The pandemic strikes hard at the economy.
This column will appear in our April 2020 issue. Because things are changing so rapidly, and in an effort to ensure its timeliness, we are publishing the digital version of this column now for subscribers and non-subscribers.
In addition to presenting difficult challenges with respect to saving lives, the coronavirus is posing economic policymakers with the most difficult decisions since the 2008-2009 Great Recession and perhaps many decades before that. The initial response in the federal government has been a $2 trillion package aimed at helping households as well as businesses, both large and small, weather the storm. Even with the massive price tag, this package is best looked at as a holding action, something that will limit the hardship and economic damage over the next few months. Another package of similar size but differing in details will probably be needed later this year.
The package developed by Congress during late March would boost unemployment benefits for four months by expanding eligibility and by increasing unemployment benefits by $600 per week above what states currently pay. Eligibility will be expanded to include gig workers, part-time workers, and the self-employed. Most households will also receive a one-time check including $1,200 for each adult and $500 for each child.
The bill also provides federally guaranteed loans to small businesses that pledge not to lay off their workers. The loans would be available through June 30 and would be forgiven if the business continued to pay its workers through the duration of the crisis.
There are also industry-specific provisions that will help larger companies that have been disproportionately affected. This includes airlines, hotels, and other companies in the hospitality business. A special provision for companies deemed important to national security will mainly benefit Boeing. Supporters of these measures argued that they were needed to save hundreds of thousands of jobs at those companies. It is not clear, however, that most of the assistance to these companies will accrue to their workers. The sharp increases in some of their share prices when agreement on the fiscal package was announced suggest that a significant portion of the benefits will accrue to the owners and senior management of these companies.
State and local governments, and hospitals and other healthcare providers will also receive substantial help. In the case of state and local governments, provisions in the bill will help offset some of the expenses they have borne during the crisis, as well as the losses in revenue that will occur as the economy declines.
The data on claims for unemployment benefits show enormous job losses. For the week ending March 28, initial claims for unemployment benefits totaled 6.6 million. In 2019, they had been fairly stable within the 200,000 to 250,000 range each week. The jump in claims does not reflect the full picture. Many workers who have lost their jobs are not eligible for unemployment benefits. (Editor’s note: An article in today’s New York Times estimates the unemployment rate is probably around 13%.) The March 28 data does not reflect the expansion of eligibility promulgated in the stimulus package.
The jump in claims for the week of March 28 only reflects the leading edge. More is to come as additional states and cities order shutdowns of non-essential businesses. The job losses reflect only one side of the equation. On the other side is new hiring, which has undoubtedly been severely depressed by recent developments. Taking both the job losses and depressed state of hiring into account, it is likely that the unemployment rate will exceed 10% when the April data is published, up from the 3.5% reported for February. Beyond April, the damage to the economy is likely to spread to sectors not directly affected by orders to implement social distancing. As these secondary effects multiply, the unemployment rate is likely to move above 20%, something not seen since the Great Depression.
The first wave of claims for unemployment benefits mostly reflected restaurants and other businesses affected by measures mandating social distancing. The knock-on effects will take on a variety of forms. For example, inventories for certain items such as apparel are piling up on store shelves. These have already led to substantial reductions and cancellations in orders. For imported goods, these cancellations have international ripple effects. For domestically produced goods, they will lead to reduced production, and in many cases, layoffs.
As the economy moves through the crisis and hopefully recovers later this year, access to credit will be crucial. The Federal Reserve and other government agencies have taken steps to help in that regard. Among the measures the Federal Reserve has announced are purchases of at least $500 billion Treasury securities and at least $200 billion mortgage-backed securities. It will also buy a variety of asset-backed securities, backed by such assets as student loan asset backed securities (SLABS) and auto loans. This will help to keep interest rates and borrowing costs down.
The Federal Reserve also announced that it will set up several facilities to help businesses access credit. One facility will provide bridge loans with maturities up to four years to corporations with investment grade ratings. Another will purchase investment grade bonds in the secondary market. The direct beneficiaries of these are companies with investment grade ratings. It will be more of a challenge to help those with credit ratings below investment grade. In many ways, those companies will need help more than those with strong credit ratings. In some cases, companies are seeing their credit ratings downgraded, making access to credit even more of a challenge.
For small businesses, the Federal Reserve announced a lending program that would complement efforts by the Small Business Administration. It is a source of concern that many small businesses will have suffered too much damage to their financial health to be deemed sufficiently creditworthy to qualify for such assistance.
The economic crisis, of course, is a global one. Countries such as Germany and the United Kingdom are implementing fiscal packages that on a per capita basis are similar in size to the one adopted by the United States. The European Central Bank and other central banks have also announced programs to buy more bonds and provide more credit to businesses.
When businesses are allowed to re-open after the pandemic has sufficiently run its course, there will be a natural burst of activity. However, a significant amount of economic damage will be permanent. Some businesses that were previously viable will have suffered so much financial damage that they will no longer be viable. To speed up and strengthen the recovery, another large round of fiscal stimulus will be needed. The one already adopted is more of an emergency survival measure.
Even with a second recovery package, the economy will have been fundamentally changed. In retailing, for example, many small companies were already losing a battle of attrition against giants such as Walmart and Amazon. The crisis will accelerate this process. Something similar will happen in many other sectors. Companies who entered the crisis from a position of financial strength will find a world where many of their weaker competitors have been decimated. No amount of stimulus will undo this unfortunate reality. On a global scale, the toll (both in terms of lives lost and economic damage) is likely to be disproportionately high in emerging economies without the infrastructure and financial cushion to weather the storm.
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