March 19, 2020

Coronavirus and The Economy

Stocks tumbled more than 5% on Wall Street Wednesday… Markets have been incredibly volatile for weeks as Wall Street and the White House acknowledge the rising likelihood that the pandemic will cause a recession. The typical day this month has seen the stock market swing up or down by 4.9%.” AP News

“The Federal Reserve took massive emergency action [last] Sunday to try to help the economy withstand the coronavirus by slashing its benchmark interest rate to near zero and saying it would buy $700 billion in Treasury and mortgage bonds.” AP News

On Wednesday night, “the U.S. Federal Reserve rolled out its third emergency credit program in two days to battle the fallout from the virus crisis, this one aimed at keeping the $3.8 trillion money market mutual fund industry functioning if investors make rapid withdrawals.” Reuters

See past issues

From the Left

The left hopes that the government will not prioritize big business over average citizens, and some see this crisis as an opportunity to restructure and reorient the economy.

Has there ever been a sudden stop comparable to this?... The Great Depression, which began after the stock market crashed in October, 1929, was wrenching and disastrous, of course. But [economics professor Barry] Eichengreen pointed out that it developed more gradually than the coronavirus shock. ‘The production of goods and services fell by about a third, but over a period of three-plus years,’ he said. ‘Industrial production fell by half, but, again, over a period of three years. The unemployment rate rose to about one in four, but over four years. Now what we are talking about is the possibility that the unemployment rate could shoot up very dramatically in a very short period of time.’”
John Cassidy, New Yorker

“President Trump has asked for aid to the airlines, which have already taken a huge hit. In practice, this would mean bailing out their shareholders. Here’s why I’m not terribly sympathetic to this idea: Airlines have access to major capital markets. They have managed to continue operations through many, many rounds of bankruptcies before, with little noticeable effect for customers or the rest of the economy…

“The same is not generally true for millions of small- and medium-sized companies — which are more likely to go out of business altogether, and take with them all the jobs on their payrolls. Compared to their larger counterparts, smaller businesses tend to operate on thinner margins and with smaller cash reserves… Just as lawmakers are leaning toward direct payments rather than loans to households, they might consider giving grants of some kind to businesses, too.”
Catherine Rampell, Washington Post

“Unless a business has been forced to fully close, there’s a way to keep workers on the payroll, ease the pain of a downturn and speed economic recovery. It’s called ‘work-sharing.’… Employers experiencing a temporary reduction in business agree to cut employees’ hours instead of laying off workers entirely. Employees on reduced hours receive unemployment benefits in proportion to the reduction in their hours. Businesses benefit by retaining valued employees and avoiding recruitment and training costs when economic conditions return to normal. Workers benefit by retaining most of their income and access to health insurance — a critical factor in a public health-triggered economic crisis like this one.”
Katharine G. Abraham and Susan N. Housman, Politico

Governments should directly assume the debt of high-risk households. Trying to incentivise financial intermediaries to modify the terms of existing loans, as the US government did with the Home Affordable Modification Program after the 2008 crisis, will be too slow to meet the current challenge. It’s often said that the public health of the majority is determined by the most vulnerable in society. The same logic applies to a healthy political and economic system: its stability depends on how it treats its weakest members. Hedging our bets on an economic system that has neglected these truths and instead prioritised wealth creation at the top has put us all at risk.”
Katharina Pistor, The Guardian

Some argue that “A recovery package could simply—and probably unsuccessfully—try to get the economy back up to where it was before the Covid-19 shutdowns took hold, complete with its decades of wage stagnation, exploding carbon emissions, and staggering inequality. Or, with politicians newly willing to spend, it could build a carbon-neutral, significantly stronger and fairer society—and put millions to work doing it… Before the immediate mobilization around World War II, the years leading up to it saw federal jobs programs employ millions in work the private sector simply didn’t see as important enough to create…

Full employment was an animating demand of social movements through much of the postwar era, which led to it being featured in the Democratic Party platform until 1980… Thinking creatively in such a dire crisis—about silver linings and opportunities—can feel inappropriate, even irresponsible… [But] How lawmakers respond to Covid-19 and its economic fallout could either protect the next century from the persistent crises threatened by rising temperatures, or make them far worse.”
Kate Aronoff, New Republic

From the Right

The right urges the federal government to provide relief to businesses and local governments to ensure a speedy economic recovery once the pandemic subsides.

The right urges the federal government to provide relief to businesses and local governments to ensure a speedy economic recovery once the pandemic subsides.

“The central goal of policy should be to keep businesses alive so they are ready to turn back on again [when the pandemic ends]. They must be able to keep rather than fire employees, to call them back quickly, and to help those employees pay bills and keep their health insurance… [but] not even the U.S. government has infinite resources. Its unique ability to borrow even when nobody else can borrow, and to promise eventual repayment by taxation, is a treasured but finite resource. When a crisis comes in which even the Treasury can’t borrow, we are in for a true catastrophe…

“Lending is better than transfers. Since loans must be paid back, larger amounts can go where needed. Small Business Administration loans are a good start. But most business and most employment is large business. Large firms are often even more cash-poor and in hock to nervous creditors, and they are harder to replace or revive if they fail. Lend with the head, not the heart. ‘People’ might seem more worthy than ‘corporations,’ but we need corporations to hire people when it’s over.
John H. Cochrane, Wall Street Journal

“We are intentionally turning the economy off to save lives and protect our future, but if we want any shot to turn that economy back on in three to six months, we’re going to need to make sure the small and mid-sized businesses that form our middle class and civil society’s spine are still there… Congress must authorize the [Small Business Administration] to take on a Federal Emergency Management Agency-like role, cutting checks and providing direct infusions to small and mid-sized businesses. The process must be streamlined, with discretion given to the administrator (or a federal corona czar) to oversee and move the machinery along.”
Christopher Bedford, The Federalist

“If people can’t go out to a restaurant to spend the extra money from their government stimulus check or payroll-tax cut because they’re quarantined or sick, municipal tax revenue will plummet. Cities and states may not even be able to sell debt (the municipal bond market is already signaling this) to pay their bills and workers. New York City and state are already projecting steep drops in revenue for the coming year. The federal government should be in discussions with governors to see if state and local governments need a Wall Street-like bailout to get through a possible liquidity crisis until the virus panic blows over, people start spending money again and tax revenues recover.”
Charles Gasparino, New York Post

“Americans have been urged to ‘social distance’ and those who may have been exposed to the coronavirus to self-quarantine. A decade ago this would have been unpleasant but also impractical for most people. Fortunately, there’s now an app, or many, many apps, for that… These apps now let customers order rides, groceries and food delivery through their smartphones

“This week [Amazon] announced it would hire 100,000 workers to meet increasing demand for grocery and other online orders. This may provide work alternatives for Americans laid off in airlines, hospitality and other industries affected by the coronavirus. It is also raising its starting wage for workers at its fulfillment centers to $17 an hour from $15. Workers can also quickly sign up for work on multiple apps and schedule their hours around when they must take care of kids at home. Progressives criticize this ‘on-demand’ work as somehow exploitative. But the coronavirus contagion is demonstrating that this free-market flexibility can be a labor lifesaver in a viral panic.”
Editorial Board, Wall Street Journal

“[I would like] to remind legislators that this is not the time to push your previous ideological agendas. For instance, a look the House Democrats’ third coronavirus bill reveals that this bill is an attempt to push everything they have always wanted to do… while we should be having a debate about whether to bail out the airline or other industries, it is inappropriate for Senator Elizabeth Warren to demand that companies, as a condition for receiving government assistance, must implement a $15 minimum wage within a year, and turn one board seat over to workers. Such demands are economically ignorant and politically opportunistic that in this of all times ought to be especially denounced.”
Veronique De Rugy, National Review

A libertarian's take

“We can boost supply quickly by removing the many unreasonable obstacles government has put in its way. For starters, we can open America’s borders to all foreign-made goods—now. Though global production is hobbled by coronavirus, it still has enormous capacity. America consumers can receive a large share of that output. We have U.S. dollars, and the world wants them. We can easily win the bidding wars for a bounty of food, medicine and other health care goods—or any other goods we want, really. We need only allow those products to flow into our ports and stores and homes unconstrained by tariffs and other trade barriers.”
Thomas A. Firey, The Bulwark

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