Depression Ahead (and More Turmoil)

The European and North American economies are entering a period of depression that already resembles the Great Depression more than any other experience in living memory.

This depression won’t last a decade; perhaps no more than six or nine months. It will not end in a global war, though it certainly has exacerbated international relations.  But lock-down policies to cope with the coronavirus pandemic already in place probably insure a couple of quarters that will set records for unemployment, bankruptcies, and many more painful deprivations.

Now these policies are about to become the center of a political argument, the most consequential of the Trump presidency. a twenty-first century equivalent of the battle of Gettysburg. That’s a strong analogy, I know.  But compared to the earlier clashes of the Trump presidency – the Russia investigation, the impeachment trial – the continuing  engagement over his handling of the pandemic will eventually deliver a climax worthy of the comparison. Radical opportunism vs. the pursuit of knowledge:  between now and November 3, Trump will try to permanently divide the nation. It is not clear which side will win.

First things first.  What happened in money markets over the course of the last ten days bore little resemblance to the desperate events of September 2008.  The coronavirus crisis hasn’t produced a systemic banking panic like the worldwide financial meltdown that threatened then.  This time the Federal Reserve System has addressed only a series of alarms in various debt markets in which the underlying concern was about impending business losses.  Former Federal Reserve Chairs Janet Yellen and Ben Bernanke described the Fed’s actions and their limits in a bracing article Thursday in the Financial Times.

However, the Fed and other policymakers face an even bigger challenge. They must ensure that the economic damage from the pandemic is not long-lasting. Ideally, when the effects of the virus pass, people will go back to work, to school, to the shops, and the economy will return to normal. In that scenario, the recession may be deep, but at least it will have been short.

But that isn’t the only possible scenario: if critical economic relationships are disrupted by months of low activity, the economy may take a very long time to recover. Otherwise healthy businesses might have to shut down due to several months of low revenues. Once they have declared bankruptcy, re-establishing credit and returning to normal operations may not be easy. If a financially strapped firm lays off — or declines to hire — workers, it will lose the experienced employees needed to resume normal business. Or a family temporarily without income might default on its mortgage, losing its home.

On Monday, former Fed governor Kevin Warsh (no relation) criticized the  “2008-style barrages” of Fed measures the day before, including cutting its short-term policy interest rate to near zero.  He called for the creation of a Government Backed Credit Facility (GBCF), a huge loan facility, to be administered by twelve regional Federal Reserve banks, backstopped by the Treasury, to lend to companies in danger of going broke who are willing to pledge assets in return for the money.

Meanwhile, Congress publicly debated Senator Mitt Romney (R-Utah) and Treasury Secretary Steven Munchin’s plan to write checks to help individuals get through their hard times. Behind the scenes, the rest of Munchin’s plan: $50 billion for the airlines, $150 billion more for other troubled businesses, and $300 billion for small business loans.

That was before governors began shutting down their states’ economies with orders of various degrees of severity – Ohio, Pennsylvania, Michigan, Texas, California, Illinois, and New York.

The backlash began on Tuesday, when Stat, a widely-respected, Boston-based online news organization, published A Fiasco in the Making?, by John P.A. Ioannides, a professor of statistics and epidemiology at Stanford University. As a top expert on statistical sampling, Ioannides complained of the dearth of broad samples of the rate of infection and death. But based on the limited evidence from the one thoroughly-studied sample – the 700 passengers of the Diamond Princess cruise ship, of whom seven persons have died – the “kill rate” of Covid-19 might be somewhere between 0.05 percent and 1 percent of those infected, or about the same as regular flu.

If that were determined by better sampling to be the case generally, Ioannides argued, then extreme measures taken could have perverse effects.  Or as my friend Lou Fedorkow put it in calling the article to my attention, the United States, having reacted to the 9/11 attacks by going to war in Afghanistan and Iraq, today may be responding to the Covid-19 virus pandemic  by going to war with itself.

Also Tuesday, the Editorial Board of The Wall Street Journal, confusing financial market distress with panic about the economy itself, began a series of editorials, which, in the course of the week, worked their way through to the conviction that the lock-downs were disastrous and needed to be undone. In Financing an Economic Shutdown, they complained that “Some state and federal leaders [were] shutting down the economy without a plan to finance it while everyone stays home.” They lauded former Governor Warsh’s plan.

The next day, The Fiscal Stimulus Panic advocated food stamps and expanded jobless insurance instead of those checks, which were said to be motivated by a “Keynesian illusion.”  On Thursday, Economic Rout Accelerates,

You don’t calm a panic by floating ill-considered trial balloons or chanting “go big” as an illusion of proper and thoughtful action. Markets are panicked in part because they sense that our political leaders are more panicked than the public is.

You calm a panic first by looking like you know what you’re doing. You explain that this is a liquidity problem caused by an extraordinary precaution against a virus that is closing down businesses. The government needs to act to prevent the liquidity panic from becoming a solvency rout that becomes a banking crisis. And it needs to act fast.

By Friday, the editorialists had recognized the likelihood of depression and were Rethinking the Coronavirus Shutdown.

If this government-ordered shutdown continues for much more than another week or two, the human cost of job losses and bankruptcies will exceed what most Americans imagine. This won’t be popular to read in some quarters, but federal and state officials need to start adjusting their anti-virus strategy now to avoid an economic recession that will dwarf the harm from 2008-2009.

And on Saturday, in Leaderless on the Economy, repeating its mantra, “Government needs to address the liquidity crisis it has created for private business, or this will soon become a solvency panic as companies default on debt and fail, which will turn into a banking crisis.” Criticizing The Extreme State Lockdowns in New York and California as “unsustainable,” they concluded,

Americans may simply decide to ignore the orders after a time. Absent a more thorough explanation of costs and benefits, we doubt these extreme measures will be sustainable for long as the public begins to chafe at the limits and sees the economic consequences.

As usual, it was left to WSJ columnist Holman Jenkins Jr., the sharpest member of the Editorial Board, to draw out the implications. On Saturday, in What Victory Looks Like in the Coronavirus War, he argued for taking what had been the British approach: isolate those who test positive for the disease and encourage everybody else to take care with their sneezes, hand-washing, etc.  He continued,

Inconveniently for my argument, the U.K., a pioneer of such thinking, is now shifting to an accept-a-depression-and-wait-for-a-vaccine approach. The medical experts and their priorities are hard to resist. Resisting their wisdom doesn’t come naturally in such a situation.

Happily, I have confidence in the American people to let their leaders know when the mandatory shutdowns no longer are doing it for them. Strange to say, I have confidence in our political class to sense where the social fulcrum lies. A reader emails that Donald Trump could declare victory at the end of 15 days, claim the blow on the health-care system has been cushioned, and urge Americans, super-cautiously, to resume normal life. This idea sounds better than waiting for spontaneous mass defections from the ambitions of the epidemiologists to undermine the authority of the government.

Meanwhile, Bret Stephens, who left the WSJ Editorial Board in 2017 for a column in The New York Times because he so objected to the former’s embrace of Trump, made a similar point yesterday in It’s Dangerous to be Ruled by Fear:

Sooner or later, people will figure out that it is not sustainable to keep tens of millions of people in lockdown; or use population-wide edicts rather than measures designed to protect the most vulnerable; or expect the federal government to keep a $21 trillion economy afloat; or throw millions of people out of work and ask them to subsist on a $1,200 check.

And as if to put a human face on the opposition to current policy, the news pages of the WSJ, a preserve of traditional news values, discovered and described entrepreneur Elon Musk’s holdout for days against suspending car production in his Fremont, Calif., “The coronavirus panic is dumb,” Musk argues.

How do these policy decisions get made?  I don’t know a better answer – a glimpse of an answer – than “The Humanitarian Revolution” chapter in Steven Pinker’s The Better Angels of Our Nature: Why Violence Has Declined (Viking Penguin, 2012).  The origins of today’s policy of lockdown is more a question of culture evolving than the existence of an epidemiological “deep state.” Obviously the costs and benefits of various approaches to managing the epidemic should be regularly examined, Bayesian-fashion – without ridicule.  As for the covid-19 pandemic, I come down on the side of Rev. Thomas Bayes (1701-1761), who argued more than two hundred and fifty years ago that, statistically, we learn from experience; specifically, that by updating our initial beliefs with carefully-obtained new information, we improve our beliefs about the prospects of whatever we undertake to know. In other words, I believe in news.

So get ready for a ferocious debate about the measures adopted. It seems certain to grow in bitterness and carry on down to election day. The situation is encapsulated in this 40-second viral clip from a presidential news conference.  Watch it twice, the first time for epidemiologist Anthony Fauci’s reaction to what the president is saying, the second time to see the look Fauci eventually receives from Trump. That was the moment in which the climactic battle of Trumps presidency began.


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