CBO, CCP Virus, China, Commerce Department, Congressional Budget Office, coronavirus, COVID 19, Financial Times, Following Up, free trade, GDP, Goldman Sachs, gross domestic product, Guggenheim, IMF, inflation-adjusted growth, International Monetary Fund, Morningstar, output gap, real GDP, Trade, Wuhan virus
A month ago, I put up a post claiming that the gargantuan economic losses stemming from the CCP Virus outbreak were shredding the standard economics case for free trade. Essentially, most economists have long insisted that the gains from trade always exceeded the losses that might be suffered by individual parts of the economy and their workers. (I purposely excluded the debate over whether more trade has exacted excessive non-economic costs, like eroded national security or more pollution.) Even better, the freest possible international trade flows would create enough additional wealth to permit generous compensation for these losers.
But I then documented that the virus-related hit to American economic output – which will clearly had stemmed from decades of freeing up trade and broader commerce with China – had already dwarfed the trade gains claimed even by cheerleaders for doing ever more business with the People’s Republic.
One month later, the China trade bonanza estimates haven’t gotten any better. But the projections of damage to the U.S. economy have greatly worsened.
My April 6 post cited two leading private sector forecasts of U.S. output losses for this year, measured in terms of gross domestic product (GDP) adjusted for inflation – Morningstar’s figure of $954 billion, and Goldman Sachs’ judgment of nearly $725 billion.
Since then, some official figures have been released, and most are bigger. For example, on April 29, the U.S. Commerce Department came out with its first read on real GDP for the first quarter of this year. Even though most of that January through March period preceded the onset of various shutdown orders across the nation, the Commerce statisticians still found that the economy shrank by 4.87 percent at an annual rate in price-adjusted terms. This means that if output kept falling at that rate for all of 2020, by year-end the economy would be $928.86 billion smaller than on New Year’s Day.
That’s still a smaller production plunge than estimated by Morningstar, but Commerce (as usual) never actually predicted that the drop-off would remain constant. Its annualized figures are simply notional.
A few days before, the Congressional Budget Office did engage in some prediction. Its expectation of constant-dollar GDP decline in 2020 was $1.27789 trillion. The International Monetary Fund’s (IMF) expectation for the U.S. economy was pretty similar – a $1.1253 trillion slump in inflation-adjusted U.S. GDP.
As also noted in last month’s post, though, virtually everyone agrees that CCP Virus-induced damage will continue beyond 2020, and the way most economists try to quantify such losses is by calculating what they call an output gap. It’s an effort to specify how much lower output will be over a period of time as a result of a shock like the virus compared with how an economy would have performed had the shock never taken place.
The last time a major output gap-estimating exercise took place was in the aftermath of the Great Recession – caused by a shock resulting from the bursting of closely related credit and housing bubbles. As shown by the chart below (originally published in the Financial Times), a team at Guggenheim investments at least consider the gap to have started in 2010 (the first year after the recovery is generally thought to have started) at about $750 billion (according to my eyeballs). Thankfully, it proceeded to shrunk steadily thereafter. But the bad news is that it shrunk so slowly that the lost growth wasn’t made up for until 2018 – eight years later.
Nevertheless, if the Guggenheim economists are right, that output gap literally was nothing compared with the one that CCP Virus’ outbreak will open up. It starts this year at about $2.7 trillion (again, as my eyeballs see it) after factoring in price changes, and it closes at a rate no faster than that seen during the last economic recovery – which was historically sluggish. In other words, the decision to free up trade with China could cost the United States economy trillions of dollars of lost growth year after year for the foreseeable future.
Maybe during this period, someone or some organization will come up with a study of the gains to America from freer trade with China that will claim purely economic benefits orders of magnitude greater than previously judged. In order to preserve a serious case that such trade expansion has turned out satisfactorily for the United States, they’ll have to.