The economy: An abrupt plunge

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Very few people (e.g., forecasters who specialize in gloomy economic predictions) foresaw the current economic crisis a couple of months ago. Take a look, for example, at this year’s State of the Union Address. Transcript, 2/4/20.

In just three short years, we have shattered the mentality of American decline, and we have rejected the downsizing of America’s destiny. We have totally rejected the downsizing. We are moving forward at a pace that was unimaginable just a short time ago, and we are never, ever going back. (Applause.)

Not that no one had heard of the coronavirus, the president did mention it as one of several healthcare issues that were in play, but it wasn’t characterized (nor at the time perceived) as a major threat.

Protecting Americans’ health also means fighting infectious diseases. We are coordinating with the Chinese government and working closely together on the coronavirus outbreak in China. My administration will take all necessary steps to safeguard our citizens from this threat.

Democratic critics offered many negative comments about the president’s speech at the time, but underplaying the coronavirus pandemic wasn’t one of them. Trump’s 2020 Democratic political rivals pounce to criticize State of the Union speech,,

This subject didn’t arise in the Democratic primary debate in New Hampshire several days later either. Indeed, billionaire Paul Steyer said the biggest challenge for the Democratic presidential nominee in the general election would be rebutting the president’s record of a full employment economy. Tumultuous times in national politics, Section V, 2/10/20.

Things look very different now, as the consequences of shutting down a substantial portion of the US economy to combat the pandemic have become glaringly apparent. Here’s some of the bad news that has surfaced lately.

1. Jobs – US nonfarm jobs had been increasing since 2010 after a major setback during the 2008-09 recession [aka “the Great Recession”], with a corresponding decrease in the unemployment rate. Overall jobs grew every month for 10+ years, but the trend vanished in March 2020. Employment situation summary, Bureau of Labor Statistics, Table A, 4/3/20.

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This doesn’t reflect recent job losses, moreover, as the March 20 data are based on surveys ending around the middle of March. Ibid.

It is important to keep in mind that the March survey reference periods for both surveys predated many coronavirus-related business and school closures in the second half of the month.

Taking the recent jobless claims into effect, it appears that the unemployment rate in the next jobs report (due out May 8) will be in double digits (higher than at the start of 2010). As unemployment nears 10%, here’s how Congress can soften the blow, Rachel Greszler,,

2. Economic output – Since 2001, US Gross Domestic Product (GDP) has been growing some 2% per year – only a bit higher than the rate of population growth. This compares unfavorably to the historical average in earlier periods (e.g., some 3.5% for 1929-2001). A survey of the US economy, SAFE, August 2013.

When the current administration took over in 2017, a substantial speed-up in the economic growth rate was predicted, e.g., to 3% or even 4%. Greatest false predictions of 2017; The left must face facts and admit they’re wrong about Trump and the economy, Stephen Moore & Jonathan Decker, Washington Times,

As we’ve acknowledged many times, the roaring stock market and the surging rate of growth of the economy (which is now estimated at 3.5 percent up from 1.6 percent in Mr. Obama’s last year in office), could turn against Mr. Trump in the months and years to come. It’s quite possible that the market exuberance over Mr. Trump’s deregulation and tax cut policies have run too far ahead. Though we’re predicting 3 to 4 percent growth for 2018 with the Trump tax cut kicking in.

GDP growth hit 2.8% in 2018, and then slowed to 2.3% in 2019. Bureau of Economic Analysis news release,

It will be some time before GDP data become available showing the impact of the coronavirus crisis on national output, but the major stock price indices are down by over 20% since the beginning of the year. Ample evidence exists, in other words, that a major recession is underway – with the main uncertainty being how deep it will be and how long it will last. As millions lose jobs, Fed policymakers say recession is here,,

3. Deficits and debt – The week before last, Congress passed a $2.2 trillion economic relief bill (the CARES Act), which will hopefully ease the economic pain of the coronavirus recession and facilitate a speedy recovery. Big bucks for the coronavirus crisis, 3/30/20.

Part of the outlays will be in the form of loan guarantees, some portion of which will be eventually repaid to the Treasury. Let’s assume that the net outlays will be $1.8T, all to be disbursed by the end of FY 2020 (9/30/21).

Let’s also factor in a 20% reduction in individual & corporate income receipts for FY 2019 & FY 2020, amounting to a 2-year revenue loss of $0.8T. Base numbers are taken from the president’s budget proposal for FY 2020, submitted in February 2020.

This indicates a net coronavirus bump to debt of $2.6T by the end of FY 2020, more than the previously projected deficits for FY 2019 & 2020 combined – assuming no more economic relief bills for the coronavirus, which isn’t necessarily a valid assumption.

Some may cite Modern Monetary Theory (MMT) for the proposition that the apparent cost is illusory. All of the added debt is denominated in dollars, the Federal Reserve can create all the money it wants, do the math?

Well, no, the theory is a bit more sophisticated than that. See this explanation, which rests on the assumption that deficits and debt are fine if they are incurred to support increased outlays that will produce net economic benefits (i.e., earning debt is OK). What is Modern Monetary Theory? Milton Ezrati,,

In all fairness, the suggested conclusion isn’t all that different from the president’s claim that his tax cuts would pay from themselves because the immediate revenue losses would be recouped from faster economic growth (which as of this writing has yet to materialize). But even conceding that some government programs/activities do produce net benefits, others clearly aren’t worth the money being plowed into them and should be trimmed or eliminated – before resorting to additional deficits. Obstacles to spending taxpayer money responsibly,

•Some programs make no sense on a benefit/cost basis. But even obviously wasteful programs have supporters, e.g., corn farmers and ethanol producers for the Renewable Fuel Standard (ethanol blending mandate), which can make such programs tough to abolish once they get established.

•At the other end of the spectrum, some programs merit generous funding based on their strategic importance and/or high benefit/cost ratios. The only danger is that some of these stellar projects may be underfunded due to the tendency of politicians to support spending limits on an across-the-board (versus targeted) basis.

•Most government programs fall somewhere in the middle. Net benefits are generated, but other programs might offer greater benefits for the taxpayer’s buck. So all programs in the government’s portfolio should be evaluated on a regular basis, including permutations and combinations, in search of better overall outcomes. And there appear to be many opportunities for improvement, ranging from relatively small to giant-sized.

Our previous suggestion that MMT should be viewed as shorthand for Medieval Magical Thinking seems a bit snarky; Muddled Magical Thinking might be more appropriate.

4. Duration – The president’s economic team says the current situation is temporary and a quick recovery is brewing. [Top economic adviser Larry] Kudlow: “Painful” economy will turn around in weeks, Sandy Fitzgerald,, 4/3/20.

"We're doing everything we can to deal with it and make it perhaps a little easier," said Kudlow. "We are trying to save jobs, save payrolls and businesses so that when this virus runs its course, as it will, it is not permanent. This is a temporary issue. As it runs its course the American economy will be ready to snap back. I believe it will happen well before the end of the year...we've had health waves, problems like this before and come back pretty rapidly. "

To us, Mr. Kudlow’s view seems overly optimistic. Not only is the present situation very serious, but many factors are supporting the continuation of policies that don’t seem to be addressing the problem. Consider the following:

#INTERNATIONAL RIVALS – The coronavirus originated in or near Wuhan, China, and its spread was facilitated by the Chinese government’s initially slow response including repression of reports about the threat. China’s early coronavirus missteps, Jeremy Page et al., Wall Street Journal,

One of the first doctors to alert Chinese authorities was criticized for “spreading rumors” after sharing with a former medical-school classmate a test result showing a patient had a coronavirus. Another doctor had to write a self-criticism letter saying his warnings “had a negative impact.”

Even after Chinese President Xi Jinping personally ordered officials to control the outbreak on Jan. 7, authorities kept denying it could spread between humans—something doctors had known was happening since late December—and went ahead with a Chinese Lunar New Year banquet involving tens of thousands of families in Wuhan.

Official statistics concerning the pandemic in China still appear to be seriously understated. Thus, as of 4/4/20 pm, the posted COVID-19 numbers for China were 82,943 confirmed cases, 3,330 deaths, and 76,946 recoveries versus a seemingly far worse situation in the US: 308,850 confirmed cases, 8,407 deaths and only 14,652 recoveries.

The unavailability of timely and reliable data from China may have slowed the initial US response by fueling perceptions that the disease was not highly contagious, as it is now considered to be, giving the coronavirus an opportunity to gain a foothold in the US and spread around the country. It may also have contributed to unrealistically high estimates of likely US deaths (as a result of failing to detect less serious cases) from the pandemic, thereby fueling support for the much stricter containment measures now in effect.

Furthermore, there have been claims by mid-level Chinese officials that the US military played some part in the introduction of the coronavirus in China. And other Chinese disinformation – in some cases picked up by US media - has tended to undermine public confidence in the US government’s response to the pandemic. Why Asia now looks safer than the US, Shashank Bengali (LA Times),,

In Asian countries that initially faced the gravest risk from the coronavirus, the shambolic U.S. response to the pandemic has elicited confusion, horror and even a measure of pity. Suddenly, it seems, the U.S. is the basket case, an aloof, inward-looking power that had already weakened its alliances, failed to lead on global emergencies such as climate change [an irrelevant factor] and shrunk in a crisis.

#LIMITED KNOWLEDGE – One persistent theme of the president’s critics is that he needs to stop shooting from the hip and follow the advice of medical experts on the coronavirus task force - like Dr. Anthony Fauci and Dr. Deborah Birx – who presumably have a good handle on the situation. But what if the experts are learning on the job too?

Perhaps the biggest misstep of the campaign to date was the failure to ramp up a robust testing program for the COVID-19 virus quickly enough. The inadequacies of the existing protocols of the Centers for Disease Control and Prevention (CDC) were only belatedly recognized.

Once the private sector was authorized to start developing test kits a couple of weeks ago, the situation quickly improved. FDA authorizes 15-minute coronavirus test, Brooke Seipel,,

The U.S. Food and Drug Administration (FDA) has issued Emergency Use Authorization for a new coronavirus test that takes just 15 minutes to complete. *** Abbott will run the tests on its point-of-care ID NOW platform, a portable platform that weighs less than 7 pounds and can be deployed to coronavirus hotspots. The company said it expects to produce about 5 million tests per month. [This] marks one of the fastest tests for COVID-19 available and comes just a week after the FDA approved another 45-minute rapid point-of-care test.

Inadequate testing produces flawed data, which cannot be expected to support reliable conclusions. A notable example was recently reported in the UK. Coronavirus lessons from the asteroid that didn’t hit Earth, Benny Peiser & Andrew Montford, Wall Street Journal,

With the Imperial [College] team talking in terms of 250,000 to 510,000 deaths in the U.K. and social media aflame with demands for something to be done, Prime Minister Boris Johnson [was forced to impose a draconian lockdown]. But last week, a team from Oxford University put forward an alternative model of how the pandemic might play out, suggesting a much less frightening future and a speedy end to the current nightmare.

If the available data are perceived as unreliable, experts placed in a position of responsibility will naturally be inclined to reach conservative conclusions and support policy responses based thereon. Thus, Drs. Birx & Fauci are projecting a US death toll of 100-200 thousand, which could soar if current restrictions were relaxed. Models of epidemic predict huge US death toll; Scientists hope for better outcome, Dan Charles,,

The job of the doctors is to fight the pandemic, after all, and doesn’t extend to dealing with associated economic problems. Fauci’s “inconvenient” policy, James Freeman, Wall Street Journal,

[Dr. Fauci at a White House briefing]: If you look at our history, we’ve been through some terrible ordeals. This is tough. People are suffering. People are dying. It’s inconvenient from a societal standpoint, from an economic standpoint to go through this, but this is going to be the answer to our problems.

#DIFFERENCES OF OPINION – People who expect the government to solve problems (Side A) have a different perspective on the pandemic than people inclined to rely on individual and private sector solutions (Side B). Even on COVID-19, left and right are divided, Dennis Prager,,

Virtually every opinion piece in The New York Times, The Washington Post and every other mainstream, i.e., left-wing, journal share two characteristics: a sense of foreboding (millions will die) and an unshakeable conviction that to prevent mass death, the world's economy must be shut down.

Meanwhile, virtually every opinion piece in The Wall Street Journal and on just about every conservative website contains less foreboding and asks more questions about whether the cure may be worse than the disease.

These differences took years to develop, and they won’t go away any time soon. So while Side B may entertain the idea that this country cannot afford to shut down its economy to fight the pandemic, Side A will keep pushing for stricter restrictions.

Well aware of the divided public sentiment, Side B politicians are wary of pushing for a policy shift that might leave them vulnerable to political attacks. Here’s an example (emphasis added) of the type of doublespeak that can result. Republicans set April target date to open economy, Erin Coates,,

“Our focus is on locking down the virus while we’re taking the steps now to prepare to reopen the economy by the end of the month if the virus permits,” Rep. Kevin Brady, the top Republican on the House Ways and Means Committee, told reporters Thursday, according to the Washington Examiner.

Under present circumstances, with the number of cases and deaths still rising in the US, Side A’s strategy of continuing to tighten the pandemic-related restrictions – rather than preparing to relax them – will be tough to overcome. And even if this trend reverses, for whatever reason, it will be argued that rebooting the economy would start a second wave of infection so the current restrictions must continue until a vaccine becomes available.

#UPCOMING ELECTIONS – Aided by the mainstream media, Side A politicians would dearly love to turn the coronavirus crisis against the president and make it the top issue on the campaign trail this fall. To date they have been frustrated by public support for the president, however, who has presided over the daily coronavirus briefings without getting crosswise with his medical experts or otherwise misplaying the situation.

In effect, these briefings have become a substitute for the political rallies that the president is forced to forego under current circumstances. How Donald Trump is getting his message out on the coronavirus, Tessa Berenson (Time),,

Meanwhile, the presumptive Democratic nominee for president – Joe Biden – has not performed impressively in broadcasts from his Delaware home. He doesn’t have any official role to play in the current crisis, and there isn’t much interest left in the remaining primaries. Being out of the limelight now may ultimately work to his benefit, however, as “he’s running as the I’m-not-Trump candidate, and voters will know that next fall even if he’s not on TV now.” Joe Biden is stuck in his basement. It just may help him win. Doyle McManus (LA Times),,

It’s a long time until the fall elections, and it may be hard for the president to maintain public interest in and support for the daily coronavirus briefings. See this suggestion that the point of overkill has already arrived. White House report card: Trump faulted on leadership, inspiration, Paul Bedard, Washington Examiner,

#OPTIONS – As matters stand, we don’t see much hope for a quick end to the economic shutdown. Bear in mind that stay at home, etc. orders have been issued by governors in most states, enjoy considerable public support, and aren’t being challenged by federal experts. Dr. Anthony Fauci says now is the time for a nationwide shutdown,, Michelle Williams,

Is there some development or policy change, however, that could brighten the chances for a quick and happy ending?

•One possibility is the identification of some kind of COVID-19 cure, which could be produced and made available quickly. Perhaps the most promising possibility at this point is an anti-malaria drug, hydroxychloroquine, which is being currently being tested in New York and other locations with the president’s enthusiastic support.

Dr. Fauci says, however, that more testing is needed. Unless he can be won over, this doesn’t look like a near-term gamechanger. Fauci cautions against “majestic leap” to believe anti-malaria drug is [a coronavirus panacea], Daniel Chaitin, Washington Examiner,

I think we've gotta be careful that we don't make that majestic leap to assume that this is a knockout drug, We still need to do the kinds of studies that definitively prove whether any intervention, not just this one, any intervention is truly safe and effective. But when you don’t have that information, it’s understandable, and I grant that it’s understandable why people may want to take something anyway even with the slightest hint of it being effective. And I have no problem with that.

•Another possibility is the organization of a bigger-scale and more sophisticated testing program, which could avert the Hobson’s choice between promoting health and preserving the economy. Such a program wouldn’t be quick or cheap, but it might yield better results than the present procedures. Testing is our way out, Paul Romer & Rajiv Shah, Wall Street Journal,

Two types of testing will be essential. The first test, which relies on a technology known as the polymerase chain reaction, or PCR, can detect the virus even before a person has symptoms. It is the best way to identify who is infected. The second test looks not for the virus but for the antibodies that the immune system produces to fight it. This test isn’t so effective during the early stages of an infection, but since antibodies remain even after the virus is gone, it reveals who has been infected in the past.

Together, these two tests will give policy makers the data to make smarter decisions about who needs to be isolated and where resources need to be deployed. Instead of firing blindly, this data will let the country target its efforts.

•The pace of new cases could slow for some natural reason, e.g., a slowing pace of infection with the advent of warmer weather. This may or may not happen, but we’d be glad to settle for a lucky break!

•Finally, the president may come out with proposals for additional economic relief – such as a $2 trillion infrastructure package that he has mentioned several times. Let’s hope not, because the government is already overextended financially and Americans would wind up paying the costs involved whether they took the form of tax increases or inflation.


#MMT might be taken to mean Magical Monetary Thinking. – SAFE member (DE)

Agree, will use that term from now on.

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