this joblessness will likely be temporary, with workers rejoining their employers once the pandemic subsides and restrictions are removed. Further, while some employers (Amazon, Walmart, grocery stores) are adding jobs, most companies are, at best, putting a freeze on hiring. The disincentive effect of unemployment benefits in the current crisis is minimal, while relief needs are large; thus, Washington has increased benefits, and many states are waiving job-search requirements.
Policymakers should be wary, though, of implementing relief provisions that will delay economic recovery, as occurred during the Great Depression and the 2008–2009 Great Recession. The Federal Pandemic Unemployment Compensation program is time-limited, but if the shutdown ends within the next four months, the aggressive unemployment-benefit replacement rates well in excess of 100 percent would hamper the labor market’s recovery.
In short, great generosity makes sense in the lockdown, but must be much more carefully calibrated if we do not want an L shaped recovery.
And emerging chaos at unemployment offices and small business administration suggests the help may come just as it is no longer needed.
How good is the U.S. economy? So good that even CNN, the monomanically anti-Trump television network, was forced to admit it last week.
“As 2019 comes to a close, the US economy earns its highest ratings in almost two decades,” CNN reported, dourly relaying findings of a poll it commissioned. “Overall, 76% rate economic conditions in the US today as very or somewhat good, significantly more than those who said so at this time last year (67%). This is the highest share to say the economy is good since February 2001, when 80% said so. Almost all Republicans (97%) say economic conditions are good right now, as do 75% of independents and 62% of Democrats. Positive ratings are up across parties compared with August of this year, when 91% of Republicans, 62% of independents and 47% of Democrats said the economy was in good shape.”
It’s no surprise that Americans are pleased with their economic situation this holiday season. Consider the data: The unemployment rate is 3.5 percent, indicating essentially full employment. Anyone who wants a job can get one, in other words. Wage growth, long stagnant, is ticking up, likely because of full employment — and, perhaps because illegal immigration has been somewhat curtailed. Total gross domestic product is chugging along, growing at more than 2 percent annually. The stock market is stratospheric, buoying not only individual investors but also anybody who has a retirement account. What’s all the more striking is that earlier this year there was plenty of loose talk about a looming recession. Sure, that could still happen (and eventually it will), but it doesn’t seem to be on the immediate horizon.
The strength of the economy can be chalked up to Republican tax cuts (which unfortunately also contributed to yawning federal deficits), deregulation and the unrelenting optimism of the American consumer. Some 70 percent of U.S. GDP is attributable to consumer spending, so the economy rises and falls with it. That Americans are spending on everything from houses to cars to dinners out contributes to economic growth and healthy jobs figures — which in turn likely contribute to more consumer spending. This is a classic virtuous cycle.
The strength of the economy no doubt has political effects as well. President Donald Trump will certainly benefit. Even CNN conceded that Americans’ bulging wallets will “[potentially boost] President Donald Trump in matchups against the Democrats vying to face him in next year’s election.”
“As perceptions of the economy have brightened, the poll also shows matchups between the top Democrats vying for the 2020 nomination and Trump tightening. In October, four Democrats tested in hypothetical head-to-head contests with Trump among registered voters led by anywhere from 6 to 10 percentage points, all advantages outside that poll’s margin of sampling error,” CNN continued. “Now, just two of those candidates hold edges at or above the error margin: former Vice President Joe Biden leads Trump nationally 49% to 44%, and Vermont Sen. Bernie Sanders tops Trump 49% to 45%. Massachusetts Sen. Elizabeth Warren and South Bend, Indiana, Mayor Pete Buttigieg each run about even with the President.”
Mr. Trump will face significant headwinds in next year’s election to be sure: a fired up opposition, various global crises and an intemperate personality that many Americans, understandably, find distasteful. But he will no doubt delight in asking Americans: “Are you better off than you were four years ago?” For large majorities, the answer will be yes.
The Great Depression of the 1930s was by far the greatest economic calamity in U.S. history. In 1931, the year before Franklin Roosevelt was elected president, unemployment in the United States had soared to an unprecedented 16.3 percent. In human terms that meant that over eight million Americans who wanted jobs could not find them. In 1939, after almost two full terms of Roosevelt and his New Deal, unemployment had not dropped, but had risen to 17.2 percent. Almost nine and one-half million Americans were unemployed.
On May 6, 1939, Henry Morgenthau, Roosevelt’s treasury secretary, confirmed the total failure of the New Deal to stop the Great Depression: “We are spending more than we have ever spent before and it does not work. . . . I say after eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!” (For more information, see “What Caused the Great Depression?“)
In FDR’s Folly, Jim Powell ably and clearly explains why New Deal spending failed to lift the American economy out of its morass. In a nutshell, Powell argues that the spending was doomed from the start to fail. Tax rates were hiked, which scooped capital out of investment and dumped it into dozens of hastily conceived government programs. Those programs quickly became politicized and produced unintended consequences, which plunged the American economy deeper into depression.
More specifically, Powell observes, the National Recovery Administration, which was Roosevelt’s centerpiece, fixed prices, stifled competition, and sometimes made American exports uncompetitive. Also, his banking reforms made many banks more vulnerable to failure by forbidding them to expand and diversify their portfolios. Social Security taxes and minimum-wage laws often triggered unemployment; in fact, they pushed many cash-strapped businesses into bankruptcy or near bankruptcy. The Agricultural Adjustment Act, which paid farmers not to produce, raised food prices and kicked thousands of tenant farmers off the land and into unemployment lines in the cities. In some of those cities, the unemployed received almost no federal aid, but in other cities — those with influential Democratic bosses — tax dollars flowed in like water.
Powell notes that the process of capturing tax dollars from some groups and doling them out to others quickly politicized federal aid. He quotes one analyst who discovered that “WPA employment reached peaks in the fall of election years. In states like Florida and Kentucky — where the New Deal’s big fight was in the primary elections — the rise of WPA employment was hurried along in order to synchronize with the primaries.” The Democratic Party’s ability to win elections became strongly connected with Roosevelt’s talent for turning on the spigot of federal dollars at the right time (before elections) and in the right places (key states and congressional districts).
Powell’s book is well researched and well organized. His chapter titles are a delight. He synthesizes a mass of secondary sources (and some primary sources) in making a strong and persuasive case that the New Deal was a failure and that the Roosevelt presidency, at least in its first two terms — was a disaster. Powell covers all the major New Deal programs; he draws on the research of historians both “liberal” and conservative; and he is nuanced — this is no hatchet job — in that he concedes that some of Roosevelt’s policies, such as tariff revision, were more economically sound than, say, his industrial and agricultural policies.
FDR’s Folly takes its place on the shelf alongside Gary Dean Best’s Pride, Prejudice, and Politics and his more recent Retreat from Liberalism as liberating revisionist works that challenge the long-standing adulation of Roosevelt given by almost all historians. In the most recent Schlesinger Presidential Poll (1997), the historians and “experts” chosen by Arthur Schlesinger, Jr., collectively ranked Roosevelt as the greatest president in American history, even though every other American president had lower unemployment rates than Roosevelt did for his first eight years in the White House. As late as 1999, David Kennedy won the Pulitzer Prize for a book (Freedom from Fear) that largely praised the New Deal as a legislative program and Roosevelt as its author.
With the dawning of the 21st century, we may be witnessing the final departure of Roosevelt’s loyal academic propagandists and those targeted recipients of his federal largess. In such a climate, Jim Powell has given us, with FDR’s Folly, a refreshing, must-read account of the New Deal.
by Tom Rogan • Washington Examiner
Economic growth and broadly shared prosperity matter. They matter because they inform whether people can pursue their dreams or whether they suffer unnecessarily. Thus follows a question: Why did Democrats refuse to applaud President Trump’s statement of fact in Tuesday’s State of the Union address that minority unemployment rates are at the lowest levels ever recorded?
As Trump said:
“Unemployment has reached the lowest rate in half a century. African-American, Hispanic-American and Asian-American unemployment have all reached their lowest levels ever recorded. Unemployment for Americans with disabilities has also reached an all-time low.”
That statement speaks to lives being made better in new jobs being found, new skills being learned, and new means of rising up the economic ladder being reached. Continue reading
Americans are increasingly foregoing paychecks due to disability, school or retirement
by Kasia Klimasinska
How come more people are retiring in their early 20s? Why are middle-age men becoming stay-at-home dads? What’s keeping women out of the workforce other than illness, kids or school?
Those are some of the questions raised in a new Bureau of Labor Statistics report that shows changes over the past decade in why people stay out of the labor force. Finding answers is key for the Federal Reserve as it maps the contours of a job market that’s becoming harder to predict with the aging of the baby boomers and shifting household priorities.
Here’s what the bureau found, broadly: Thirty-five percent of the U.S. population wasn’t in the labor force in 2014, up from 31.3 percent a decade earlier. (You’re considered out of the workforce if you don’t have a job and aren’t looking for one. That’s distinct from the official unemployment rate, which tracks those out of work who are actively job hunting.)
Drilling down into the numbers reveals more about the shifts in the reasons some people forego a paycheck. In all age groups, for instance, more people cited retirement as the reason for being out of the labor force, and it wasn’t just older people. Continue reading
by Stephen Moore • NY Sun
What ever happened to the old-fashioned American work ethic? I ask this because Thursday’s Labor Department report for June found yet another 430,000 Americans of working age (16+) dropped out of the workforce.
Over the last year more only 1.3 million of Americans of working age have entered the workforce even as the population of this same demographic increased by more than 2.8 million. Just over 1 million of this group found jobs. That’s right—of the increase in working age population, less than 36 percent found employment! Continue reading
by Jeff Cox • CNBC
The revelation, contained in a new survey Wednesday showing how much work needs to be done yet in the U.S. labor market, comes as the labor force participation rate remains mired near 37-year lows.
A tight jobs market, the skills gap between what employers want and what prospective employees have to offer, and a benefits program that, while curtailed from its recession level, still remains obliging have combined to keep workers on the sidelines, according to a Harris poll of 1,553 working-age Americans conducted for Express Employment Professionals. Continue reading
by the Oklahoman Editorial Board
Thus it was no surprise that he parroted a Reagan trope in recently asking the question of whether Americans are better off today than when he took office — and then answering his own question by concluding that “the country is definitely better off than we were when I came into office.”
For Reagan, it was a campaign strategy drawn as a weapon against Jimmy Carter in 1980. Are you better off, he asked voters, than you were four years ago?
Such comparisons aren’t unique to Reagan and Obama, of course, but Reagan put his own stamp on it — quite successfully as it turns out.
“By every economic measure,” Obama told college students the other day, “we are better off than when I took office.” So not only has this president adopted the Reagan line (even crediting Reagan). He’s turned it into yet another example of repeated, robotic rhetoric in the endless campaign speeches made by a man “who is not running for anything except the exit,” in the words of Caroline Baum, a former Bloomberg News columnist. Continue reading
The number of people collecting paychecks rose more than had been expected and the tally of people counted as jobless fell, placing the unemployment rate — 5.9% — at its lowest level since 2008.
While the trends are positive, they offer only distant hope to a middle class that is taking home less pay than it used to and can only watch as the wealthy enjoy ever greater prosperity.
It wasn’t supposed to be this way under President Obama, tribune of ordinary folks who, as he likes to say, play by the rules. Continue reading
Three new Fed surveys highlight damage to the labor market.
Most of the political class seems to have decided that ObamaCare is working well enough, the opposition is fading, and the subsidies and regulation are settling in as the latest wing of the entitlement state. This flight from reality can’t last forever, especially as the evidence continues to pile up that the law is harming the labor market.
On Thursday the Federal Reserve Bank of Philadelphia reported the results of a special business survey on the Affordable Care Act and its influence on employment, compensation and benefits. Liberals claim ObamaCare is of little consequence to jobs, but the Philly Fed went to the source and asked employers qualitative questions about how they are responding in practice. Continue reading
by Peter Morici • FoxNews
The U.S. economy created only 142,000 jobs in August, down from 212,000 in July, indicating the economy significantly slowed this summer.
Job creation is well below the pace needed to reemploy all the workers displaced during the financial crisis—the economy is in crisis!
Although official GDP estimates indicate the economy expanded in the second quarter at a torrid pace—4.2. percent—much of that was inventory build, as consumer spending continued to drag along at a nonplus pace and capital investment, especially in manufacturing, remains subpar.
The official jobless rate is down to 6.1 percent but real unemployment is closer to 18 percent, because so many prime aged adults are sitting out the party.
by Kerri Toloczko • Investor’s Business Daily
In a fit of political pique and campaign considerations, President Obama’s Department of Education is proposing higher education regulations that would deny access to degree programs to nontraditional, low-income and minority students attending for-profit colleges and universities during a time of job scarcity.
The administration has been swinging a sword at this sector since Obama took office, striking through “Gainful Employment” regulations restricting federal student loans based on arbitrary post-graduation employment rates only at private-sector institutions. In 2010, the department proposed similar severe funding restrictions for students attending career colleges and technical schools such as Strayer University, ITT Tech, Kaplan College and University of Phoenix. Continue reading
Public policy intended to make layoffs less painful actually made layoffs cheaper and more common.
Why has the labor market contracted so much and why does it remain depressed? Major subsidies and regulations intended to help the poor and unemployed were changed in more than a dozen ways—and although these policies were advertised as employment-expanding, the fact is that they reduced incentives for people to work and for businesses to hire.
You probably heard about the emergency-assistance program for the long-term unemployed that ended only a few months ago after running for almost six years. But there is also the food-stamp program. It got a new name and replaced the stamps with debit cards. Participants are no longer required to seek work and are not asked to demonstrate that they have no wealth. Essentially, any unmarried person can get food stamps while out of work and can stay on the program indefinitely. Continue reading
Ask voters what their top priority is, and the most frequent answer is “the economy,” although that’s a catch-all term for a wide variety of concerns and sub-issues. That March Gallup poll found 59 percent personally worry about “the economy” a great deal; 58 percent said they worry about “federal spending and the deficit,” 57 percent “the availability and affordability of health care,” 49 percent “unemployment,” and 48 percent “the size and power of the federal government.”
Rarely will you find a political environment as golden for a Republican policy agenda as this one. Continue reading