Smart moves needed to avert looming recession
Business optimism was at the highest level in a year — companies expected to hire more workers. The biggest problem facing the economy was supposed to be rising wages, according to a global consulting firm’s survey of CEOs released last week.
IHS Markit wrote the report, of course, before anyone understood how fast the new coronavirus was spreading, how fast the price of crude oil would plummet, or how far the stock market would nosedive. But the survey proves how hard it is to predict the future.
The economy is screeching to a halt. For how long depends on what government does next.
Economists define a recession as six months of economic contraction. While it is too early to use that technical term, we can safely say we are in for a rough few months.
“Base case, we anticipate one quarter of negative output and a modest pace of recovery, however, depending on the depth and duration of the impact, repressed activity could easily be extended to a technical recession,” said Lindsey Piegza, chief economist at Stifel, an international brokerage firm.
Investment bank Morgan Stanley predicts the U.S. economy will grow only 1.5 percent for all of 2020, and frankly,
that’s if we’re lucky.
The danger is that a drop in supplies of goods from places like China, combined with a decline in demand for products from consumers, will force employers to lay off workers. Those workers then could not pay their debts, which would hurt banks, and generate a vicious cycle.
Politicians are scrambling to figure out how to keep that from happening. President Donald Trump proposed cutting the payroll tax , but that plan assumes people are still on a payroll. Payroll tax cuts don’t help the unemployed, but they do benefit the wealthy.
An economic model developed by the Wharton Business School found that a 2 percentage-point payroll tax cut would put $50 in the pockets of the bottom 20 percent of workers and give an average of $410 to the next 20 percent. The wealthiest 10 percent would collect $3,000.
The president is also pushing for lower interest rates, but the money supply is not the problem. Corporations
and individuals have already loaded up on debt, and companies collecting lower revenues, and people making less money, should not take out more loans, no matter how cheap.
Economists know the smart move is to use taxpayer money to fight the crisis. The $8.3 billion that Congress approved to help local authorities mitigate the coronavirus is a good start, and Treasury Secretary Steve Mnuchin says the administration will ask for a lot more.
We should spend much of that money on broader public health programs.
Mandating paid sick leave would be a brilliant move, and the federal government could soften the blow to businesses by expanding corporate tax deductions and credits. Congress should do the same with mandatory health insurance to encourage people to go to the doctor before they need an emergency room.
If we learn nothing else from COVID-19, we should realize that our neighbor’s health is directly tied to our physical and economic well-being.
Governments can also fend off a recession by hiring companies to prepare for other predictable natural disasters. We know hurricanes will hit the Gulf Coast, earthquakes will shatter California, and greenhouse gases will heat the planet, so let’s fortify the nation now.
Trump has proposed providing low-interest small business loans through programs typically used following natural disasters. If all companies have equal access and keep people employed, that’s a good move.
Taking it a step further, we can copy Germany and give temporary tax incentives to companies that keep people on the payroll. Instead of providing unemployment benefits, the government could pay part of an employee’s salary during the recession. The employer, worker and government typically suffer less than they would from the lay off-unemployment-rehire churn.
COVID-19 has two outcomes. The virus becomes part of our daily lives, like the flu, and we grow inured to its death toll. Or the heat of the summer kills the virus, and it fades like previous coronavirus outbreaks. Either way, it drops from the headlines, and life returns to normal.
After all, between Feb. 10 and 25, the future was so bright, CEOs told IHS Markit they had to wear shades, as the rock band Timbuk3 once sang. Economists around the world were expecting nothing but blue skies, as Willie Nelson crooned.
We’ll get there eventually. The only questions are how long it will take, and how much will we suffer? What our leaders do next will decide. Will they focus on helping workers or corporations?