What will the post-Covid economy be like? Part 1: national economy

People of a progressive bent should think about what sort of world we will step into when the governor gives us permission to come out of hibernation and, perhaps, what sort of world we want to step into and what we can do to make it happen. This involves several dimensions, including the state of politics, the economy, and, perhaps most important, what sort of people are we? Do we become kinder? Or meaner? This paper will address the national economy.

Many assume that at some day the crisis will be over and things will pick up where they were – unemployment will go back to 3% or less, and the market will return to the stratospheric levels it was at a month ago. The president certainly envisions this.

There is no reason to expect this. Economic recoveries tend to be slow and prolonged. In the last recovery, for example, although the economy improved steadily from its October 2009 bottom (10% unemployment), the unemployment rate still hovered at nearly 8% in 2012, three  years after the turnaround.

We don't know how to bring the economy back to life. There is no precedent in world history for an economy going into an induced coma and then coming back. The Black Death (which had far higher casualty levels than the worst predictions for Covid-19) led to centuries of social and political dislocation. More recently, it took World War II and its infinite demand for production to bring us fully out of the Great Depression -- after 12 years of recovery efforts.

There have been occasions like World War II where the civilian economy was largely shut down, but in that case Americans piled up income with nothing to spend it on, creating enormous pent-up demand that triggered 30+ years of prosperity. Today’s situation is more like the opposite, with companies forced out of business (not converted to war production) while consumers accumulate debt.

One sobering fact is that our recent record-setting stock market and low-unemployment economy haven’t been sustained by the traditional linchpins of a strong economy: capital investment, productivity improvements, and exports. It's primarily a services economy and its recent growth has been driven by consumer spending. There is no sturdy base of new capital investment, as there was after World War II, to churn out a cornucopia of cars and appliances. Instead, the driver of the economy (consumers) is being battered and weakened. Even before the corona virus, this was a weak and unstable economy as economic inequality worsened and more and more people fell out of the middle class.

Even if the virus is under control and we’re out of the woods in, say, three months (optimistic, in my opinion), people may not be financially ruined but fears of the virus will persist and many jobs will no longer exist. The idea that every business will reopen the day Trump says "start your engines," that every employee will be rehired at their former wage, and, most unlikely, that consumers will resume their spending spree, is highly unlikely. People and businesses are going to be prioritizing debt reduction and building up a nest egg for the next emergency. Business will be slow. The recovery is likely to be slow and hesitant. Biotech will be booming, but other industries, such as retail, restaurants, travel and tourism, airlines, transportation and warehousing, auto and aircraft production, agriculture, residential and business construction, and professional sports, may be severely damaged.[1]

We are also likely to face a serious fiscal crisis. Before the crisis, we were on track for a $1T+ deficit. Without any stimulus funding, just the fact we’re headed into a recession will increase the deficit (tax receipts go down, things like food stamps go up). Separate from the stimulus, the recession will probably add $500B a year in 2020 and 2021.

Then there’s the $2T added by the recently signed “round 3 stimulus.” That will probably spend out largely over two years, so add another $1T a year to 2020 and 2021, for a total of $2.5T each year BEFORE the infrastructure bill they’re talking about. This will all be added to an existing $23T national debt, up from $20T the day Trump came in.

There might be a day of reckoning in our near future. In recent years, financial markets have been phenomenally willing to finance our growing deficits, but with a shrinking economy and growing deficits, the day of reckoning might arrive. And another thought, know who the biggest buyer of US government securities is? The social security trust fund. As the day comes when they’re paying more out than taking in (soon), that’s going to make it harder to run a deficit, too.

But even if the markets are ok with our deficits, there will be a battle of the century on deficits next year, especially if a Democrat is elected president, when the Republicans will once again <gasp> discover that they’re shocked, shocked there are deficits going on here and how did you create that deficit on your inauguration day, man?

This pattern has now held for 39 years. Reagan and Bush explode the deficit for 12 years with GOP support, then freak out that Clinton “created” the deficit. Clinton actually brings the budget into balance and restores a semblance of sanity to the tax code. Bush II promptly nukes the surplus and brings on record deficits AND a deep recession, with silence from Republicans. They freak out again about deficits when Obama comes in and he reduces the deficit by 2/3s. Trump (and Paul Ryan) put the deficit into the stratosphere again and the virus adds to it.

This is the true cost of the 2017 Paul Ryan tax cuts. Classical economic theory holds that budgets should be close to balance when times are good and that increased federal spending should be used to stimulate the economy during recessions. By spiking the federal deficits with regressive tax cuts at a time of full employment, the situation was created where Keynesian stimulus blew the deficit up to unsustainable levels, before the crisis hit.

The battle royal next year will be fought on 3 battlefields. 1) Defense funding is the first, though given the sums we’re talking about here, even this is pretty trivial, 2) the Paul Ryan/George W Bush tax cuts, and 3) social security and Medicare and Medicaid (and other relatively small entitlements). The familiar chestnuts like foreign aid and welfare involve, in the broad scheme of things, trivial sums.

Nobody should assume even their CURRENT pension, social security and Medicare payments are safe. When this fight comes, it won't just be about benefit cuts for people 45 or younger. YOUR payments will be on the table. Because of the carnage being inflicted on state budgets, Medicaid funding is also in jeopardy. This political battle is likely to dwarf the fight over the ACA. Now is not too soon to start thinking about it.

Vote carefully.

[1] A massive infrastructure program, just being discussed in a preliminary way as this paper is prepared, could make a big difference but for many reasons (suspicion between the House speaker and the Senate majority leader, fears of even more deficit spending, the president’s short attention span, push and pull about what further stimulus bills should cover, …..), such a spending program seems unlikely.