We know the US economy is bad right now. Millions of people have lost their jobs and millions more will. Estimates of the extent of unemployment and the decline in GDP are staggering. Production and spending in much of the country has been brutally halted.
It is natural to want to see a light at the end of the tunnel, obviously in terms of the health crisis caused by the coronavirus but also for the economy. And there will be one – eventually.
“In the best of times, we bounce back quickly and get closer to something where we were before. Personally, I think it’s very unlikely. The shock of the virus will trigger a wider economy-wide recession, ”said Jesse Edgerton, economist at JPMorgan. “It’s a really harsh reality.”
The question of when and how the economy improves depends largely on our ability to control the virus itself. Despite calls from some Republican lawmakers to get back to work before that happens, and even some speculation about the President’s rapid reopening of the economy, this is not a realistic scenario – people are unlikely to stumble upon themselves to go out to restaurants and get into theaters as a deadly virus spreads or he or his loved ones get sick.
At some point – and we don’t know exactly when – the economy will rebound, at least partially. When this is the case, this new standard will be different. Many Americans may be worse off than before, some people may still be afraid to resume their lives as they have lived, and many businesses may have closed permanently.
“There is likely to be permanent damage to the economy,” said Greg Daco, chief economist at Oxford Economics. “What this shock does is worsening the pre-existing inequality problems across the country. The individuals who were hit the hardest were those who were in the most precarious position at the start. “
Economists say it could be between 2021 and 2031 before the economy reverts to something like the “normal” pre-coronavirus. But it may never be quite the same thing.
“We have never seen anything like this before, so we speculate with everyone,” said Edgerton.
What the economic recovery will look like: contraction, partial rebound and long slog
The first prerequisite for economic recovery will be a public health solution: generalized tests, screening for possible infections, antibody immunity tests, adequate supplies for the health system, etc. The coronavirus epidemic will need to be firmly under control before the economy can resume anything near normal, and we do not yet know when the public health breakthrough will occur. Consumers need to be confident that participating in the economy will not make them or their loved ones sick before resuming their typical economic activity.
“The longer these problems persist in the form of people who no longer have confidence in returning to their daily activities,” said Daco, “the more severe these upheavals will be.”
But once this goal is achieved, the problems and solutions we face will become increasingly economical. Jason Furman, a former senior economist at President Barack Obama who is now at Harvard, told Vox that the economic benefits and recovery will likely take place in three stages:
- Contraction: This is what Americans are going through right now, millions of people losing their jobs as business investment and consumer spending drop sharply.
- A partial rebound: Once the company starts to reopen, there will be a lot of hiring, spending and investment to trigger the recovery, but the economy is unlikely to return to its January 2020 level.
- The long slog: After the initial but incomplete improvement, unemployment and wages may take a long time to return to levels similar to those of the economy before the coronavirus.
The timing of the second and third stages is difficult to know. The recovery should seem robust at first; Furman suggested that we could see some of the most impressive job gains (a million or more in a month) and the GDP growth figures of all time. Parts of the economy should be able to return to something closer to their pre-crisis state.
And such a rapid recovery could strengthen itself, at least up to a point.
“If the economy starts to rebound, some companies will suddenly be faced with insufficient capacity. These companies will have to double their hires, order supplies and invest in new equipment, capital, etc. Said Karl Smith, vice president of federal fiscal and economic policy at the Tax Foundation. “This then gives an additional boost to demand for the rest of the economy which produces a secondary wave of investment.”
While it is not possible to rule out a rapid and complete return to normality – a V-shaped recovery, in the jargon of economists – most experts we have spoken to consider it unlikely. Too much structural damage has been done, jobs and businesses lost that will never return. Supply chains have been broken and need to be rebuilt.
Americans are more likely to end up in something like the environment of 2011 or 2012 after the Great Recession: the economy is no longer the biggest story in the world, but the unemployment rate will be high and wages will always be depressed. It is worth remembering how the economic recovery last started in June 2009, when the national unemployment rate was 9.5%. A year later, in 2010, it was blocked at 9.4%. In 2011, it was 8.2%. Unemployment did not fall below 5% until the beginning of 2016. And in this crisis, the unemployment rate should have an even higher peak.
“The shock of the virus … will be enough to trigger at least one normal recession in the rest of the economy beyond these direct effects of the sectors we had to close. … We should expect the next nine months or a year to look like a recession, to continue to see high levels of unemployment and depressed production levels, “said Edgerton. He predicted that “it will take at least a few years before we feel as good as in January.”
How long it lasts and what the recovery looks like depends on the actions while the health crisis is still going on. The government has adopted a $ 2.2 trillion stimulus package in an attempt to support the economy in the meantime, and more federal spending will be required. But the transition from stimulus arrangements to a normal economy can be tricky.
Smith pointed out that increasing unemployment assistance will be a boon for short-term consumer demand while reducing the supply of labor, but as soon as it is cut, demand could fall because people have less money to spend and not everyone will find a new job immediately. (One way to avoid this: sort of phasing out.)
“It really depends, in my opinion, on the damage done during the economic downturn,” said former chairman of the Federal Reserve, Janet Yellen, in a recent interview with CNBC. The more workers are laid off, the more households reduce their savings, the more people who fall behind on their bills, the longer the slog for recovery.
Recovery can take many forms if you consider it a line graph: a V, a U or, worse still, an L (sudden sharp drop and long gradual climb). Yellen said, “The more damage like this, the more likely we are to see a U, and there are also worse letters, like L, and I hope we don’t see something like that. “
Inequality could worsen because low-wage workers are the hardest hit
As we have seen after previous economic crises, not everyone will experience the same recovery. For wealthy and high-income people, those who have not lost their jobs and whose financial well-being has been more marginally affected, they can rebound quickly to normal once they return to full-time work and the stock market is starting to improve.
“There will be individuals who will have a V-shaped recovery,” says Claudia Sahm, who worked at the Federal Reserve during the 2008 recession and is now director of macroeconomic policy at the Washington Center for Equitable Growth. “The people who entered this situation with a good financial situation … it will be fine.”
But the labor market for low-wage workers is likely to deteriorate, even if the broader economy begins to pull out of the coronavirus recession.
At the start of this year, the unemployment rate was down about 3% and wages were rising. This is basic supply and demand: there weren’t many workers looking for work, so companies had to raise their wages to be competitive. But this new reality, which took years to reach after the Great Recession, has been dismantled.
We already know that low-wage service sector jobs were most vulnerable to job cuts due to the Covid-19 pandemic.
And when the public health crisis is over and life resumes its normal course, unemployment could reach 15 or even 20%. There will be a lot of workers looking to fill these open slots, especially as the emergency unemployment benefits in the stimulus bill are starting to expire.
“Wages will come out of the recovery worse than they were,” says Sahm. “Everything is going to be worse for workers who have entered the recession in the most fragile position, and there are many of them.”
Workers’ horizons may differ by geography. University of California Berkeley economist Danny Yagan found that after the Great Recession, workers who lived in places hard hit by the recession were less likely to be employed in 2015, although the rate of local unemployment had recovered. It seems that years later, some people in the worst affected areas had just stopped looking for work altogether.
The economic crisis may also worsen the inequality of racial income. In 2015, an ACLU report estimated that in 2031, the wealth of white households would be 31% lower than it would have been if the Great Recession had never occurred. For black households, it would be down almost 40%. And the coronavirus crisis is already hitting black communities particularly hard. Early figures suggest that blacks are at higher risk of contracting and dying from coronavirus, and a lower proportion of black and Hispanic workers are able to work from home compared to Asian Americans and whites.
“We know that blacks, Latinx and natives, in terms of race and ethnicity, have lower reserve levels, and we also know that their jobs are more precarious than that of whites”, Darrick Hamilton, executive director from the Kirwan Institute for the Study of Race and Ethnicity at Ohio State University, recently told Vox.
Parts of the economy will never be the same
However, the hardest truth to accept may be that some things may never come back as they were.
The travel and hospitality industries could experience a long depression, depending on how quickly people trust the security of international travel or venture away from home. This is where the public health response comes into play: the sooner people feel confident in infection testing and detection, the more confident they can be to book a flight and hotel room in a distant destination, the sooner these industries will return to normal.
“Where I see the potential for change, and I don’t know if it’s permanent or sustainable, is the journey,” says Daco. “There may be an environment of caution in the future in terms of travel. You will likely see normalization of local services before you see normalization of travel-related activities. People will still be careful when it comes to boarding an airplane and going on vacation. The same may be true for business trips. “
The same goes for bars and restaurants, at least in the short term – it might take a while for people to feel comfortable in such establishments, and many places may not survive. crisis. Even if you try to order delivery to keep your local favorites afloat, you can’t order enough Pad Thai to pay their rent. But, presumably, at some point, people will start eating again as they once did.
Live events may take some time to take advantage of the audiences they have already had, although Furman has said he expects that at some point the live entertainment industry will have to about the same appearance as before the crisis.
And generally speaking, we can see a greater concentration of the market in sectors where many small businesses have disappeared. Congress has attempted to support small businesses through loans approved as part of the stimulus package, but there are already reports of problems with the actual administration of these benefits. The more small businesses close due to the initial economic shock or a problem with access to federal benefits, or both, the more the markets they leave will be concentrated among a handful of dominant players.
It is certainly worth asking if the Americans want the economy to come back in exactly the same way. The coronavirus crisis has revealed and exacerbated deep flaws in the American system, including the economy. The companies that have just benefited from a massive tax cut may no longer have the resources to deal with the recession. Why have large companies been able to spend a large part of this tax windfall on share buybacks and executive compensation? Why weren’t workers paid enough to accumulate savings and get out of it when they lost their jobs without it being their fault? Where is the social safety net?
“In the United States, economic inequality has long been on a steep slope, and there were already a lot of people on the verge of happening, systems are already failing,” said Jamila Michener, assistant professor of government at Cornell University. “It highlights all the cracks and flaws and faults that already existed.”
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