April 12, 2020
(This post first appeared on my Patreon page.)
We have a lot of economist type people telling us how awful the economy will be once we get through our near-term shutdown period. At the risk of being accused of unwarranted optimism, I am not sure I buy the pessimists’ story.
Before saying anything about the economy, we have to outline where we think our containment efforts are headed. I will throw out my story, which people here who know what they are talking about can correct.
Let’s assume that after two months we have the coronavirus reasonably well-contained. People are still getting sick, but the numbers are much more manageable so that our hospitals are no longer overflowing and health care personal are no longer being worked to exhaustion and beyond.
At least as important, let’s assume that we have testing fairly well advanced so that we can quickly identify people with the disease and both quarantine them and test the people with whom they have been in contact.
We can also envision that we would be able to do some quick checks, that while not conclusive, should be able to substantially reduce the likelihood of an infected person entering a public place. To give an example, my wife and I visited a doctor’s office yesterday (not coronavirus related). We had our temperatures checked before we entered and were asked a series of questions about our own health and the people with whom we had been in contact.
This sort of testing is hardly foolproof, recently infected people generally won’t have fevers, and people may not be truthful about their health or their contacts, but this sort of simple check should screen out a substantial share of the people who are infected. I would also be fairly confident that we can develop better techniques over the period of the shutdown. Anyhow, checks of this sort should allow most businesses to reopen with the requirement that they have people stationed at the door whenever the business is open, so that in principle no one can enter without going through this sort of check.
Those pushing negative views on the post-pandemic economy generally highlight the situation of heavily indebted businesses that face bankruptcy. Clearly, there were many businesses that were heavily indebted prior to the crisis, although this burden was often exaggerated by those who focused on debt rather than interest burdens. We have been in a period of extraordinarily low interest rates, so it is not surprising that many businesses would take on a large amount of debt, since more debt can be serviced at a lower interest rate.
It is also wrong to imagine that bankruptcy is the end of the world. Businesses that are otherwise viable can and do operate through bankruptcies. (Most of our major airlines have been through at least one bankruptcy.) There will undoubtedly be a huge mess sorting out unpaid bills when the lockdown period ends (look to a boon for the accounting industry). It would be helpful if states (mostly a state issue) passed simplifying rules to cover loss-sharing over the shutdown period, but the idea that large numbers of businesses will be unable to reopen due to debt simply does not make sense.
Even apart from bankruptcy, a creditor has no interest in forcing an otherwise viable business to shut down. It is better for the business to be able to operate and allow the creditor to recover some of their debt than to shut it down and hope to get a few dollars from selling the scraps.
We have seen a lot of talk about how the plunge in the stock market will pose a huge blow to households and pension funds. Most households actually have little or no money in the stock market, but the important point in this discussion is that, even with the recent plunge, the market is still (April 2) roughly 17 percent above its level of five years ago. That is not a great return, but not too much worse than investors had a right to expect. So, the idea that the drop in the market is leaving everyone destitute does not make much sense. It essentially means that they don’t have as much money as they would like.
From the standpoint of households, most should come through a two-month shutdown period in pretty good financial shape. The rescue package will do a decent job keeping most people whole, through the loans to small businesses maintaining their payroll, the relatively generous unemployment benefits, and the $1,200 per person checks. There are many people who will fall through the cracks, most importantly undocumented workers, but the bulk of the workforce should have something close to their pre-crisis income over this period.
At the same time, their spending would have been quite restricted. They have not been able to go to restaurants, movies, travel, or spend on most other items, except bare necessities. If the economy can reopen in June, we are likely to see large numbers of people rushing to do the things they could not do for the prior two months.
This means that restaurants and stores are likely to be flooded with customers. This will also be the case with car dealers and appliance stores, as people will have put off major purchases through the shutdown period. Many businesses will have difficulty dealing with a big surge of customers since they have not retained their staff, and will be forced to hire and train new workers. We are also likely to see a burst of travel as people make up for the prior two months. Also, many conventions and business trips that were scheduled for the shutdown period will be rescheduled for the late summer and fall. On the morbid side, there will be many people who will want to visit with family members after the loss of a loved one.
Will this demand be enough to re-employ all the workers now being laid off? There clearly will be a major sorting out period, but I don’t think it is possible to reach any firm conclusions.
First, hopefully, most workers will have the option to return to their former employers. This will likely be the case where employers had the foresight to keep workers on their payrolls. In cases where they laid-off workers, when they reopen, most will likely be looking to hire roughly the same number of workers that they laid off.
The qualification is that many businesses may have found more efficient ways to do things. This is productivity growth, which is ordinarily a good thing, but perhaps not just now. Some businesses may also not reopen if they were already marginally profitable and/or the owner(s) were getting tired of running a business. On the flip side, if restaurants, stores, airports and other public places all have to hire workers to test and question people before they can enter, this will be a major new source of employment.
It is also likely that some people who were in the workforce in the pre-crisis period will decide not to come back to work. This is especially likely to be the case with older workers who were nearing retirement anyhow. There were 11.6 million employed people between the ages of 60 and 64 before the crisis and 10.8 million over age 65. If 5.0 percent of the former and 10.0 percent of the latter decide to leave the labor force, that would mean 1.7 million fewer potential workers than before the crisis.
I don’t have any simple way of determining how this nets out, but I think it’s important to realize that the stories of weak near recession or even depression economy are not well-founded. It is actually possible that we could be seeing too much demand, as a burst of post-shutdown spending outstrips the immediate capacity of the restaurants, airlines, hotels, and other businesses. In that case, we may actually see a burst of inflation, as these businesses jack up prices in response to excessive demand. Hopefully, the Fed would move cautiously in its response, recognizing this as a one-time jump that will soon be eroded as more capacity on line. But Jerome Powell probably won’t be calling me for advice, and it’s possible to envision a stop-start scenario where the Fed zig zags on interest rates, responding to the immediate economic data.
Of course, we could see a much worse recovery scenario than I have outlined here, especially if we are unable to control the spread of the disease. If we still lack adequate testing two months from now, and we still see the number of cases spiraling out of control, then we would be seeing a much worse scenario. I have no expertise on the likelihood of the different paths of the pandemic, but I would hope the one I have outlined is at least plausible.
Anyhow, my main point here is that I don’t believe the folks predicting a bad recession following our period of shutdown have really thought through the picture carefully. This matters for policy now as we discuss plans for a new spending bill. Since we don’t know the economy will be suffering from a shortfall in demand, generic spending is not advisable at this point.
At the same time, there are needs that should be addressed. We certainly need to spend more ensuring adequate supplies of medical equipment, protective gear, and training more medical personal to help in the crisis. (In the last category, we can quickly train people to do mundane tasks like changing bedding and cleaning surfaces that will free up time for more highly-trained medical professionals.) State and local governments are seeing an unprecedented collapse in revenue at the same time they seeing an explosion in demand for their services. They need far more money than was appropriated in the last bill.
These should be our priorities. If we want to spend more, it should be in our areas where more spending would be valuable whether or not the economy needs stimulus, such as clean energy, child care, and conservation. But we definitely should not commit ourselves to large amounts of spending for the sake of spending. That definitely made sense in the 2008-2009 recession, it is not clear it does now.
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