In yesterday’s post, I was mostly upbeat about near-term economic outcomes. The overall gist was that we are going to see a snapback recovery soon that makes this the shortest recession on record. But, the snapback won’t get us to anywhere near full throttle.
Getting there will take time, perhaps a very long time. And, as I outlined it yesterday, the two main wildcards are the coronavirus itself and the policy response. I talked about the policy response as being aggressive to date. But, there’s no guarantee it can or will remain so for the duration of economic weakness.
I didn’t talk about the virus itself though because I am not an epidemiologist. But today, I want to tell you what I am hearing both regarding policy and regarding the coronavirus to give you a sense of potential outcomes.
Re-opening and a second wave in the US
I have been looking at country and US state charts to get a sense of where there are some vulnerabilities for re-opening. And from what I can see, despite the re-opening wave concerns being valid, the second waves are not necessarily going to be acute.
But there are some troubling areas. Here are some charts from the Washington Post to go along with re-opening policies for states.
There a bunch of ‘red states’ that look vulnerable to me here because they are re-opening a lot of businesses while the coronavirus case counts are still flat to rising. States where this is occurring are Alabama, Arkansas, Arizona, Mississippi, North Dakota, Oklahoma, South Carolina, Tennessee, Texas, and Utah. Every single one of these has a Republican as governor.
Other states where case counts are still flat to rising but remain more shuttered include the ones in my area of Maryland and Virginia, but also California, Delaware, Maine, Minnesota, North Carolina, and Puerto Rico. Every single one of these has a Democrat as governor except Maryland.
My analysis tells me that there is a very partisan divide in how re-opening is proceeding in vulnerable US states, where the number of cases of Covid-19 infection are flat to rising. The pressure to re-open before the virus is under control is fully on the Republican side. Every vulnerable state that has a Democratic governor is not re-opening a lot. But only Maryland has been able to buck the full re-opening trend among states with Republican governors.
As to what this means regarding likely outcomes, we will just have to wait and see. The hope is that summer weather and people being outdoors slows transmission and a second wave. But we don’t know if that is going to happen. There simply isn’t enough information yet to say this is true.
Latin American Wave
I think what’s happening in Latin America should give us some pause on thinking hot weather alone will stop viral transmission because Brazil has turned into a hotspot. Three days ago, it surpassed Italy’s case count. And now reports are that the coronavirus is charging beyond Latin America’s hot spots, threatening to overwhelm cities.
Beyond the hot spots of Brazil and Mexico, the coronavirus is threatening to overwhelm Latin American cities large and small in an alarming sign that the pandemic may be only at the start of its destructive march through the region.
More than 90% of intensive care beds were full last week in Chile’s capital, Santiago, whose main cemetery dug 1,000 emergency graves to prepare for a wave of deaths.
In Lima, Peru, patients took up 80% of intensive care beds as of Friday. Peru has the world’s 12th-highest number of confirmed cases, with more than 99,000.
“We’re in bad shape,” said Pilar Mazzetti, head of the Peruvian government’s COVID-19 task force. “This is war.”
One could draw two reasonable conclusions here. One thought is that warm weather isn’t enough of an impediment to the virus to prevent epidemic levels of transmission. The second possibility is that we are seeing a fall and winter season wave hit Latin America now. And that could mean that there is seasonality here. Therefore, while a second wave in the US would be neutered to a degree because of seasonality, the virus will simply return for a third more deadly wave in the fall.
Again, we simply don’t have enough information to know yet. But we should hope for the best but prepare for the worst, something the US is not doing yet from what I can see.
The Swedish example
In Europe I want to turn back to Sweden here because they are an outlier in terms of crisis response protocols.
The long knives are out in Sweden now. Former Swedish Chief State Epidemiologist Annika Linde gave a scathing interview in Swedish daily Dagens Nyheter about the current policy response. Her view is that a month’s closure would have given Sweden time to better prepare (link in Swedish).
She’s saying that the month would have shown Sweden to be under-prepared in terms of its healthcare system and eldercare facilities, where many of the deaths have occurred. But she also believes that would have made quarantine, therefore, also much stricter for those who came from hard-hit countries like from Iran and China and for ski travelers and other potential carriers. Her view: Sweden would have been less saturated with infections and have had a better chance to prepare.
That’s said with the benefit of hindsight, of course. But, all other countries took this approach. And so it puts Sweden in an uncomfortable position in terms of defending their policy response.
I have tried to defend the logic behind the Swedish policy because I think the jury is still out on Sweden for now. Clearly, their approach is the more sustainable over the longer term because you can’t lock down forever. The economy collapses. Their approach was always geared to flattening the curve while restricting freedom as little as possible from day one rather than locking down. They have achieved that goal.
It’s come at a cost though. For example, in Norway there are fewer than 300 lives lost to Covid-19. While Sweden, twice as large, is now approaching 4,000 lives lost. That’s an enormous gulf. I lean toward saying it’s unacceptably large. But, it was hard to say in advance how high or low the cost would be. I think they’ve done better than I initially expected. And their economy has been helped by both that fact and the lack of a total lockdown.
Worse still, right now Sweden has had the most coronavirus deaths per resident in Europe in the past week. The country recorded an average of 6.25 deaths per million inhabitants. The UK is second with 5.75 deaths per million in the same seven-day period, by the way. So, the cost of being open continues apace in terms of infections and deaths in Sweden.
Only down the line will we know if their sustainable approach was worth it as more and more countries converge to their level of openness. But, right now, the problem is that the other Nordic nations are looking to form a low restriction travel area but are having difficulties doing so because of Sweden. The Swedish approach is so different that they fear opening the border to Sweden and having their case counts rise. But Sweden is smack in the middle of the Nordic region geographically. It will interesting to see how they work this out politically.
Policy fatigue
Switching gears for a second, let’s talk about aggressive monetary policy and deficit spending. I think there will eventually be a revolt against these policies. And likely that revolt will occur before we have recouped all of the coronavirus-related economic losses. So the risk is another recession or even a Great Depression.
For example, in the US, the Washington Post is reporting that Trump has expressed opposition to extending unemployment benefits enacted in response to pandemic.
President Trump on Tuesday privately expressed opposition to extending a weekly $600 boost in unemployment insurance for laid-off workers affected by the coronavirus pandemic, according to three officials familiar with his remarks during a closed-door lunch with Republican senators on Capitol Hill.
The increased unemployment benefits — paid by the federal government but administered through individual states — were enacted this year as part of a broader $2 trillion relief package passed by Congress. The boost expires this summer, and House Democrats have proposed extending the aid through January 2021.
But congressional Republicans have said they are concerned that some workers are making more money on unemployment insurance than if they were on a payroll and therefore have less incentive to return to work or find a new job.
“You can extend some assistance, but you don’t want to pay people more unemployed than they’d make working. You should never make more than your actual wages,” said Sen. Lindsey O. Graham (R-S.C.), who said he raised the issue with Trump during the lunch. While Trump did not explicitly say he would not sign another bill if it contained a benefit boost, Graham said “he agrees that that is hurting the economic recovery.”
Think about this ideologically for a second. The thinking from Republicans here is that lower income workers don’t ‘deserve’ to make more than they would being employed. They believe that benefits are earned, not given. And their concern is that these workers would be getting benefits they didn’t earn and that this would cause them to continue to stay home taking benefits instead of heading back to work.
The problem is that, even if you support this logic, it’s impossible to separate those who ‘earned’ the benefits and those who are getting undeserved freebies. Stopping the benefits for everyone will hurt everyone – both those who ‘earned’ the benefits and those who presumably didn’t earn all of them. So, my concern is that Republican lawmakers are fixated on preventing ‘freeloading’ to the detriment of the economy. And this would set us back and could create a double dip recession.
My View
This is the kind of calculus you are going to see everywhere at various points in the future as the economy regains strength. The question will always be about ending deficit spending because of concerns about government debt. And this will be particularly acute in the eurozone where governments cannot depend on the central bank to work hand in glove to support deficit spending.
Over at the FT, Martin Wolf outlines his view in a short video that debt is going to be much higher in the post-coronavirus world – both for governments and the private sector. He also believes taxes will be higher as a result, especially on the rich. That’s another way to deal with deficit spending, something I suspect that, in the US, leading Democrats like Nancy Pelosi, Joe Biden and Elizabeth Warren would support. But, remember, the potential for these tax increases to crater the economy is also there.
The bottom line is that we’re not out of the woods by a long shot. My baseline is for a snapback recovery to a lower level of output followed by a long period to regain full economic momentum.
How long will this period last? It depends on how much damage has already been done, how well individual countries’s economic models are with dealing with large unemployment losses, how long policy support remains in place, and how large second and third waves of viral contagion are.
I believe we have seen considerable damage already. So that means we won’t get back to square one until at least 2022, pretty much everywhere. Countries like the US with a porous social safety net will take even longer to get there because there will be a large cohort of people out of work for months and years into the future. Economic areas like the eurozone will face a longer slog too. But there the biggest variable is the lack of policy support because of built-in restrictions on deficit spending and government debt.
Overhanging all of this is the virus. We simply don’t know how long it will be with us, what changes to the economy it will force and whether second and third infection waves will be deadly or muted.