What’s really going on with the economy

“Six months ago, public health experts were arguing that if the United States set up robust surveillance testing, contact tracing, case isolation, and rigorous mask usage, a version of economic normalcy could return without incurring grave risks to human life. Looking across the globe, this seems to be correct — many countries have achieved much better outcomes in terms of less loss of life without incurring any clear economic cost relative to the United States.

At the same time, the view (once widespread among economists) that failing to control the outbreak would necessarily have dire economic consequences looks like it may have been overstated. While the US public health situation looks terrible in an international context, the economy is going okay.”

“Had the country spent May and June pursuing a strategy to suppress the virus, we might have been able to reopen most things in July and August and enjoyed a strong economic rebound without too much danger to public health. That didn’t happen. But despite the lost opportunity to contain the virus, the economy did rebound sharply once restrictions began to lift. The CARES Act not only met urgent humanitarian needs during the period of maximum business closures, it also led the economy to behave like a bouncy ball: Even as economic activity collapsed, household finances did not, so when it became easier to go out and spend money, people did — and rapid economic growth ensued.”

“we’ve gotten back only half the jobs lost earlier in the pandemic, and the 8.4 percent unemployment rate is still awfully high.

But the current job growth really is fast.”

“One boring technical problem is that people who are on temporary furlough from their jobs are supposed to report themselves as unemployed if a Bureau of Labor Statistics surveyor calls. But many people in this situation, not being experts on labor market statistics, are evidently not doing this. So the real unemployment rate is higher than the official one.

A more serious conceptual issue is that ideally, it would be useful to distinguish between people who are unemployed because they work at a movie theater in a city that won’t let movie theaters open and people who’ve actually lost their jobs on a permanent basis.”

” the improvement in the labor market situation has largely been the result of furloughed workers going back on the job. But while temporary furloughs continue to be a factor in the economy, Furman writes, “Even if individuals on temporary layoff returned to work very quickly, the United States would still have a recessionary level of unemployment for some time to come.””

” if you’re still unemployed, you’re out of luck. And if you’re a low-wage worker, you’re probably gaining nothing from the stock market, you’re taking a big risk with your health every time you report to the job, and the elevated pool of unemployed workers means you have little leverage to bargain for better pay and working conditions.”

“Even worse, as Ford School economist Justin Wolfers points out, the inflation rate has shifted in unusual ways that are unfavorable to low-income people: “People are buying more of the essentials, like groceries, forcing their prices up. And they’re buying fewer airline tickets and less gasoline and clothing, pushing those prices down.”

For white-collar workers with comfortable incomes, the rising price of food is offset by reduced spending on travel and dining out, and in many cases, office workers are no longer burning gas by commuting. But for lower-income workers who always dedicated a larger share of their income to groceries, this is just bad news.”

“The other factor impacting Americans unevenly is the closure of schools in many jurisdictions. For older kids, online learning is a drag. For younger kids, it’s a huge drag on parents’ attention — especially for mothers — or a new source of expense as more affluent parents hire nannies to assist with visual learning. And for younger kids whose parents have to work outside the house and can’t afford child care, it’s an educational disaster.”

“he Treasury Department stages bond auctions of various kinds from time to time to finance the federal deficit, and on August 20 it held an auction for what’s known as the 30-year Treasury Inflation-Protected Security. This is a bond that pays interest for 30 years. But rather than a flat interest rate, it promises to pay the owner the rate of inflation plus some interest — hence “inflation-protected.”

The price that emerged from the auction was negative 0.272 percentage points.

The buyers of these bonds, in other words, are guaranteeing themselves financial losses. It sounds weird, but negative interest rates have been popping up from time to time in various places for years now”

” it’s clear that there is some level of economic hardship out there, and it’s equally clear that addressing the hardship is extremely affordable. Reasonable people can disagree about what, exactly, would be best to spend money on — or what taxes would be best to cut — but it seems pretty clear that a big increase in the deficit is extremely affordable. So as long as we could find even slightly worthwhile uses of the money, we’d be better off.”

Why Stimulus Spending Fails

“the belief is that when the government takes a dollar out of your pocket, puts that dollar through the political process, and decides where to spend it (based on input from special interest groups), the economy will somehow return more money in growth than the money invested, even after Washington bureaucrats take their cut. It’s magic! Sadly, these arguments ignore recent empirical evidence that the costs of increased government spending far outweigh the benefits to the economy.

For starters, contrary to the claims of pro-government spending proponents, economists are far from having reached a consensus about the actual return on government spending. While some economists find that a dollar spent by the government generates more of a return than the dollar spent, others find that the return is less than one dollar. And yet others find that if you take into account the future taxes needed to pay for the dollar that’s spent, the multiplier is actually negative, and the economy takes a hit.”

“there are narrow cases when government spending can stimulate the economy, but for that to happen, the environment in which the spending takes place is important. Work by economists Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh on the impact of government fiscal stimulus shows that it “depends on key country characteristics, including the level of development, the exchange rate regime, openness to trade, and public indebtedness.” Many other economists have found the same. Unfortunately for the proponents of fiscal stimulus, the United States has the features of a country where stimulus by spending does have an impact and, in fact, can have a negative impact on growth.”

“even if you had a country with little debt and the right environment, implementing the spending correctly is a key to getting a multiplier that’s larger than one. As former Treasury Secretary and former Director of the National Economic Council Larry Summers has explained, stimulus spending needs to be timely, targeted, and temporary. Unfortunately, evidence from the last recession shows that it rarely is.”

Trump’s New Tariffs on Canadian Aluminum Are Indefensible

“When President Donald Trump imposed 10 percent tariffs on imported aluminum in March 2018, it was (predictably) American aluminum-consuming companies that suffered the most.

Companies like Whirlpool Corp., for example. The appliance manufacturer—which had previously been a cheerleader for Trump’s tariffs on imported washing machines—saw its sales and stock prices tumble in the months after Trump’s aluminum tariffs took effect, as the import taxes added to the company’s input costs. It takes a lot of aluminum to build a washing machine, after all.”

“Those tariffs had been lifted in 2019 as Trump sought to negotiate the United States–Mexico–Canada Agreement (USMCA), which officially took effect last month. But with the new trade deal in place, Trump has quickly returned to his old tricks. “Canada was taking advantage of us, as usual,” he said Thursday during a largely off-the-cuff speech at the plant. The new tariffs are slated to take effect on August 16.

Ostensibly, the justification for reimposing these tariffs is the claim that imports have increased dramatically in recent months. In reality, that’s a bunch of nonsense. The Aluminium Association says the claims of a surge in aluminum imports “are grossly exaggerated.” In fact, aluminum imports from Canada are below 2017 levels—the last year before Trump’s first round of tariffs took effect.

And even if aluminum imports were increasing, that’s not something to get upset about. The United States literally does not produce enough aluminum to meet its domestic needs, so imports are essential for supporting the 97 percent of American aluminum industry jobs that are in downstream production. And when more aluminum—or anything else—is traded back and forth between the United States and Canada, both countries benefit from the transaction. That’s how trade works.

It’s not exactly clear what Trump hopes the reinstated tariffs will accomplish, but the one thing that should be obvious is that American aluminum-consuming industries will once again be punished by the president’s trade policies.”

I Don’t Want To Be Anybody’s Employee

“According to the U.S. Bureau of Labor Statistics and McKinsey & Co., 70–80 percent of independent contractors prefer contract work to a traditional job and do not feel financially strapped. I fall into that category—but the crusaders behind laws such as A.B. 5 treat people like me as if we are invisible. Here in New Jersey, a July 2019 report from Gov. Phil Murphy’s Task Force on Misclassification was written by a group that included no independent contractors and drew on work by the National Employment Law Project, a think tank funded by the AFL-CIO and other unions. The report acknowledged that misclassification of workers as independent contractors was most prevalent in low-wage, labor-intensive sectors such as janitorial services. But the policy changes it recommended applied to independent contractors across the board.”

We are sleepwalking toward economic catastrophe

“The Coronavirus Aid, Relief, and Economic Stability Act, or CARES Act, signed into law by President Trump in March, was an unprecedented act of fiscal policy by the US government. It entailed measures that would have once seemed unthinkable, including an extra $600 in unemployment benefits, $1,200 stimulus checks to most Americans, and billions of dollars in forgivable loans to small businesses. As Vox’s Dylan Matthews recently laid out, the Covid-19 response was larger than the stimulus policies put in place in response to the Great Recession and, from a fiscal standpoint, bigger than the New Deal.

It made a difference. Personal incomes actually went up in April thanks in large part to unemployment insurance and stimulus checks. Poverty rates didn’t increase.”

“The stimulus bill had with it an underlying assumption that the economy would improve by the summer, and that was predicated on the country getting its outbreak under control. But the country didn’t — a series of public policy and leadership failures at the federal, state, and local levels have allowed the virus to thrive.”

The Federal Budget Deficit in June Was Bigger Than the Entire Federal Budget Deficit for 2018

“The annual budget deficit—the gap between government spending and tax revenues—would run about $900 billion in 2019, and it would push beyond $1 trillion every year starting in 2022. Debt as a percentage of the country’s total economy would rise steadily, reaching 93 percent of GDP by 2029, the highest level since the years directly following World War II.

Automatic spending on major entitlements would keep government spending high and make reductions difficult. Interest payments on the nation’s rising debt would become one of the country’s largest spending categories. The persistently high levels of debt and deficits, meanwhile, would serve as a drag on economic growth. Overall debt levels were on track to reach the highest levels in the nation’s history.

All of this was reason to worry. “Such high and rising debt would have significant negative consequences, both for the economy and for the federal budget,” the report warned, with reduced national productivity and total wages plus an increased likelihood of a fiscal crisis. In an emergency scenario, policymakers might be more constrained from responding in the most effective way. Debt and deficits were a modest burden on the economy in good times. And the higher they ran, the more economic risk accumulated.

Again, this was the outlook in 2019, when the unemployment rate was below five percent, when the deficit was projected to run about $900 billion over a 12-month span, when daily viral death tolls and case-count heat maps weren’t posted on major news sites like especially grisly weather reports.

In June of this year, the federal deficit was $864 billion.”

“the United States is in uncharted waters in terms of both public finances and their effect on the economy. And no one really knows where we’ll go from here.”

The PPP worked how it was supposed to. That’s the problem.

“The controversy surrounding the PPP, which supports businesses with 500 employees or fewer, has a lot to do with a disconnect between the program’s design and how Americans think about business. The real goal of the PPP was to keep American workers on payroll, not to simply keep small businesses going. And so the majority of the money was disbursed to businesses with more employees, rather than to tiny ones with small staffs. That’s why a program widely perceived as being meant to boost the United States’ most vulnerable small businesses ended up prioritizing businesses that aren’t actually that small.”

America’s Long-Term Debt Crisis Is Now a Short-Term Problem

“Decades of rising debt and deficits, even under thriving economic scenarios where persistently high deficit levels are unjustified, have left lawmakers across the aisle less willing or able to respond, exactly as budget-watchers have predicted. The debt is not just a drag on the economy. It’s a burden on crisis response, a limitation on the government’s ability to take action in a time of need.”

“When the Congressional Budget Office (CBO) examined the nation’s long-term fiscal state last year, it offered this dour assessment: Federal debt levels were on track to reach their highest levels since shortly after World War II. On the current trajectory, “growing budget deficits would boost federal debt drastically over the next 30 years,” pushing debt to levels that were “the highest in the nation’s history by far.” Interest payments were set to spike, tripling over the next several decades, and exceeding the total amount of all discretionary spending. Over time, debt service would essentially become its own massive federal program.”

“What the nonpartisan congressional budget analysts were saying, in their own carefully antiseptic language, was that even if things went pretty well for the economy, the continued growth of federal debt was going to be a big problem. A crisis was brewing, perhaps not immediately, but in the long term.
You may have noticed: Things have not gone well.

As COVID-19 spreads, the American economy is in the midst of the largest freefall in at least a generation, perhaps the most devastating since the Great Depression. Joblessness is at record highs, and financial analysts are predicting that the economy will end up shrinking by as much as 40 percent during the second quarter this year. A sharp drop in health care spending, as people delay elective surgeries and other non-emergency care, has alone managed to trim several points from the gross domestic product. No one has any clear sense of how or when this will end.

As the economy has tanked, Congress has responded with a series of aid packages totaling nearly $3 trillion, all of which have been deficit-financed. This year’s budget deficit is expected to come in somewhere around $4 trillion, nearly the size of last year’s entire federal budget. In April, the U.S. posted its highest monthly budget deficit ever, at $737.9 billion. In 2016, the final year of Barack Obama’s presidency, the annual deficit was $585 billion. In a single 30 day period, the U.S. government ran a bigger budget deficit than any one year outside of the Great Recession and its aftermath.

And this year isn’t over”

“there is at least a case to be made that this crisis, which is different in both scale and kind from previous economic upheavals, is one that actually justifies some amount of emergency deficit spending, if not the particular bills that Congress has passed: When governments are forcing businesses to close in response to an unforeseeable exogenous event, as well as forcing individuals to stay home from work, some form of recompense is probably justified. It is notable that the Committee for a Responsible Federal Budget, one of the organizations most single-mindedly focused on national debt reduction, has backed deficit spending in this instance.”

“the relief effort is running up against legislative skepticism—a political constraint imposed by the high debt and deficits that were already locked in before the crisis began.”

Plans for Extended Unemployment Benefits, Wage Subsidies Risk Creating a Zombie Economy

“the states that have reopened have seen anemic economic recoveries at best.

Slate’s Jordan Weissman, using data from the app Open Table, notes that restaurant reservations are down as much as 92 percent from last year in those states that have allowed dining rooms to reopen.

A ranking of state jobless claims released yesterday by the personal finance website Wallethub finds that the number of people applying for unemployment is especially high in Connecticut, which had a bad COVID-19 outbreaks and a strict shutdown order, but also in Georgia and South Dakota. The former is lifting its shutdown order, and the latter never imposed one.

This matches with new research showing that economic activity declined at similar rates regardless of when states issued formal lockdown orders. Individuals, not the government, shut the economy down. They’ll also decide when, or if, it reopens.”

“if we can’t expect much of the pre-pandemic economic activity to return, that dramatically weakens the case for propping up businesses as Jayapal and Hawley want to do, or paying workers to stay jobless like the HEROES Act does. Both policies stymie markets’ ability to adjust to COVID-19 while shifting resources from those parts of the economy that can be productive during a pandemic to those that can’t. If there’s no demand for air travel, we’d be better off seeing baggage handlers shift to being warehouse workers or grocery delivery drivers. We want cooks and cashiers to move to restaurants that can figure out a way to stay profitable without dining service.

That doesn’t mean the government can’t provide relief. Even if we allow those readjustments to happen, we’ll still probably have a less productive economy for a while, and the negative effects of that will be concentrated on people who aren’t in a position to adapt. So there’s a reasonable case for cash transfers targeting the poorest Americans. But they shouldn’t be conditioned on staying at their current jobs, and—unlike unemployment benefits—they shouldn’t be conditioned on staying out of the labor force altogether.”

In Zimbabwe, It’s Crisis as Usual

“Major factors in the sharp economic decline include government corruption, a horrific drought, and rampant inflation and cash shortages after the reintroduction of a Zimbabwean dollar (ZWL, colloquially called “bond”) following almost a decade under a multi-currency system.”

“The first Zimbabwean dollar originated in 1980 after the country, then called Southern Rhodesia, fought and won a guerrilla war for independence against its British colonizers. As white settlers made up 1 percent of the population but controlled the majority of arable land, former freedom fighter and new government leader Mugabe put into place a moderately successful “resettlement” program, which compensated landholders and redistributed their property to black Zimbabwean farmers. In 2000, Mugabe’s party amended the constitution to allow the legal seizure of farmland without compensation. The mismanagement of that program contributed to severe famine, according to a report by the U.K.’s Africa All-Party Parliamentary Group. The food instability in Zimbabwe today is an ongoing symptom of this.
During the global recession of 2008, the Zimbabwean dollar saw inflation hit 500 billion percent before it was abandoned in favor of the multi-currency system. In its original incarnation, Zimbabwean bill denominations reached 100 trillion—not even enough to buy a loaf of bread. (Ironically, those bills are now sold on eBay for around $40 U.S.)

“The light at the end of the tunnel in 2008–9 was dollarisation,” wrote University of Zimbabwe economist Tony Hawkins in the Zimbabwe Independent last year. “Inflation came to a shuddering halt, the economy returned to positive growth for the first time in a decade and a financial sector, ravaged by hyperinflation, recovered strongly.”

A national shortage of the U.S. dollar starting in 2015 prompted the government to mint “bond,” a substitute currency that acted as a placeholder for foreign cash, according to Al Jazeera. When bond devalued swiftly, thanks to the black market, the government attempted to integrate it into a new Zimbabwean dollar and banned most use of foreign currencies.

“De-dollarisation in 2019 has turned the clock back towards hyperinflation without achieving its basic objective of providing a viable alternative to the United States dollar, trusted by the community,””

” The quashing of political dissent has been more profuse under Mnangagwa’s government than even under the iron-fisted Mugabe, according to Roselyn Hanzi, director of the group Zimbabwe Lawyers for Human Rights. In 2019, during protests over a government-imposed fuel price hike of more than 100 percent, more than 1,000 protesters were arrested within two weeks. Some were dragged out of their homes by police after the fact, tortured, and prosecuted without legal representation. “That has never happened [on this scale], as far as I can remember,” Hanzi says. “Every other day [activists are] getting attacked by the police…brutally and arbitrarily.””