- The US is just now starting to respond to the economic fallout of the novel coronavirus.
- In some cases — mostly on the state and local level — governments are aggressively taking steps to combat the demand shock of the virus.
- But some economists are still wrongly treating the coronavirus as just a supple shock.
- And President Trump and Congress are doing nothing to help contain the fall out.
- George Pearkes is the global macro strategist for Bespoke Investment Group.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider’s homepage for more stories.
With the US economy almost certain to enter recession thanks to the demand shocks brought on by COVID-19 and efforts to fight it, economic policymakers are trying to cope.
Responses range from the good (mostly at the state and local level) to bad (mostly bad advice from economists). And then there’s the efforts of the White House and Congress to blunt the massive hit from COVID-19, which are downright ugly.
A growing shock
As I wrote last week, the US economy will almost definitely enter recession in 2020 after the longest economic expansion on record. The Federal Reserve is doing what it can, with a pair of emergency actions that have brought their key interest rate to zero and efforts to bolster liquidity, but even if that response is correct it isn’t enough.
Politicians and appointed policymakers across federal, state, and local governments have a lot on their plates trying to prevent further spread of the virus and organize their efforts to treat existing cases, but they also have an obligation to avoid a disastrous economic shock.
Services industries are going to be hit hard by plunging demand as local leaders order businesses to shutter activity and consumer behavior shifts (the “social distancing” that has proven so effective in slowing the virus’ spread). These changes will reduce the number of diners, drinkers, shoppers, and customers at everything from make-up boutiques to barber shops to dive bars.
For instance, reservations software company OpenTable reports that restaurants on its platform had 42% fewer US customers than a year ago as-of Saturday, March 14th. That contrasts with +1% year-over-year customer traffic on March 1st. Major disease clusters in Boston, New York, and Seattle are showing traffic declines of more than 60% per the OpenTable Data and every US state is reporting a 19% or greater year-over-year decline.
The good: state and local responses
States and local governments can do much to enforce social distancing, for instance by ordering closures of bars and restaurants or preventing large groups from gathering. A growing number of states and municipalities have ordered the closure of bars and restaurants (though curb-side pickup will still be allowed) in order to prevent groups from gathering.
These closures will lead to huge job loss in the hospitality industry, but Ohio’s Republican Governor Mike DeWine is working to soften the blow by designating all quarantined individuals as unemployed and not subject to work-seeking requirements, offering blanket unemployment coverage for workers at businesses that shut down to prevent COVID-19’s spread, and waiving the one-week waiting period for new unemployment filings. These are good steps to preserve income that the virus is destroying.
The bad: economic misunderstanding
Closure of businesses like these and the mass layoffs that come with them is a straightforward demand shock and Ohio’s policy is an example of properly trying to blunt its impact. Unfortunately, prominent economists are in some cases arguing that the coronavirus pandemic is simply creating a supply shock, which would require a different response.
For instance, London School of Economics professor Ricardo Reis recently argued that lost production now could be made up by extra production later. Imagine a factory where the line stops for a day; two extra half shifts over the next two days mean total output for the three days in question is on-schedule!
But that misunderstands the fact that services output can’t be smoothed; skipping dinner out today in favor of canned soup doesn’t mean you buy two dinners out tomorrow! It also ignores the effects of debt both at the company level and for the workers laid off by services businesses.
Rapidly widening credit spreads and plunging equity markets are sending a signal about the effects of COVID-19 on the ability to make debt payments, and the message suggests we cannot minimize the role of finance in exacerbating the virus’ shock, the opposite of what Reis claims.
Ries is one example of the bad reaction of economists to an unprecedented decline in demand that has no analogue in a services-dominated and financialized economy like ours.
The ugly: Trump, Congress, and the federal government
At last, we arrive at the ugly. Ideally, this sort of unprecedented shock to demand would be offset by the federal government, probably via a combination of the Federal Reserve purchasing bonds and direct cash transfers from the government to citizens.
Instead, Congress and the White House are dithering. On Friday, House Democrats passed a package negotiated with the Senate Republicans and the White House. Speaker Pelosi claimed it would provide paid sick leave to any worker who contracts the virus, but an analysis by the New York Times’ editorial board has illustrated what a lie that was; only 20% of workers will receive the benefit.
While the bill has other constructive provisions, exempting employers with more than 500 employees and allowing those with less than 50 employees to seek hardship waivers guts the benefits to maintaining worker income that the sick leave provisions include.
And even now we’re seeing more delays, as the Senate is reportedly not going to take up the already flawed House bill until later in the week.
That of course leaves aside the elephant in the room: actions like Ohio’s or the sham paid leave provisions in Congress are better than nothing but at best reduce the scale of aggregate demand declines rather than creating new demand. In defense of states and cities across the country, they are often constrained by constitutional amendment, statute, or markets from ramping up the amount they spend to the level needed to truly handle the crisis.
In support of states or even cities that want to go above and beyond to support their citizens, the Fed should immediately start buying short-term municipal bond market obligations, that is buying state and local government’s debt, with less than six months to maturity as they are statutorily empowered to do.
This would effectively give states unlimited funds (in the form of loans from the Fed) to spend on resources fighting the virus and stabilizing their economies. It would not apply to all states and cities because some have balanced budget amendments or other rules restricting expenditure, but it would create room for many states and cities to open up spending when it’s needed most.
Employ America’s Skanda Amaranth and the Berggruen Institute’s Yakov Feygin recently released a proposal on this subject that goes into greater detail.
Supporting sub-federal governments should come on top of the $700 billion new quantitative easing package, other forms of credit easing, and return to the zero lower bound that the Federal Reserve announced on Sunday night.
As I’ve said before, though, just because the Fed can take the steps they have already as well as more aggressive ones and they will help on the margin does not mean they are a sufficient response.
Congress must act. A failure to blunt the pending economic slowdown is a massive indictment of the most powerful politicians in this country: Speaker Pelosi, Majority Leader McConnell, and President Trump.
Working people are about to take it on the chin as financial markets already have, and the ugly power games in Washington have so far only served to make that blow worse. Our leaders have badly let us down so far, but they can make up a lot of ground by working with real urgency in the days ahead.
George Pearkes is the global macro strategist for Bespoke Investment Group. He covers markets and economies around the world and across assets, relying on economic data and models, policy analysis, and behavioral factors to guide asset allocation, idea generation, and analytical background for individual investors and large institutions.