The myth of a V-shape economic recovery
Overcoming the COVID-19 crash will be much harder than the Trump administration hoped
The spin is in! The Trump administration’s economic ‘message bearers’, Treasury Secretary Steven Mnuchin and Kevin Hasset, the president’s senior economic adviser, have launched a coordinated effort to calm the growing public concern that the current economic contraction due to the COVID-19 pandemic may be as bad (or worse) than the Great Depression of the 1930s.
Various big bank research departments are now predicting a GDP contraction in the first quarter (January-March 2020) anywhere from -4 to -7.5 percent, and for the current second quarter, a further contraction from -30 to -40 percent. Morgan Stanley is predicting a 30 percent drop.
Meanwhile, the bond market investment behemoth, PIMCO, estimates a 30 percent fall in GDP. Even Congress’s Budget Office recently estimated the contraction in GDP could be as high as -40 percent in the second quarter.
Mnuchin-Hassett’s ‘new old normal’
Despite the flashing red lights warning of the state of the US economy, the Trump administration’s key economic spokespersons are pushing an official line that the economy will quickly ‘snap back’. On the near horizon is a V-shape recovery coming in the third quarter (July-September) or, at the latest, in the following fourth quarter of 2020. The economy may be particularly bad, they admit, but be patient folks—a return to normal is on the way before the year is over.
Speaking on Fox News on April 26, Mnuchin declared the US economy is about to open up in May and June and “you’re going to see the economy really bounce back in July, August and September”. Hassett echoed the same sentiment, just in a barely less optimistic tone, predicting the snap back will occur in the fourth quarter.
Meanwhile, the Trump administration’s big banker allies were also making their television news show rounds, singing the same ‘happy days will soon be here again’ tune. Bank of America CEO, Brian Moynihan, appeared on Face the Nation and predicted consumer spending would soon rise nicely again in the fourth quarter (October-December), followed by double-digit GDP growth in 2021.
The Trump administration is pressing hard to reopen the economy now. It knows if it doesn’t, the contraction of the economy could settle in to a medium to long term stagnation and decline. Business interests are pushing Trump and the Republicans to reopen quickly, regardless of the likely consequences for a second wave of the virus which would devastate the health system and result in skyroketing deaths.
There is a growing segment of the US business elite who are desperate to see a return to sales and revenue, without which they face imminent defaults and bankruptcies after a decade of binging on corporate debt. This could very well provoke an eventual financial crisis which would exacerbate the collapse of the real economy even further.
The Fed’s $9 trillion may not succeed
In an historic experiment, the Federal Reserve has committed $9 trillion in loans and financial backstopping to the banks and other financial institutions. Not only is the magnitude of the Fed bailout unprecedented in dollar terms—already twice the amount the central bank employed in 2008-09—but this time the Fed is not waiting for the banks to fail. It is pre-emptively bailing them out.
The Fed is bailing out non-banks as well, trying to delay the defaults and bankruptcies at their origin, before the effects begin hitting the banking system. Bailing out non-banks is new but it should not be assumed the Fed will succeed, for reasons I will explain below.
The magnitude and rapidity of the shutdown of the real economy in the United States is no less unprecedented. Even during the Great Depression of the 1930s, the contraction of the real economy occurred over a period of several years, not months. It wasn’t until 1932-33 that unemployment had reached 25 percent.
As of late April 2020, that 25 percent unemployment rate was already a fact. Official government data indicated that 26.5 milllion workers had filed for unemployment benefits; that is about 16.5 percent of the 165 million member US civilian labor force. Bank forecasts are showing 40 million jobless and on benefits by the end of May.
Yet, respected research sources like the Economic Policy Institute, recently estimated that as many as 13.9 million more Americans are actually out of work but have not yet been able to successfully file for unemployment benefits. So the 40 million jobless figure may already be a reality. And that is roughly equivalent to a 25 percent unemployment rate. In other words, in just a couple of months the US economy has collapsed to such an extent that the jobless ranks are at a level that took four years to attain during the Great Depression.
A contraction that fast and that deep likely has dynamics to it that are unknown. It may not respond to normal policy fixes like enhanced unemployment benefits, emergency income checks, and even grants and loans to businesses on an unprecedented scale. The psychology of consumers, workers, businesses, and certainly investors may be so shocked and wounded that the liquidity injections may not result in a return to normal spending and production habits. The uncertainty of what the future may bring may be creating an equally unprecedented fear of spending the money. Economists sometimes call this a ‘liquidity trap’. But it may more accurately be called a ‘liquidity chasm’ out of which the climb back will prove very slow, and the path strewn with economic landmines that could spur a second or third collapse along the way.
The V-shape argument is predicated on the assumption that the virus’s negative effect will dissipate this summer. Those supporting the argument assume, openly or indirectly, that the economic collapse today is largely, if not totally, due to the virus. They believe that when the latter is resolved, the economic crisis will fade as a consequence.
But this assumes two things: first, that the virus will in fact ‘go away’ soon and not hang like a dead weight on the economy. Second, that there were not underlying economic causes that were already slowing the US (and global) economy before the virus’s impact. COVID-19 is seen as the sole cause, in other words, and not as a precipitating factor that accelerated an already weak and fragile economy into a deep contraction.
These systemic issues are often ignored by the advocates of a V-shape recovery. In their view, COVID-19 is just a health crisis that will likely end soon. And when it does, we will all return to the old ‘normal’ and the economy will snap back. But the depth and rapidity of the decline into a ‘Great Recession 2.0’ strongly suggests that the forces of decline which have been unleashed in the US economy have a dynamic of their own. That dynamic is independent of the precipitating cause of the virus which, in any event, is not going away soon, either. In all pandemic situations, there has always been a second and even third wave of infection and death. COVID-19 appears to be the most aggressive and contagious global virus on record.
Simply put: It is not just the 40 million and likely more unemployed that define the unprecedented severity of the current crisis.
Millions of small businesses have already shut down or gone out of business. More will soon follow, and many will never reopen again. The average number of days of cash on hand for small businesses before the virus hit was 27. Many small businesses were projected to run out of that by end of April. That is why we are not witnessing growing protests and refusals to abide by a ‘sheltering in place’ order announced by various state governors. Small businesses and their workers, both on the brink of bankruptcy, are taking to the streets—encouraged of course by radical right forces, conservative business interests, and political allies right up to the White House.
The millions of workers who have not been able to get through to successfully file and obtain unemployment benefits, and the millions of the smallest businesses who have been squeezed out of the small business bailout program (called the Paycheck Protection Program) are fertile ground for right-wing propaganda demanding the government reopen the economy immediately, even if it is premature in terms of suspending virus mitigation efforts and almost sure to result in a second wave of infection.
In addition to the slow distribution of loans by the big banks, the same large financial institutions began re-directing the small business program loan funds first to their own biggest and best customers. Thus the first $350 billion in congressional funding for small businesses was directed to the banks’ best customers in less than two weeks. A second $320 billion supplement, just added, has already been accounted for in less than half that time.
Despite the data on jobs, small business, and GDP much of the liberal establishment appears to be falling for the Trump administration’s official line and spin that there will soon be a V-shape recovery.
Liberal economists buy the Mnuchin-Hassett line
The dean of liberal economists, Paul Krugman, in one of his recent columns, says the COVID-19 pandemic is not an economic crisis but a disaster relief situation. It is, in other words, sort of like an economic hurricane; once it passes, the sun will come out and shine again.
Then there’s Larry Summers, the Harvard economics professor and former advisor to Barack Obama, who agreed with Krugman, saying “I think the recovery is going to be quite rapid.”
Theirs is economic analysis by means of weather metaphors. They do not see the virus as only a precipitating cause, exacerbating and accelerating what was basically a weak US and global economy going into the crisis.
Krugman and other proponents of the ‘snap back’ (V-shape recovery) thesis all deny the counter argument that the current deep and rapid economic decline was precipitated by the pandemic and that there is an internal economic dynamic that is driving the economy into a downward spiral.
Instead of pacifying the public with nice metaphors, they might just look at the recent past. No snap back economic recovery occurred after 2008-09, which was a contraction far weaker in relative terms than the present, with fewer job losses and a much smaller GDP decline.
2008-09 recovery was no V-shape
Even after the less severe 2008-09 contraction, bank lending after 2009 did not return immediately or even normally. Only the largest, best customers of the big banks and their offshore clients received new loans from them. Bank lending to small and medium businesses continued to decline for years after 2009. And jobs lost in 2008-09 did not recover until 2015. The ratio between full time jobs and part time (and temporary and contract) work also deteriorated after 2009, with more of the latter hired and the former not rehired. Real wages still have not recovered for tens of millions of workers at median income levels and below.
So one can only wonder what the Krugmans, Summers and Reichs are thinking when they make ridiculous declarations about ‘snap back’ recovery. They should know better. All they had to do was look at the evidence of the historical record post-2009 that V-shape recoveries do not happen when there are deep and rapid contractions. And that is true not only for 2009, but even for 1933 when the Great Depression finally bottomed out.
Between 1929 and 1933 the US economy continued to contract. Not all at once, but in a kind of ‘ratcheting down’ series of lower plateaus as banking crises erupted in 1930, 1931, 1932 and then again in early 1933. When Franklin Roosevelt came into office in March 1933 he introduced a program aimed at bailing out the banks first, and then assisting business to raise prices. It was called the National Recovery Act. That program stopped the collapse but generated only modest recovery, and by mid-1934 that recovery had dissipated.
It was then, in the fall of 1934, that Roosevelt and the Democrats proposed what would be called the New Deal, which was launched in 1935 after the mid-term congressional elections. The US economy began to recover rapidly in 1935 to 1937. In late 1937 Republicans and conservative Democrats in the South allied together and cut back New Deal social spending. The US economy relapsed back into depression in 1938 until Congress, fearful of the return to economic stagnation, reinstated New Deal spending and the economy recovered again to where it was in 1937. The permanent recovery did not begin until 1940-41, as the US economy mobilized for war and government spending rose from 15-17 percent of GDP to more than 40 percent in one year in 1942.
But mainstream economists are not very attentive to their own country’s economic history. If they were they would understand that deep and rapid economic contractions always result in slow, protracted, and often uneven recoveries. There never is a ‘snap back’ when depression levels of contraction occur—or even when ‘Great Recession’ levels occur, as in 2008-09.
It takes a long time for both business and consumers to restore their ‘confidence’ in the economy and change ultra-cautious investing and purchasing behavior to more optimistic spending-investing patterns. Unemployment levels hang like a shadow over the economy for some time. Many small businesses never reopen and when they do with fewer employees and often at lower wages. Larger companies hoard their cash. Banks typically are very slow to lend with their own money. Other businesses are reluctant to invest and expand, and thus rehire, given cautious consumer spending, business hoarding, and banks’ conservative lending behavior.
In other words, the deeper and faster the contraction, the more difficult and slower the recovery. That means the recovery is never a V-shape, but more like an extended U-shape.
Dr. Jack Rasmus is the author of several books on the USA and global economy. He hosts the weekly New York radio show, Alternative Visions, on the Progressive Radio network, and is shadow Federal Reserve Bank chair of the ‘Green Shadow Cabinet’. He also served as an economic advisor to the USA Green Party’s presidential candidate, Jill Stein, in 2016. He writes bi-weekly for Latin America’s teleSUR TV, for Z magazine, Znet, and other print and digital publications.