US economy: The big problem Covid poses for White House economists


"A lot depends on things I don't have the skills for," Hassett, a former CNN contributor, said in an interview last week with Poppy Harlow.

It is the surreal reality President Donald Trumps economic team whose growth turns into contraction and 30 million Americans have lost their jobs. It is an economic crisis with major depression that has everything to do with public health – but unlike the 2008 economic collapse, very little has to do with anything wrong with the underlying economy.
As a result, the tools economists typically use to adjust supply and demand – targeted spending, tax cuts, changes in trade and regulatory policy – have little power. The restoration of American prosperity lies more in the hands of public health officials, epidemiologists and scientists racing to develop a vaccine against coronavirus.

"The rule # 1 about virus economics is, go and stop the virus if you want to fix the economy," said Austan Goolsbee, a former economic adviser to President Barack Obama. He suggested that the White House Economic House had a record of state data to identify the best ways to stop the spread of the epidemic.

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Success would preserve the possibility of the rapid "V-shaped" improvement that the Trump administration has embraced as its goal. The pursuit of achieving that has led Trump to allow federal policies to expire and go to governors to reopen their states for business despite warnings from public health officials about recurring infections.

The Congressional Budget Office, which rarely tracks administrative optimism, also envisions a major setback when economic activity resumes. After falling at an annual rate of 40% during April, May and June, CBO expects, production will increase by 17% in the second half of 2020.

But all forecasts for this unique situation depend on factors no economist can safely predict. How many businesses will have retained enough of their workforce and customers to profitably reopen when governors blink a green light? If infections recur, can advances in testing and treatments include them? Or can renewed shutdowns throw the economic engine back in reverse this fall?

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The mix of public fears, financial hardship and uncertainty in the business creates enormous doubts – which is Kryptonite for both business planners and consumers.

"This is not going to be a V, let's face it," concludes former CBO director Doug Holtz-Eakin.

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The job of Trump's economic team, Holtz-Eakin says, is to identify "the right set of policies to support the economy of this new world we are in." This could include regulatory changes that help companies adapt workplaces to address health problems, or the expansion of broadband infrastructure to meet increased demand for telecommunications and other services offered remotely.

The pandemic threatens lasting damage to sectors that require close contact between large groups, such as the cruise ship industry. Closed malls, which for years have lost market share for online stores, can never recover.

Nevertheless, the most pressing immediate financial task is simply to maintain the links between businesses, their workers and their customers so that they can restore known patterns when health conditions allow.

"Try to reduce the permanent destruction," says Betsey Stevenson, another former Obama economist. "Every day there is a bit of crumbling."

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Too much crumbling would turn a short-term shutdown of coronavirus into a long-term economic term. Corporate failure turns defective bank loans into defaults, which in turn can create a self-sustaining financial crisis.

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To avert it, both the Federal Reserve and Congress have thrown a lifeline with cash for the entire US economy. Instead of changing the way of the economy, the goal is simply to keep its head above water until the pandemic storm has passed.

"We just have to keep doing it," said Andrew Metrick, who heads the Yale University program on financial stability. "Traditional economic policy stuff – that's not what we need right now."

But it is easier to maintain for the independent Fed through its credit facilities than for a divided congress and president through direct spending decisions. As the trillions go up and aid priorities expand, the Republican president and Senate have begun to frighten.

"The liquidity and cash phase is on its way," warned Larry Kudlow, director of the White House National Economic Council, in recent days. He signaled a return to the president's pre-pandemic agenda, including tax cuts and infrastructure investment.

With Trump now trailing in key battlefield states, the election year pressures threaten to create new risks. After other White House aides suggested punishing Beijing for the corona virus by defaulting on Chinese-owned US debt – a step that was sure to raise borrowing costs and damage the nation's financial performance, Trump's economic team rushed to publicly reveal the idea.

The turnaround against accusations and traditional priorities signals confidence among some advisers – if not those responsible for public health – that progress against the virus has opened the door for economic prosperity. "We are on the other side of the medical aspect of this," said President's son-in-law Jared Kushner last week.

Hassett sounded less confident.

"Opening will be a significant positive event," he warned, "but only if opening does not lead to a renewal of this horrific infection."

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