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.