Wednesday, June 03, 2020

The neutron bomb spring

by John W. Mitchell
| March 29, 2020 1:05 AM

A mere three weeks ago, the U.S. economy basked in the longest expansion in its history, help wanted signs were abundant with unemployment at a half-century low, and inflation was below Fed targets.

A bull market was boosting retirement accounts and helping to mitigate public pension shortfalls. It was reminiscent of the 1997 movie title “As Good As It Gets” and was expected to continue through 2020.

By late March initial unemployment claims hit record levels, much of the nation was shut down under shelter-in-place orders, the stock market had plummeted. The question has become how long and deep the recession will be? This will be defined by the National Bureau of Economic Research after the fact.

The shock was the coronavirus and the response to its spread as well as a market share battle between Russia and Saudi Arabia that has sent crude oil prices plummeting. For many people, the only recession they remember was the 2007-2009 event known as the Great Recession. This followed a quarter century marked by only two short mild downturns and was centered on housing and financial markets.

The 2020 experience is different in the face of the pandemic. The decimation of air travel, the shelter-in-place and closure orders, activities in many areas have ground to a halt. There is a daily litany of layoffs and closures in the hospitality sector, airlines, auto plants, aerospace and beyond. Employment will have declined sharply when April data are released in early May. GDP will decline at a rapid rate for sure in the second quarter of 2020.

Policy makers have responded quickly to the shock. The Federal Reserve cut its target rate back to 0-.25 percent and took emergency actions including regulatory flexibility to stabilize credit markets. This did not start as a financial issue, but shutdowns where firms (borrowers) have expenses but no revenue becomes a financial problem for the banking system very quickly.

On Friday, March 27, the $2.2 trillion CARES Act was passed to get funds to laid off workers, to support firms so that they can survive the period with diminished or no income, and to assist state and local governments. It is vital that when the pandemic passes, businesses are able to ramp back up and the jobs reappear. If they go bankrupt or shut down permanently, the rebound will become much more complicated and problematic.

Time is of the essence for many smaller firms and larger ones such as airlines. The imperative of speed makes it difficult to debate the finer philosophical points of legislation and will likely lead to unintended consequences that will become apparent down the road.

The income support for families is vital although it is not like the aftermath of 9/11, when people were urged to go out and shop — it becomes hard to do when one is sheltering in place. The funds are rather to mitigate financial hardship stemming in part from government-ordered shutdowns and to maintain confidence.

No one knows how long the forced halt will last. It will depend on the course of the pandemic, but preserving the ability of the system to rebound is vital and initial steps have been taken.

Some of the lessons from the 2007-2009 experience have been applied, with the Fed moving quickly and the Congress and Administration going big and relatively fast. The hope is for a quick rebound, but this is an event with no modern counterpart in a developed country. The longer it goes on, the more the risk to the underlying institutions and entities and people.

The spring of 2020 will change us just like 9/11/01, 12/7/41 or the early 1930s. Pandemic preparation will receive increased attention, supply chains and alternative suppliers will be developed, sanitary practices will change with handwashing taken far more seriously, along with flu shots.

There will likely be an increased desire to hold an emergency fund along with the toilet paper. The policy responses to the extent that they work will become models for the next shock. There may be a move to develop more automatic stabilizers triggered by economic shocks.

A few years ago, the notion of a neutron bomb was discussed. This would leave the buildings and infrastructure intact but decimate the population. Now we have made the people stay at home with the rest of the structures intact. When the restrictions pass, the hope is that they can resume operations quickly.

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John W. Mitchell has been one of the Northwest’s most prominent economists for the last 50 years. He resides in Coeur d’Alene.