Home > Uncategorized > More thoughts on the recession, stimulus, and recovery

More thoughts on the recession, stimulus, and recovery

from Dean Baker

As we get more data in, it seems increasingly likely that we are looking at a horrible and prolonged recession, not a complete economic collapse of Great Depression proportions. The May employment report showed a substantial bounce back in employment, with jobs up by more than 2.5 million from the April level. Retail sales had a huge 17.7 percent jump in May, by far the largest on record, although they are still 6.1 percent below the May 2019 level.

Mortgage applications also show a considerable degree of confidence about the future, with both refinancing and purchase mortgages soaring. Mortgage applications for refinancing are up more than ten-fold from year-ago levels, while purchase applications are up 268.6 percent to the highest level in more than 11 years. The latter is far more important for the economy since it implies people are buying homes, which typically lead to the purchase of new appliances and spending on renovations.

These data, and a variety of surveys of consumers and businesses, do not show an economy in collapse. At the same time, there is little reason to believe that we will see a robust rebound to anything resembling normal. We lost 22 million jobs between February and April. Even if we had seven more months adding jobs back at the May rate, we would still be down by more than 2 million jobs from the pre-pandemic level. And, we are not likely to see seven more months with job growth anything like May’s pace, without some very serious fiscal stimulus.

new paper from Raj Chetty and co-authors provides some interesting insights on the problem the economy faces. Using real-time data from a number of private sources, it finds that there has been a sharp fall in consumption by people in the top income quartile of households, with relatively little change in consumption from the other three quartiles.

This drop is overwhelmingly associated with a sharp drop in demand for services, like restaurant meals, hair salons, and other personal services. Interestingly, the size of the drop is not affected to any substantial extent by laws on shutdowns. Areas where these services were fully available saw comparable declines in spending as areas where these services were still subject to lockdowns.

There are two major takeaways from these findings. First, the drop in demand that we have seen to date has little to do with declines in income. The top quartile has reduced its spending not because it lacks the income to spend, it has reduced spending because it is scared to spend in the areas where it would ordinarily be spending its money.

An implication is that any further efforts at boosting the economy should be better targeted than the first rounds. For example, giving $1,200 to every adult in the country was not a very effective way to boost the economy. While this was payment was phased out for very high-end earners, the phase out only affected the top 2-3 percent of the income distribution, the bulk of the top quartile received their checks even though they were not suffering any income loss as a result of the pandemic.

The other major take away is that if we want people to use restaurants, hair salons, gyms, and other services, the issue of legal shutdowns matters far less important than ensuring their safety. This means actually getting the pandemic under control. While virtually every wealthy country has been able to do this, outside of the Northeast corridor, new infections are higher than ever in the United States. This means that without a vaccine and/or effective treatment, we are likely to see demand for a wide range of services badly depressed for the foreseeable future.

This matters in a big way because these industries provide tens of millions of jobs largely to less-educated workers. These sectors also disproportionately employ women and people of color. If they continue to see demand at far below pre-pandemic levels, it will mean a massive and persistent increase in unemployment for the less-educated segments of the workforce. This will quickly reverse all the gains that lower-paid workers were able to make as the labor market tightened in the prior five years.

Shaping the Stimulus

The most immediate need in the next round of a rescue package to come from Congress is for money for state and local governments. Their budgets have been devastated by the loss of tax revenue due to the shutdown and the additional demand for services. The Center on Budget and Policy Priorities calculated that the shortfalls could be as high as $500 billion.

They have already laid off 1.6 million workers and this number will hugely increase if Congress does not provide a large chunk of money to make up for their shortfalls. Some people have pointed out that the laid-off workers were largely teachers, who were not paid for the period in which schools were shut down. This is true, but if state and local governments cannot get the money to make up shortfalls, many of these teachers may not be called back in the fall and other workers are likely to be laid off to make up the cost of paying the teachers who are called back. Cutbacks at the state and local level were one of the main reasons that the recovery from the Great Recession was so slow. We should not make an even larger mistake now.

The Post Office will also need substantial funding to stay in business, as it has seen both a sharp decline in revenue and sharp increase in spending due to efforts to keep its workers safe. As with state and local governments, the employees of the Post Office are disproportionately Black. This is due to the fact that Black workers in the public sector have faced less discrimination than Black workers in the private sector. As a result, the public sector has historically been an important source of middle-class jobs for Black workers. This will be threatened if the fallout from the pandemic forces large cutbacks in employment.

There has been a peculiar debate over the extension of the $600 weekly supplements to unemployment benefits that are scheduled to end next month. It is important to remember the reason these were included. We gave people this supplement because we did not want them to work. The point was to keep people whole through a period in which the economy was largely shut down in an effort to contain the virus.

In this context, the question we should be asking in deciding whether to continue the supplement is whether it is safe to work. This depends on our progress on containing the virus. One obvious way to determine the extent to which the pandemic has been contained is the positive rate on new tests. If the positive rate is below some low level, say 3 percent, then it would be reasonable to remove the supplement in that area (this can be county specific), however, if we are seeing high positive rates, then as a matter of policy it would make more sense to encourage people to stay at home than to work.

For the areas where the virus is under control, it would still be desirable to have some supplement to the standard benefit. Benefits in many states have been eroded in recent decades so that it would be very difficult for unemployed workers to survive on them. In a context where the nationwide unemployment rate is virtually certain to be in double digits through the rest of the year, most of the unemployed are not going to be able to find work. For these reasons, a smaller supplement, perhaps $200 a week, should be left in place until the economy has recovered more.

In addition, we should also increase SNAP benefits to protect those at the bottom of the income ladder. Food prices have risen sharply since the pandemic hit. These increases may be reversed in the months ahead, but for now, low-income families have to cope with high food prices, with no increase in benefits. It is also important to remember that SNAP spending is a small share of the total budget. At $70 billion a year, it is just 1.6 percent of total spending. It is less than one-fifth of the premium we pay each year for prescription drugs because of government-granted patent monopolies.

Longer Term Recovery

At the point where we have developed effective treatments and/or a vaccine, many people will go back to eating at restaurants and flying for vacations. However, there are some changes in spending patterns that are likely to be enduring.

It is likely that much of the increase in telecommuting will be permanent. This means that many fewer people will be going to downturn offices and taking advantage of restaurants, bars, gyms, and other services in central cities at lunch and after work. People are also likely to be taking many fewer business trips, as meetings will take place on Zoom. Also, many colleges and universities will likely be downsized, as more instruction takes place on the web, decreasing retail sales in college towns.

While there will be other long-term changes resulting from the pandemic (maybe even some questioning of government-granted patent monopolies for prescription drugs), the basic point is that large numbers of workers are likely to still be displaced even after the immediate impact of the pandemic is over.

This actually presents a great opportunity. If the private sector is not spending enough to fully employ the workforce, then the public sector has to fill the gap. In this case, we don’t need to have make-work jobs, we have enormous unmet needs.

Most obviously we need people to increase our capacity for clean energy and conservation. This can mean millions of jobs for people installing solar panels, insulation, and other energy-saving measures. We also need to ramp up our child care capacity. The lack of adequate child care was driven home in the pandemic as many health care and other essential workers had difficulty making arrangements when child care facilities shut down. We also need more health care workers as we move towards establishing a universal Medicare system. This will likely mean many more nurses, nurses’ assistants, and other health care professionals. And we will need social workers or other trained professionals who can be the first responders in many non-violent situations where the police are currently called in.

We can’t imagine that all the people who lose their jobs in restaurants and hotels will be able to work installing solar panels or train to be nurses, but that is not how the labor market functions. In a normal pre-pandemic month, more than five and a half million workers lost or left their job every month. As jobs are generated in these new areas, many currently employed people will look to fill them. That will create job openings that former restaurant and hotel workers can fill. The story is not as simple as this, as we know there is considerable discrimination in the labor market and many pockets of high unemployment, but we don’t have to imagine that we need to match up displaced workers directly with the newly created jobs in clean energy, child care and health care. The labor market is far more flexible than this story implies.

Anyhow, a full discussion of the post-pandemic economy is a much longer story, but the basic picture is actually a positive one. More telecommuting will mean a more productive and less polluting economy. It will also lead to more dispersion of higher paid jobs, benefiting many of the areas that have been left behind in the last four decades and lowering rents and house prices in places like New York City and San Francisco. If we can get through a very bad stretch for the country and the economy, the future could actually be quite bright.

  1. Ikonoclast
    June 29, 2020 at 3:16 am

    The COVID-19 pandemic has now spread to 10,000,000 known cases globally and 500,000 known deaths. I see no reason why, short of an effective vaccine, it will not spread to 5 billion people globally. That is 500 times the number it is known to have spread to so far. Calculating this out, 500 times 500,000 is 250 million people. I would expect COVID-19 to kill 250 million people globally, without a vaccine, in the first pandemic “long wave”. Without a vaccine it will continue to kill people indefinitely after that.

    Worldwide, I would suspect that the total number of infections is already ten times the known number. That would mean 100 million already infected. This proportion of total infections to known infections is already proposed by American authorities including the CDC.

    https://www.nbcnews.com/health/health-news/cdc-says-covid-19-cases-u-s-may-be-10-n1232134

    The true size of the spread is bad news. The potential excess deaths of 250 million people globally plus possible ongoing deaths is also bad news. The likely lethality of COVID-198 is 10 times 10 million divided by 500,000 = 0.5%. The lethality of the last flu season in the USA was 0.1%. The R0 of seasonal flu is about 1.2. The R0 of COVID-19 is thought to be around about 2.4 in an “average” city without limiting measures. These numbers would indicate that COVID-19 is about 10 times more effectively lethal than flu. This is in its current form(s) without significant mutations. Of course, COVID-19 is much more dangerous to elderly people.

    Without an effective vaccine, the effects on the global economy will stretch into the order of years, probably several years or more. Without an effective vaccine, a nation like Australia, which is at “near eradication”, will have to stay locked down from significant global people movements indefinitely. How should Australia approach that possibility? Whether it is better to near-eradicate or “let it rip” is now being tested in the “global laboratory”. My prediction is that near-eradicating or eradicating will be socially and economically more successful even after accepting the quasi-autarkic losses (if there are such losses) from international isolation in people movement terms. I am not totally certain about this and I await empirical outcomes which will take some time to arrive. There are counterfactuals which might suggest that (for example) the USA will fare better long term than China.

    I am not confident these counterfactuals will “bear fruit” so to speak. One counterfactual in particular might sound cruel to contemplate. We should still have the intellectual courage to contemplate such a counterfactual without advocating it. I have, from the firstm advocated the eradication approach as followed by New Zealand and Australia. But let us pursue counterfactual thinking.

    Firstly, in natural selection and demographic terms, the USA might benefit from COVID-19 as a long term selection event. The elderly and those with pre-existing conditions will die in greater numbers thus reducing the number of unfit individuals in the populations. I can validly refer to this unpalatable possibility as I am elderly myself. Secondly, nations which go through the epidemic floridly might be able to open up their economy domestically after eradicators but globally before eradicators and suppressors. In turn, this latter calculation would be thrown out by a realtively early effective vaccine, say even by the end of 2021.

    Overall, I strongly doubt there are economic advantages to the “let it rip” approach of USA and the EU and the moral judgement must be for protecting life in any case. Time will tell.

    Neoliberal capitalism has failed. It has shown itself to be in poor control of its own future. The “let it rip” approach was a post facto rationalization after both a failure to quarantine nations properly and a failure to maintain adequate medical systems and pandemic preparations. That is to say “let it rip” became a defacto policy founded on years of neoliberal capitalist white-anting of necessary social, medical and scientific capabilities. Even the existence of such a large anti-science demographic in the population is the result of years of white-anting and privatising education and making it “neoliberal-friendly”; neoliberal rather than scientific and with humane values.

    As soon as neoliberal capitalism in the USA and Europe was stressed exogenously (by COVID-19) it started falling apart socially and economically. It was exposed as an extraordinarily fragile and brittle system. Just-in-time supply chains broke down. Nations found themselves hostage to international trade flows (and thus to the manufacturing giant, authoritarian China, with its State Capitalism) without ability to immediately manufacture essentials autarkically. Protests against oppression and extreme inequality broke out everywhere. The global system was also exposed as a mono-system lacking necessary regional autonomy and robustness.

    How we respond to this crisis will determine whether the civilized world collapses or survives. If the USA and Europe collapse, they are certainly big enough to bring everything else down with them, even China. Only a complete repudiation of capitalism, along with a repudiation of the crony state capitalism extant in Russia and China, carries a chance of saving us. We must now evolve and emerge our political economy system beyond capitalism. To fail to do so will mean the extinction of homo sapiens and the complete destruction of the Holocene biosphere.

    • June 29, 2020 at 9:03 am

      Your lethality math is off. If the CDC is correct and there are 10X more cases than are being officially recorded – 25m instead of 2.5m – in America, which has 1/4 of all the world’s cases, than the lethality must be correspondingly less, as you point out as well – 0.5%, not 2.5% or anything with a whole integer.
      Furthermore, statistics, as least in the hardest hit state of NY, show 43% of the deaths occurred in Nursing Homes. This was compounded by our Governor Cuomo’s horrendous decision early on to quarantine CV-positive cases in nursing homes, and in order to be “fair” to not even allow Nursing Home staff to know who they are!
      In any case, the percent of people getting a bad case of Covid-19 without having the top 4 Co-morbidity symptoms is almost non-existent. These factors are self-limiting in the population and include, in order of prevalence:
      – Overweight, not even obese
      – Diabetes
      – Hypertension
      – Advanced age, 75+. Without the first 3, seniors are actually under-represented in the serious/death statistics, until over 75, the age at which most people in most societies are likely to die anyway.
      – Two studies also support the finding that people with type A blood type are 50% more likely to experience severe symptoms. While there’s nothing anyone can do about their blood type, it is another self-limiting factor. There are only so many people with that blood type in the world.
      Already, we are seeing a rise in cases nationwide, without a rise in death rates. Either our treatment options are getting better, e.g. replacing ventilators which had an 80% fatality rate, with a new steroid which cuts the death rates of people on ventilators by 1/3 and people on oxygen supplements by 1/5, OR the population currently being infected is less susceptible.
      Rather than masking and isolating people – a particular problem in the young, whose time in life to network, climb the job ladder, and even find a mate, is demographically limited – we should be encouraging them to mingle, knowing that their vulnerability is very low, until herd immunity is built-up, preferably before the flu season rolls around again.
      There has never been a corona virus vaccine, and even the flu vaccine is only 60-70% effective, and it has to be updated every year. A CV vaccine, if it comes at all, will likely be subject to similar limitations. And outside the ivory tower of epidemiologists like Dr. Fauci or financiers like Bill Gates, many people are going to be suspicious of a new vaccine – as they are of old ones. What then? Forced vaccinations? And you thought forced lockdowns were hard and destabilizing!
      We’re on the wrong track.
      Protect the most vulnerable population (no one testing positive should be in a Nursing Home).
      Allow people to work and children to go to school.
      Test where we can, and of course, vastly improve treatments (they can hardly be worse).

      • Ikonoclast
        June 29, 2020 at 10:18 am

        Given my assumptions, my lethality math is spot on. Don’t mistake the R0 for contagiousness with the lethality percentage. The lethality percentage expresses the percentage that die after catching the disease. The R0 number expresses the replication of contagious infections in new persons. An R0 of 2.4 means each infected person infects 2.4 more persons on average. The R0 can be reduced by quarantine, isolation, distancing, masks and improved hygiene, especially if all used in combination.

        Young people are much safer but still not entirely immune. Many young people today are obese and/or have other pre-existing conditions. Also, how many young people will be happy about being the cause of the deaths of their parents, grandparents and other vulnerable relatives? I am not so sure about that.

        But clearly you in favor of letting the virus go through the whole population. As I said, it’s an (unintentional) global experiment now. In ten years time we will know if the USA or China were correct in their approaches (unless other factors, not controlled for, change so much that the comparison is not valid).

        It is true there’s never been a coronovirus vaccine except one for canine enteric coronavirus. It will prove difficult and maybe technically impossible to make a vaccine for a pulmonary coronavirus. However, the incentives to make it are high so if it is technically possible at all it will be made.

        China has controlled the outbreak and done well on a per capita basis. This is if their figures are to be trusted. Personally, I don’t trust any figures or information out of China so I don’t know what to think. Australia has near eradicated the virus and New Zealand has effectively fully eradicated it. This has been done by isolation, shut-downs and much voluntary compliance with government requests. There has been little need for heavy handed government actions. Being island nations far away from the rest of the world certainly helps. Australia’s island-continent is large; nearly as large as the continuous 48 states of the US. But we have a small population spread out. That helps too. So some of this is luck of situation.

  2. Ikonoclast
    June 30, 2020 at 12:23 am

    This COVID-19 pandemic has revealed a number of interesting things about Western economies and societies.

    (1) Privatizations and neoliberal capitalist economics have gone much too far. The answer lies in nationalization of key infrastructures and services plus the provision of more public services including national health, welfare and education services. That is where the new spending needs to go.

    (2) An economy commanded by billionaires and large corporations is highly inefficient and inequitable. It spends on the wrong things and cannot withstand exogenous shocks as we have seen. We see too many Ferraris, too many mansions, too many football stadiums and not enough public hospitals. Opportunity costs mean that a nation spending on luxuries (for the privileged classes) is not spending on essentials for all classes.

    The economy needs to be commanded by the people through a fully democratically elected government. Large economies are always command economies anyway. The fallacy that the sometimes competing and sometimes conspiring oligarchs do not constitute a form of command economy ought to be jettisoned. The only realistic choice is for command by oligarchs or command by democracy. Which ought we prefer?

    (3) Global supply chains are fragile and an excessively connected world system is also too much of a mono-system and hence fragile. Large nations, and small nations in loosely federated regions like Europe, need to pursue higher levels of regional semi-autarky. As far as possible, all essentials should be produced at the regional level. We are discovering now the importance of NOT relying on one central manufacturer for the globe for many necessities, meaning China.

    (4) The capitalist method of production is destroying the environment for the production of luxuries, absurdities, fripperies and non-essentials. This is unsustainable. We need to use this crisis to re-configure and re-tool our entire economies away from endless growth and wasteful consumerism. We need to redirect the economy to essential activities required for sustainable survival and a circular economy. The changeover to renewable energy is a key project which would employ many more people than the fossil fuel supply chain.

    (5) We see that the capitalist system breeds self-indulgent, over-consuming people in the West and now even in China (except for oppressed underclasses). When asked to employ self-discipline and selfless ethics of the common good and to halt the pandemic spread, too many people trained by consumerism are unwilling or unable to change their ways. They are thoughtlessly cathected (emotionally invested in) and addicted to consumer products and a consumerist way of life. Some have an inadequate understanding of any higher ethic as a standard for social conduct.

    I see people who cannot do without non-essentials. Who apparently cannot do without restaurant, clubs, pubs, bars, alcohol and drugs; all the non-essentials. Who do not know how to fill their days and nights if it is not in the idiotic pursuit of destructive and self-destructive fun or escapism. A culture which promotes this is empty and has no mission. Yet the mission is, or should be, crystal clear – Radically change the economy to save the oppressed and to save the planet. Nothing could be more important than that.

    The mission, the quest if you like, is clear. We see people today are addicted to “quest” and “hero” narratives. Our screens and books are full of this formulaic tripe. We need to ponder why the fake is preferred over the real. People survive on these ersatz quest narratives when a radical and revolutionary quest in the real world is right before them. That is to save the planet by cooperative action. Heroes only seem necessary when cooperative action is foreclosed by cultural obstacles, mental blind-spots and political bans on cooperative behavior. Any real human alone is weak. Atomistic and selfish individuals are weak. We do not have any special powers at all, except for one: the power of combination and cooperation. That is the “super-power” of any social or eusocial species.

    • July 1, 2020 at 2:49 pm

      Thank you Econoclast, you are half-way around the world from me yet singlehandedly make me feel less alone. Here’s my missive for today…

      An interesting point of social evolution has been reached;

      Almost half the US population has escaped wage slavery. Now the question is, How will autonomous democracy focus distributed human intelligence so it may create a much more fun and healthy way of life that allows Earth to heal and return to former bounty provided to a gently declining population knowingly using less and less to hasten Earth’s healing.

      Garrett

      https://www.wsws.org/en/articles/2020/07/01/jobs-j01.html?pk_campaign=newsletter&pk_kwd=wsws

  3. Theodore G.
    July 2, 2020 at 9:06 pm

    Please people, stay within your area of true knowledge.
    Trying to apply this kind of mathematics to a viral outbreak will give numbers that are ridiculous. The dynamics involved are extremely more complex, dynamic and interrelated.
    I will just say one thing. At this point in time, the behavior of the virus is such that it deems a vaccine and most protective measures practically useless.

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