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(What’s Left of) Our Economy: How Bad Will it Get?

14 Tuesday Apr 2020

Posted by Alan Tonelson in (What's Left of) Our Economy

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Baby Boom, CCP Virus, Cold War, coronavirus, COVID 19, Edward Harrison, Federal Reserve, Great Depression, Great Recession, health security, military spending, moral hazard, recession, recovery, secular stagnation, small business, start-ups, technology, Trump, uncertainty, unemployment, World War II, Wuhan virus, {What's Left of) Our Economy

How bad economically? That’s a CCP Virus-related question everyone’s understandably asking these days. In fact, last night one of my social media friends expressed the super-bear case pretty compellingly:

“I can’t see any way this is not going to destroy us. No one will have any money, so they won’t buy anything, won’t pay their bills, can’t pay rent or mortgages. No spending power means no employment. More layoffs. certainly as soon as stores open there wil be a rush to sell everything, a rush to normal, hoping for the best, but I think this is pretty much The End of life as we know it.”

And an economy-watcher I know with an unusually good feel for finance is awfully pessimistic, too – and has been right so far about the virus’ impact on output, employment, and the markets.

I’m feeling even less confident than usual in my economy crystal ball (that’s a low bar). The main reason of course is that the current U.S. nosedive, as I (and nearly everyone else) have observed, isn’t a standard recession or depression. That is, it hasn’t been caused either by some built-in weakness in the economy that finally becomes too big to ignore or paper over, or similar problems in the financial system that wind up wrecking the “real economy.” We can’t even blame the current crisis on some outside economic shock, like the boost in global oil prices that wreaked such economic havoc in the 1970s.

Even so, here are four somewhat related, extremely tentative thoughts that I hope will help readers form their own judgments about the American economy’s future. Spoiler alert: They’re pretty pessimistic.

First, the fundamentally biological nature of the crisis creates the kind of uncertainty that’s unprecedented in modern times, and that consumers, businesses, and investors will hate even more than usual. For example, what if there’s a second wave? Or a third? How will these three groups of economic actors respond to attempted restarts of economic activity that, however gradual or rolling, turn out to be premature?

Worse, what if the CCP Virus is here to stay for the time being, and treatments can only become good enough to reduce it to the status of a really nasty flu? And what if it mutates into something requiring qualitatively different cures?

Second, because of all these possible biology-rooted uncertainties, I fear that many of the standard arguments for expecting a relatively quick, strong rebound should be thrown out the window. All of them, after all – including President Trump’s – apparently assume that the timeout mandated in most of the economy’s consumption (and that therefore inevitably undermines its business spending) is creating lots of frustrated demand that will burst into actual spending once the crisis passes.

One big historical precedent cited: the aftermath of World War II. At that time, officials inside the federal government feared that growth would fizzle at best for two main reasons. First, the massive boost to growth and employment delivered by wartime military spending would dramatically fade. Second, this pessimism was no doubt greatly reenforced by the nation’s immediate pre-war experience – a lengthy and deep depression that showed no signs of ending until the global fascist threat inspired a pre-Pearl Harbor military buildup.

But after the war, consumption came back with a vengeance – because the main threats on everyone’s mind were decisively defeated; because so many Americans had lots of income to spend; because Washington laid the ground for more income-earning with programs like the G.I. Bill, along with war-time advances in science and technology that boasted phenomenal peacetime uses; and because baby-making boomed along with consumption, juicing demand for more housing in particular.

And let’s not forget the Cold War! The household spending binge did slow in 1947 and 1948. But by 1949, defense spending began rising again, and it really took off from 1951 on, once the Korean War in particular convinced policymakers that a global Communist threat was alive and here to stay.

Today, however, determining when the major threat is finally over is much more difficult. Unemployment is sure to rise much higher than the 5.9 percent pre-Korean War peak (in 1949), meaning that not only will incentives to save remain stronger, but that much more income is being lost. And nothing like a post-World War II Baby Boom was even in sight before the CCP Virus struck. Indeed, the arrows were pointing in the opposite direction. A post-virus repeat seems unimaginable.

The one interesting possible reason for purely economic optimism? A new military spending surge – perhaps spurred by worries about China? And new healthcare products investment might jump as well, possibly boosted by government incentives, to prevent a repeat of current supply shortages.

The third consideration weighing on my mind is the separation factor. Even if post-virus improvement is solid, I wonder how sustainable it will be. The main reason is that, at least during past episodes of major job loss (e.g., the last decade’s Great Recession that followed the global financial crisis), many of the unemployed face big difficulties returning to work in any form, and particular difficulties finding work at previous pay levels. Because the longer unemployment lasts, the harder these obstacles generally become, and because of the likely rate joblessness is likely to hit, this separation factor could become considerable even if unemployment insurance and other income supports do turn out to be generous enough to sustain such economic victims until the nation reaches “the other side.” 

The separation factor, moreover, may go beyond workers. I don’t by any means rule out the possibility that significant numbers of small business owners may call it quits, too – either because cratering demand for their products and services will kill off their enterprises, because the the government aid being offered doesn’t cover all their losses for long enough, or because they conclude that applying for the aid just isn’t worth the candle.

Sure, new start-ups will fill part of this gap. But all of it? Not if the abundant pre-crisis evidence of a significant drop-off in such entrepreneurism is any indication.

Fourth, also reenforcing the bear case: Although the roots of the current economic mess are dramatically different from those of the last near-meltdown and recession, the “whatever it takes” response of the federal government and the Federal Reserve are remarkably similar. As pointed out by Edward Harrison, the economy- and finance-watcher I cited above, on the one hand, the authorities probably don’t have a choice. On the other, this thick, pervasive safety net did produce an epidemic of “moral hazard” – financial decisions in particular that turn out to be bad but that initially look smart because confidence in some form of bailout reduces the perceived risks and costs of mistakes.

As I explained previously, the last outbreak of moral hazard took a painful pre-virus economic toll, as the resulting inefficient use of capital helped produce  one of the weakest economic recoveries American history. In fact, it’s produced a theory that I personally find as convincing as it is depressing (personally): secular stagnation. It holds that the economy has become so fundamentally unproductive and inefficient that the only way it’s been able to generate even adequate (not especially strong) levels of growth has been for government to inflate bubbles of various kinds (with all its moral hazard-creating spending and guarantees) that, of course, eventually burst. So it doesn’t seem at all unreasonable to believe that the upcoming recovery will be similarly feeble.

Even worse, according to Harrison, even the current official backstopping might not suffice to prevent defaults by the financially weakest businesses – which would generate their own harmful spillover effects.

I’m not saying that there’s no case for optimism – at least cautious optimism. The overall long-term historical momentum for improvement in living conditions the world over is very impressive. As a result, doom-saying has a lousy record in the post-World War II period in particular. Technological advance isn’t going to stop, and may not even slow much. Maybe most important, at least in the medium-term, the human desire to acquire and consume shows no signs of having vanished.

So maybe the safest conclusion to come to (however unsatisfyingly timid): This time won’t be completely different. But don’t bet on a simple, and particularly a quick, return to pre-virus times.

Im-Politic: No Let-Up in Immigration Fakeonomics – and Fake History

20 Wednesday Dec 2017

Posted by Alan Tonelson in Im-Politic

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business, Center for American Entrepreneurship, chain migration, Dreamers, Fortune 500, illegal immigrants, Im-Politic, Immigration, RAISE Act, social mobility, start-ups

The Open Borders Lobby is now touting a new study claiming that the Trump administration and Congress should permanently legalize the roughly 800,000 so-called “Dreamers” in part because of “the remarkable and persistent importance of immigrants to the creation and growth of America’s largest, most successful, and most valuable companies.” Moreover, it’s making the case that the findings should be shaping the entire “on-going national debate about immigration policy.”

There just one big problem: If you’re sympathetic to the plight of those immigrant children brought to the United States illegally by their equally illegal parents, and/or to the idea that the country needs an even more lenient immigration policy than the present version, you should hope that much stronger arguments for these positions are developed. Because the study, issued by the Center for American Entrepreneurship (CAE) is a classic of Fake Policy Analysis.

CAE is clearly correct in noting “the well-established importance of immigrants to entrepreneurship in the United States….” But it’s headline finding – that a large percentage of today’s Fortune 500 companies have been founded or co-founded by immigrants or their children – should simply remind readers of a simple historical truth: America has been a “nation of immigrants” since the founding because it’s generally been a relatively young, thinly populated country that’s needed to build up its human resources and actively sought this goal. The data have absolutely nothing to do with the main questions dominating the immigration policy debate these days, such as legalizing the Dreamers; or amnesty-ing the entire current illegal population; or reducing or ending “chain migration”; or cutting legal immigration levels.

Skeptical? Just check out the CAE’s numbers. At a glance they do seem to vindicate claims that immigrants have been much more entrepreneurial than the American population in general. And if you believe in capitalism and free markets, that’s incredibly important.

But look more closely, and the relevance to contemporary immigration debates vanishes. For an enormous percentage of the immigrant entrepreneurs listed here arrived and made their marks in the 19th and early 20th centuries, when the country’s immigrant population grew substantially faster than the population as a whole. Between 1850 (the earliest official data available) and 1910 (the date of the last U.S. Census before World War I, when immigration inflows of course dramatically dropped, and before 1924, when legislation slashed inflows and established discriminatory foreign country quotas), America’s foreign born population grew from 9.7 percent to 14.7 percent. And obviously, before 1850, it was at least as large, and growing at least as fast.

So of course during this period, immigrants were especially important in business formation. They were especially important in all demographic respects.

It’s also curious, to put it mildly, that the CAE would use immigrants’ children to buttress its case about immigrant entrepreneurship. These children founded or co-founded more than 57 percent of the “immigrant-founded” companies the Center has spotlighted. (In other words, immigrants themselves founded only about 43 percent of the so-called immigrant founded firms, and therefore only 18.4 percent of current Fortune 500 companies.)

But what’s the rationale for including them? Why not count the third generation, too? Because an entrepreneurship gene is for some reason not passed on to these immigrant descendants? Or somehow watered down? And why would this be? Because the second generation is likelier than the immigrants themselves to marry someone from the supposedly less entrepreneurial native-born population?

Counting the children – along with the prominence of these progeny – also seems to undercut the belief that immigrants are outsized business creators either because their very decision to leave their native lands reveals unusually high levels of get-up-and-go; or because as newcomers to the United States, they faced unusual barriers, like discrimination, in achieving prosperity; or some combination of the two.

For immigrant children established considerably more major companies than immigrants themselves. And presumably, they faced fewer obstacles, and were more steeped in native norms, than their foreign-born parents.

And finally, if you’re wondering why any of these findings should bear on today’s main immigration policy debates, you’re right – mainly because social mobility in America has been on the wane for decades, and in particular for the kinds of relatively poorly skilled and educated individuals who have dominated recent immigration inflows and the illegal population.

This trend significantly reduces the odds that the Dreamers – who for the most part share these characteristics – won’t match the business-creation record of previous immigrant generations. Ditto for today’s other illegals and the legal beneficiaries of chain migration.

Focusing on immigration policy as a business-formation booster, let alone cure-all, also ignores all the purely domestic obstacles to greater entrepreneurship – like weak social mobility and all the policy mistakes and inadequacies (and economic and social ills) behind it; like growing levels of business concentration and consequent declining levels of competition, which shrink the space for start-ups; like today’s feeble levels of consumer demand, which have surely undercut overall business investment.

When those problems are addressed more effectively, the United States will no doubt see a revival or entrepreneurship. And just as certainly, it will be in a much stronger position to handle the costs of recent immigration levels – and even possibly increase them.

Blogs I Follow

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(What’s Left Of) Our Economy

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Our So-Called Foreign Policy

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  • Golden Oldies
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  • Housekeeping
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  • In the News
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Im-Politic

  • (What's Left of) Our Economy
  • Following Up
  • Glad I Didn't Say That!
  • Golden Oldies
  • Guest Posts
  • Housekeeping
  • Housekeeping
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Signs of the Apocalypse

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The Brighter Side

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  • Golden Oldies
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  • Im-Politic
  • In the News
  • Making News
  • Our So-Called Foreign Policy
  • The Snide World of Sports
  • Those Stubborn Facts
  • Uncategorized

Those Stubborn Facts

  • (What's Left of) Our Economy
  • Following Up
  • Glad I Didn't Say That!
  • Golden Oldies
  • Guest Posts
  • Housekeeping
  • Housekeeping
  • Im-Politic
  • In the News
  • Making News
  • Our So-Called Foreign Policy
  • The Snide World of Sports
  • Those Stubborn Facts
  • Uncategorized

The Snide World of Sports

  • (What's Left of) Our Economy
  • Following Up
  • Glad I Didn't Say That!
  • Golden Oldies
  • Guest Posts
  • Housekeeping
  • Housekeeping
  • Im-Politic
  • In the News
  • Making News
  • Our So-Called Foreign Policy
  • The Snide World of Sports
  • Those Stubborn Facts
  • Uncategorized

Guest Posts

  • (What's Left of) Our Economy
  • Following Up
  • Glad I Didn't Say That!
  • Golden Oldies
  • Guest Posts
  • Housekeeping
  • Housekeeping
  • Im-Politic
  • In the News
  • Making News
  • Our So-Called Foreign Policy
  • The Snide World of Sports
  • Those Stubborn Facts
  • Uncategorized

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Current Thoughts on Trade

Terence P. Stewart

Protecting U.S. Workers

Marc to Market

So Much Nonsense Out There, So Little Time....

Alastair Winter

Chief Economist at Daniel Stewart & Co - Trying to make sense of Global Markets, Macroeconomics & Politics

Smaulgld

Real Estate + Economics + Gold + Silver

Reclaim the American Dream

So Much Nonsense Out There, So Little Time....

Mickey Kaus

Kausfiles

David Stockman's Contra Corner

Washington Decoded

So Much Nonsense Out There, So Little Time....

Upon Closer inspection

Keep America At Work

Sober Look

So Much Nonsense Out There, So Little Time....

Credit Writedowns

Finance, Economics and Markets

GubbmintCheese

So Much Nonsense Out There, So Little Time....

VoxEU.org: Recent Articles

So Much Nonsense Out There, So Little Time....

Michael Pettis' CHINA FINANCIAL MARKETS

New Economic Populist

So Much Nonsense Out There, So Little Time....

George Magnus

So Much Nonsense Out There, So Little Time....

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