The Illusion of a Rapid US Recovery|
Jun 9, 2020 JamesK. Galbraith
(ref: https://www.project-syndicate.or ... k-galbraith-2020-06)
The United States has built an economy based on global demand for advancedgoods, consumer demand for frills, and ever-growing household and businessdebts.
This economy was in many ways prosperous, and it provided jobs andincomes to many millions. Yet it was a house of cards, and COVID-19 has blownit down.
AUSTIN – As protests roil the United States, the country’s center-lefteconomists gaze brightly into their crystal balls. Harvard’s JasonFurman, formerly chair of US President Barack Obama’s Council ofEconomic Advisers, has warned Democrats – eager to defeat President DonaldTrump in the November election – that “the best economic data ... in thehistory of this country” will emerge just before voters head to the polls. PaulKrugman is likewise predicting a “fast recovery.” The non-partisanCongressional Budget Office agrees.The stock market seems equally optimistic.
The arithmetic behind this thinking is simple. The CBO expects real GDP toshrink by 12% in the second quarter, and by 40% in annual terms. But itforecasts a third-quarter rebound of 5.4% – resulting in spectacular annualgrowth of 23.5%.
That is certainly possible: already in May, unemploymentfigures took a favorable turn, and it is looking like thesecond-quarter slump may not be as bad as projected. But, even if the CBO isright on both counts, GDP at election time would be seven percentage pointsbelow its first-quarter level, and unemployment would be above – possibly farabove – 10%.
Let’s assume that the optimists are right about the third quarter. Whathappens next? Will the economy continue merrily along, with incomes and jobsbouncing back? Or will it stay in depression, requiring a new revolution – or,more precisely, a new New Deal – to save it?
To assess this question, Furman, Krugman, and the CBO share a mental model.They regard the pandemic as an economic shock, like an earthquake or the 9/11 terroristattacks. It is a disruption to a solid structure, a deviation from normalgrowth. To get America moving again, what is mainly needed is confidence,perhaps aided by stimulus. If consumers channel their pent-up demandinto new spending, this “shock-stimulus” model dictates, then businesses willrevive investment, and soon enough, all will be well once again.
This is how mainstream center-left economists and policymakers have thoughtabout recessions and recoveries since at least the 1960s, when President JohnF. Kennedy and his successor, Lyndon B. Johnson, pushed through tax cuts. Butit ignores three major changes in the US economy since then:
therise of services in consumption and employment, and
the impact of personal andcorporate debts.
In the 1960s, the US had a balanced economy that produced goods for bothbusinesses and households, at all levels of technology, with a fairly small(and tightly regulated) financial sector. It produced largely for itself,importing mainly commodities.
Today, the US produces for the world, mainly advanced investment goods andservices, in sectors such as aerospace, information technology, arms, oilfieldservices, and finance. And it imports far more consumer goods, such asclothing, electronics, cars, and car parts, than it did a half-century ago.
And whereas cars, televisions, and household appliances drove US consumerdemand in the 1960s, a much larger share of domestic spending today goes (orwent) to restaurants, bars, hotels, resorts, gyms, salons, coffee shops, andtattoo parlors, as well as college tuition and doctor’s visits. Tens ofmillions of Americans work in these sectors.
Finally, American household spending in the 1960s was powered by risingwages and growing home equity. But wages have been largely stagnant since atleast 2000, and spending increases since 2010 were powered by rising personaland corporate debts. House values are now stagnant at best, and will likelyfall in the months ahead.
Mainstream economics pays little attention to such structural questions.Instead, it assumes that business investment responds mostly to the consumer,whose spending is dictated equally by income and desire. The distinctionbetween “essential” and “superfluous” does not exist. Debt burdens are largelyignored.
But demand for many US-made capital goods now depends on global conditions.Orders for new aircraft will not recover while half of all existing planes aregrounded. At current prices, the global oil industry is not drilling new wells.Even at home, though existing construction projects may be completed, plans fornew office towers or retail outlets won’t be launched soon. And as peoplecommute less, cars will last longer, so demand for them (and gasoline) willsuffer.
Faced with radical uncertainty, US consumers will save more andspend less. Even if the government replaces their lost incomes for a time,people know that stimulus is short term. What they do not know is when the nextjob offer – or layoff – will come along.
Moreover, people do distinguish between needs and wants. Americans need toeat, but they mostly don’t need to eat out. They don’t need to travel.Restaurant owners and airlines therefore have two problems: they can’t covercosts while their capacity is limited for public-health reasons, and demandwould be down even if the coronavirus disappeared. This explains why manybusinesses are not reopening even though they legally can. Others arereopening, but fear they cannot hold out for long. And the many millions ofworkers in America’s vast services sector are realizing that their jobs aresimply not essential.
Meanwhile, US household debts – rent, mortgage, and utility arrears, as wellas interest on education and car loans – have continued to mount. True,stimulus checks have helped: defaults have so far been modest, and manylandlords have been accommodating. But as people face long periods with lowerincomes, they will continue to hoard funds to ensure that they can repay theirfixed debts. As if all this were not enough, falling sales- and income-taxrevenues are prompting US state and local governments to cut spending,compounding the loss of jobs and incomes.
America’s economic plight is structural. It is not just simply the consequence ofTrump’s incompetence or House Speaker Nancy Pelosi’s poor political strategy. It reflects systemic changes over 50 years that have created an economy basedon global demand for advanced goods, consumer demand for frills, andever-growing household and business debts. This economy was in many waysprosperous, and it provided jobs and incomes to many millions. Yet it was ahouse of cards, and COVID-19 has blown it down.
“Reopen America” is therefore an economic and political fantasy. Incumbentpoliticians crave a cheery growth rebound, and the depth of the collapse makespossible some attractive short-term numbers. But taking them seriously willmerely set the stage for a new round of disillusion. As nationwide protestsagainst systemic racism and police brutality show, disillusionment is America’s onebig growth sector right now.