The lockdown’s destruction
An excerpt from an editorial in The Wall Street Journal
Democrats and their media allies have trapped themselves in a contradiction. They are deploring Thursday’s grim second-quarter GDP report even as they demand a repeat of the lockdown that caused the economic catastrophe. What do they expect when government orders Americans to sit in their homes for weeks?
That’s the main message from the 32.9% decline in GDP, the worst ever recorded. The damage extended across the private economy—from business investment to manufacturing and housing. But the greatest harm was from the collapse of consumer spending as the shutdown crushed the service economy.
Consumer spending fell 34.6% and accounted for some 25 percentage points of the GDP decline. The fall in transportation, recreation, food services and hotels was brutal. But the biggest surprise was the plunge in health care spending during a health care crisis. Health care represents about 12% of the U.S. economy and its collapse subtracted 9.5 percentage points from GDP.
How does that happen in a pandemic? The answer, as our friend Don Luskin points out, is that politicians panicked in March and waited for a surge of COVID-19 patients that the pandemic modelers told them would arrive. Blessedly, the modelers were wrong, and far fewer hospital and intensive-care beds were needed. But the economic harm from stopping all elective surgeries and barring visits to doctors was severe and unnecessary.
It was also a terrible public-health blunder. That harm will play out for years as Americans discover cancer, heart disease and other diagnoses that were missed or delayed.
Notably, Congress’ nearly $3 trillion in appropriations couldn’t stop the economic collapse. Government grew 2.7% in the second quarter, led by a nearly 40% increase in nondefense federal outlays. The feds offset a $795 billion decline in employee compensation with a $2.4 trillion increase in transfer payments. But the GDP decline shows that $1,200 cash payments and jobless benefits can’t replace a dynamic private economy.
Personal disposable income increased $1.5 trillion (42.1%) while the savings rate rose to 25.7% from 7.3% in last year’s fourth quarter. People haven’t been dining out or traveling, so they are stockpiling cash. The more uncertainty caused by threats of second lockdowns, the less likely Americans will be to spend.
These transfer payments are fiscally unsustainable, and the second quarter offers a window on what an economy run by politicians looks like. More transfer payments will delay and slow the recovery by causing more workers to stay on the sidelines.
Hard to believe, but some on the left are stumping for a second nationwide lockdown to control the virus. Shut the U.S. down again until October when the scourge will be gone for good. Do they want another 33% decline in GDP and 40 million more unemployed?
Without a vaccine, the virus was always likely to spread through most of the country, as the Centers for Disease Control and Prevention predicted in March. The lockdown-as-miracle-cure is a fantasy, as the World Health Organization has now acknowledged. The economic and public-health harm is too great and the virus is too easily transmissible.
At least the worst economic news is over, or it should be without a second lockdown. Orders for motor vehicles and capital goods are rising, and housing is strong. The service economy will take longer to come back, but it will do so when the public feels confident enough to venture out. What no one needs is another catastrophe like the second-quarter lockdown.