As I write this, it is unclear how large the coronavirus
effect will be on worldwide economies. It will be negative; we don’t know how
bad. Nor do we know how long the direct effects will continue. Parts of China
have already returned to work, but many places have not reopened. According to
Bloomberg news, pollution levels are still 20% lower there than at the same
time as last year.[i]
Italy has essentially self-quarantined, the country forbidding
public gatherings including postponing all sporting events. Israel now requires
all incoming travelers to self-quarantine for fourteen days.[ii]
In Iran, some of the top leadership is infected.
The U.S. has recorded over 700 cases of coronavirus through
March 9. But here’s something to consider: it takes about five days for the symptoms
to show up. If people are stupid (and who would bet against that?) and don’t
take self-quarantining seriously when they feel ill or are exposed, then the
U.S. is only at the early stages of contagion.
Stock market volatility is caused by uncertainty. (With certainty,
markets reflect the news—up or down—and then go on with life.) How many people
in the U.S. are ultimately infected by coronavirus and how many die are not the
questions the stock market really worries about. As President Trump has pointed
out, many more people are likely to die of the flu (or gunshots or traffic
accidents, which the president did not use as a comparison, although he could
have) this year. No, the real concerns are the economic effects of government
policies to contain the virus.
I predict those effects will be sufficient to cause a
worldwide recession. What I don’t know is how long and how serious it will be.
Economic expansions do not die of old age. Expansions cause imbalances in the
economy and eventually some external shock demonstrates those imbalances are no
longer viable. The resulting recession corrects those imbalances and sets a new
base upon which to build a new expansion.
The U.S. economy has been expanding for eleven years, fed in
part by enormous Federal Government deficits. During those eleven years the
national debt has increased by $10.7 trillion. The projected budget deficit for
the current fiscal year is projected to be over $1 trillion.[iii]
This massive injection of borrowed funds to prop up the
economy has worked. February’s job’s report indicated unemployment was at a 50-year
low of 3.5% with 273,000 newly employed workers for the month[iv].
Damage from coronavirus will show up slowly in government statistics, but prior
to this shock, the total economy was constrained not by capital to borrow or by
unemployment, but by the lack of qualified workers.
Into this debt-fueled economic expansion arrives the coronavirus
and government responses to it. China shutting down travel in infected
providences seems to have worked. The number of new cases recently reported is
much smaller than in the rest of the world. But their economy has not yet
restarted in full. The worldwide effects are being felt, and they will continue
for a long time.
A Marketplace interview airing last Thursday (3/5/20)
indicated that LA Port traffic was down 25% from the same time last year. Containers
are piling up at the port because of the lack of ships to return them to Asia.
United Airlines and others have announced significant reductions to their March
and April schedules. Events bringing large numbers of people together are being
cancelled around the world. The London Book Fair expected 25,000 people to
attend. Now no one will. Tech conferences and marketing conventions are being
canceled in droves. These affect not only the immediate loss of travel, hotel
rooms, meals out, etc. Longer-term, they affect orders for goods and services
that will never be made because of lost exposure, innovations delayed, startups
squashed.
Reduced travel and transport of goods requires less oil. An
oversupply leads to a decrease in price. That’s short-term good for consumers
(as President Trump extolled), but terrible for the U.S. oil fields in Texas and
the Dakotas where high-leveraged exploration outfits will first shut off
drilling and then close their doors through bankruptcy.
These are data points in a large picture of uncertainty—enough
uncertainty that the U.S. Federal Reserve in a unanimous decision cut its
benchmark target interest rate by 50 basis points from a range of 1.50% to 1.75%
to a new range of 1.00% to 1.25%. (A basis point is 1/100th of 1%.)
They are obviously worried and made this move “in support of achieving its maximum
employment and price stability goals.”
Fed rate cuts have a few short-term effects (banks immediately
cut the rates they pay savers, new borrowers have lower finance charges, often
stock markets increase). However, the reason the Fed makes cuts is not for the
short-term effect. It’s because they worry about the longer-term. Lower
interest rates will (eventually) stimulate the economy through the process of
businesses deciding to invest more because more projects are profitable given
the lower borrowing costs.
Can cutting interest rates mitigate damages from the coronavirus
shock? Not likely. They won’t repair supply chain issues. Interest rate cuts
can’t get quarantined people back into factories or offices or out buying from restaurants.
Interest rate cuts may delay bankruptcies in over-leveraged firms, but they won’t
prevent them. Nor do they put money on the table for people who have lost their
jobs.
Trump has discussed a payroll tax cut to stimulate the
economy: a broad brush that will increase the deficit without targeting people in
ways that will stimulate consumer confidence and buying. Those who still have
jobs don’t need more money to buy more stuff—especially if there are shortages
caused by supply chain difficulties. And Trump’s mentioned supporting the oil
industry to offset their losses, reminiscent of his approach of tapping the
American taxpayer to pay farmers for losses caused by his tariff wars.
I am not averse to spending money to address the current
issues. But let’s do it in a manner that does build confidence. Instead of spreading
money using a squirt gun with a spray nozzle, sprinkling a little everywhere in
hopes some of it will work, we should fire-hose our spending to promote
confidence and address human losses.
The bipartisan $8+ billion-dollar legislation to address
coronavirus is a good start. Why not make sure everyone can be tested for
coronavirus without an economic cost to them? If they don’t have insurance,
make it free. If they have insurance, pay for the deductible or reimburse the
insurance company for their costs.
How about reimbursing those who suffer work loss because
they have to self-quarantine? Or compensating those who don’t have sick leave
and become infected? How about a plan to reimburse those who must stay home
with their kids because their schools are closed and who can’t work from home?
These measures directly put money in the pockets of those who most need it—and will
spend it and directly help the economy.
James
M. Jackson authors the Seamus McCree series. Full of mystery and suspense,
these thrillers explore financial crimes, family relationships, and what
happens when they mix. False Bottom,
the sixth and most recent novel in the series is set in the Boston
area. You can sign
up for his newsletter and find more information about Jim
and his books at https://jamesmjackson.com.
No comments:
Post a Comment