Re­open­ing econ­omy too fast risks W-shaped re­cov­ery

The State - - Business - BY PAUL WISE­MAN

When the coro­n­avirus erupted in the United States, it trig­gered quar­an­tines, travel curbs and busi­ness shut­downs. Many econ­o­mists pre­dicted a V-shaped jour­ney for the econ­omy: A sharp drop, then a quick bounce-back as the virus faded and the econ­omy re­gained health.

Others en­vi­sioned a slower, U-shaped course.

Now, as Pres­i­dent Don­ald Trump and many Repub­li­cans press to re­open the econ­omy, some ex­perts see an omi­nous risk: That a too-hasty re­lax­ation of so­cial dis­tanc­ing could ig­nite a resur­gence of COVID-19 cases by fall, send­ing the econ­omy back into lock­down. The re­sult: a W-shaped dis­as­ter in which a ten­ta­tive re­cov­ery would sink back into a “dou­ble-dip” re­ces­sion be­fore re­bound­ing even­tu­ally.

“The push to re­open the econ­omy is mak­ing a W-shaped re­cov­ery very much more likely,” said Jef­frey Frankel, pro­fes­sor of cap­i­tal for­ma­tion and growth at the Har­vard

Kennedy School.

In Frankel’s view, any wide­spread re­open­ing should wait for a sus­tained drop in death rates and the broad avail­abil­ity of tests. No one is com­pletely safe un­til an ef­fec­tive treat­ment or vac­cine can be pro­duced and widely dis­trib­uted – a sce­nario that’s likely many months away.

Frankel said he also wor­ries that the gov­ern­ment might pre­ma­turely with­draw fi­nan­cial aid to the econ­omy, thereby weak­en­ing the pil­lars of any ten­ta­tive re­cov­ery.

“A W-shaped re­cov­ery is a distinct pos­si­bil­ity,” said Yongseok Shin, an econ­o­mist at Wash­ing­ton Univer­sity in St. Louis and a re­search fel­low at the Fed­eral Re­serve Bank of

St. Louis. “Un­less the re­open­ing is care­fully man­aged with ex­ten­sive test­ing and vol­un­tary so­cial dis­tanc­ing, in­fec­tions will rapidly rise in many lo­cal­i­ties.

“Peo­ple will then hun­ker down for fear of in­fec­tion, and lo­cal gov­ern­ments will re-im­pose lockdowns, quash­ing any eco­nomic re­cov­ery we will have had to that point.”

A dou­ble-dip re­ces­sion would sig­nif­i­cantly heighten the risks for an al­ready de­bil­i­tated U.S. econ­omy. Congress has pro­vided roughly $3 tril­lion in aid – by far its largest res­cue ever – to help house­holds and com­pa­nies sur­vive the next few months. That short-term aid, though, as­sumes any re­cov­ery will last. If a sec­ond down­turn were to flare up, it’s far from clear that Congress would be ready to of­fer tril­lions more to en­able busi­nesses to sur­vive yet an­other round of month­s­long shut­downs.

Nor do many com­pa­nies have the cash re­serves to cush­ion against a sec­ond re­ces­sion. And just as threat­en­ing, a dou­ble-tip down­turn would sap the con­fi­dence of in­di­vid­u­als and busi­nesses that is es­sen­tial to an eco­nomic bounce-back. If con­sumers don’t trust that a re­cov­ery will last, many won’t re­sume spend­ing, and the econ­omy would strug­gle to re­bound.

On Mon­day, plas­tic spac­ing bar­ri­ers and mil­lions of masks ap­peared on the streets of Europe’s newly re­opened cities as France and Bel­gium emerged from lockdowns, the Nether­lands sent chil­dren back to school and Spain al­lowed peo­ple to eat out­doors. All faced the del­i­cate bal­ance of restart­ing bat­tered economies with­out caus­ing a sec­ond wave of coro­n­avirus in­fec­tions.

In the United States, Fed­eral Re­serve Chair Jerome Pow­ell has urged cau­tion in re­open­ing the econ­omy. Pow­ell has warned against tak­ing “too much risk of sec­ond and third waves” of the virus.

For now, the econ­omy is es­sen­tially in free-fall. It shed a record 20.5 mil­lion jobs in April. The un­em­ploy­ment rate surged to 14.7%, the high­est since the Great De­pres­sion. The gross do­mes­tic prod­uct – the broad­est mea­sure of out­put – shrank at a 4.8% an­nual rate from Jan­uary through March and is ex­pected to post an as­tound­ing 40% an­nual col­lapse in the cur­rent quar­ter. That would be, by far, the worst on record dat­ing to 1947.

Fac­ing a catas­tro­phe in an elec­tion year, Trump and many Repub­li­can al­lies are ea­ger to ease re­stric­tions and restart the econ­omy. They say the use of masks and other pro­tec­tions should al­low many busi­nesses to safely re­open un­der cer­tain guide­lines. Trump has openly backed protests that are in­tended to com­pel gov­er­nors to “lib­er­ate” their states from lockdowns.

But The As­so­ci­ated Press re­ported last week that many U.S. gov­er­nors are dis­re­gard­ing White House guide­lines. Seven­teen states didn’t meet a key bench­mark set by the White House for be­gin­ning to re­open busi­nesses: A 14-day down­ward tra­jec­tory in new cases or pos­i­tive test rates.

Texas’ Repub­li­can lieu­tenant gov­er­nor, Dan Pa­trick, has gone so far as to sug­gest that restart­ing the econ­omy might be worth the risk of some ad­di­tional deaths.


Many restau­rants have closed be­cause of the coro­n­avirus pan­demic.

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