Popular Economics Weekly
Nobel laureate Paul Krugman has said it might take an alien invasion to bring Americans together again to counter the threat of another economic downturn possibly as great as the Great Depression.
Well, the new threat has arrived—COVID-19, the ‘new’ coronavirus. The only way it will be defeated is if Americans can come together as we once did with the creation of the New Deal under President Roosevelt.
Today, unfortunately, we have a president who would like us to gather together in churches on April 12, Easter Sunday, to celebrate our deliverance from a pandemic that will not end for months, if not years.
He has named himself a “wartime” president yet wants to declare an armistice before the enemy has been vanquished. Why? He said, “We cannot let the cure be worse than the problem.”
But the cure will be worse because the social isolation and business shutdown required to keep the coronavirus pandemic even in check can take months; enough time to bring on a recession or depression. And in fact it will take another New Deal, or Green New Deal to defeat the economic damage caused by new coronavirus.
Economists such as Nouriel Rubini predict we could be entering a “greater” Great Depression, even with the just-passed $2 trillion aid package that gives extended benefits to all business sectors and the unemployed.
“With the COVID-19 pandemic still spiraling out of control, the best economic outcome that anyone can hope for is a recession deeper than that following the 2008 financial crisis. But given the flailing policy response so far, the chances of a far worse outcome are increasing by the day,” he said in Project-Syndicate.
The Conference Board has predicted in three scenarios just what could be the effects of this worldwide pandemic on the U.S. economy.
- May reboot (quick recovery): Assuming a peak in new COVID-19 cases for the US as a whole by mid-April (with some possible variation by region), economic activity may gradually resume beginning in May.
- Summertime V-shape (deeper contraction, bigger recovery): The peak in new COVID-19 cases will be higher and delayed until May, creating a larger economic contraction in Q2 but a stronger recovery in Q3 than in the scenario above.
- Fall recovery (extended contraction): Managed control of the outbreak helps to flatten the curve of new COVID-19 cases and stretches the economic impact across Q2 and Q3, with growth resuming by September.
The April scenario is President Trump’s wish, but he would have had to act as fast and methodically as China’s Premier Xi Jinping. That can’t happen when Trump has labeled himself as a “wartime” president but has been reluctant to use the War Powers Act that would order private industry to produce what health care workers lack now to protect themselves while treating the mushrooming population of COVID-19 victims.
The other two scenarios are called ‘V’ and ‘U’-shaped recoveries by economists, meaning the recoveries would take longer. The V-shape means a quicker recovery with a more severe downturn, as can be seen in the Conference Board graph. The ‘U’ shape means the downturn and return to growth is more gradual and over a longer term.
All of the Conference Board’s predictions posit a return to GDP growth in the fourth quarter of 2020.
But not so fast, says Dr. Rubini: “While most self-serving commentators have been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the COVID-19 crisis is something else entirely. The contraction that is now underway looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.”
Which scenario will it be? It’s obvious that the just-passed $2 trillion recovery package will keep this economy alive for a few months only. Additional aid will be required, when the initial jobless claims for just this week reported 3.28 million new unemployment claims.
The Great Depression lasted 10 years, and the layoffs have just begun for this downturn. Our best hope is that a new vaccine and treatment regimen is discovered sooner rather than later. But also that Americans are able to band together to create a ‘new’ econo,ic New Deal that protects all Americans.
Harlan Green © 2020
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