Surviving the wave
U.S. faces economic challenge
The turbulent economic conditions of today have far exceeded any economic challenge the U.S. has faced since the Great Depression of the 1930s. Newly released numbers indicate that 30 million Americans are unemployed. Businesses, both large and small, are struggling, and too many are teetering on the edge of bankruptcy.
What exactly are we going to call this economic free-fall due to the coronavirus? Let’s hope we don’t have to call it the Second Great Depression.
It’s not pretty! The human cost is and continues to be tremendous. The economic cost is also. The airplanes are grounded, the cruise ships are docked, the cars are parked in the garage, the hotels are empty and the U.S. oil industry is grinding to a halt. The list goes on and on. The economy must get back in gear before we reach a point of no return. The economic damage is just too great, and it is not going to disappear overnight.
On the bright side, covid-19 is leveling, and the Federal Reserve System is doing what it should have done during the Great Depression by providing the credit to keep the economy from collapsing. In fact, the Fed is financing a huge part of the federal stimulus. Some economists project the Federal Reserve will increase its portfolio of bonds by as much as $7 trillion. Federal Reserve Chairman Jerome Powell is certainly sending the right message to the economy, but even the Fed has limits.
In addition, Uncle Sam is pumping out trillions of dollars in helicopter money, which at this point is very much needed, and aiming it for individuals through stimulus checks and unemployment benefits. The stimulus also targets small business and provides billions in forgivable loans. The administration has worked hard to moderate the effect of the economic decline and empower states, as is appropriate in our federal system.
The downside of all of this is that federal debt is mushrooming at a record-setting rate. The current debt is at the $24 trillion to $25 trillion level and is poised to increase over the next year somewhere in the range of $4 trillion to $6 trillion. This is not something we can continue to repeat. We must learn to manage this type of crisis with approaches that minimize economic damage.
The first quarter economic numbers are in, and the U.S. gross domestic product declined at a 4.8 percent annual rate. In addition, we know what is coming in the second quarter. With 30 million unemployed, the economic damage will be considerable. At least we know it is coming; we should certainly not be surprised. However, the numbers are going to show the largest and most stunning short-term economic decline in our history.
There are all varieties of opinions and forecasts of what will happen next. Will it be a U-shaped or a V-shaped recovery? I think it is going to be a V, but the recovery will certainly not be as swift as the decline. It will take time to get the U.S. economy back to its pre-virus levels. The longer we delay, the longer the recovery is going to take. We need to move promptly.
At present, the economic forecasts for the second quarter range from a decline in GDP ranging from 20 percent to nearly 30 percent. Goldman Sachs economists forecast a 24 percent decline. Most forecasts indicate a recovery in the third and fourth quarters, but overall, this year will most likely be one of negative GDP growth.
Those states that avoided the lockdown approaches, including Arkansas, have fared well in comparison with other states. These states relied on the good sense of citizens to protect themselves and their families. It is critical to protect the most vulnerable among us and yet allow those less vulnerable to keep the economy operating. There have certainly been some high-density population centers, such as New York City, where the approach has to be different. However, for most areas of the country, commerce must be allowed to proceed.
The truth is that Americans can multitask. We are a free-market nation and have relied on the creative genius of our people to generate the most powerful nation in the history of the globe. We must avoid economic calamities like this in the future. As we recover, we need to develop plans for future viruses and pandemics that balance health with the economic realities of a sophisticated and interconnected economy.
Author of What Every American Needs
to Know About Economics, Dr. David F. Rankin is president emeritus at Southern Arkansas University where he has been a professor in finance and economics for over 46 years and served as president for 13 years. For the past 24 years, he has also been the chairman of the Governor’s Council of Economic Advisers.