After the Iceberg

National Review, March 24, 2020

The economic numbers are beginning to come in, and, predictably enough, just about wherever you check, they are appalling. In Pennsylvania alone last week there were more than 350,000 first-time claims for unemployment assistance. That compares with (seasonally adjusted) initial national claims over the last year averaging in the low 200,000s, and the news is only going to get worse in Pennsylvania and, probably, every other state. Brokerage research, usually a reliable source of good cheer until well past the last moment, now makes for bleak reading. On Friday, Goldman Sachs estimated that U.S. GDP would tumble by an annualized 24 percent in the second quarter (against earlier expectations of a 5 percent hit). A pandemic has consequences and so do the measures taken to contain it. This week Morgan Stanley ratcheted up the gloom, forecasting an annualized 30 percent GDP decline in a second quarter when unemployment could hit nearly 14 percent. Tracking the course of these projections shows how rapidly the mood is darkening, and expectations play no small role in driving the economy.

Goldman’s economists are, however, anticipating that GDP will recover by (an again annualized) 12 per cent in the third quarter. But the damage inflicted on the economy is not going to be easily undone: Unemployment was expected to peak at 9 percent. Bad though that unemployment figure may be, my guess (and currently that is all that any forecast can be) is that it, along with hopes of a more or less V-shaped recovery, will turn out to be too optimistic. Even if the parts of the economy that have been braked or switched off were to start up again tomorrow, it would take a while for them to return to any approximation of business as usual.

Take a look at consumer spending, some 70 percent of GDP. Even if all the furloughed and the fired could resume what they were doing (or, in the case of workers from home, go back to the office), many of them will have drained their savings or gone deeper into debt. Meanwhile a good portion of those who have kept their jobs will have learned that they are more vulnerable than they might previously have thought. For all the talk of pent-up demand, it’s hard to see depleted wallets and badly bruised confidence as the preconditions of a spending spree, even more so if consumers pay any attention to the longer-term fiscal implications, whether at the state or the federal level, of today’s emergency.

What’s more, even if the lockdowns are eased, a lot of people will be reluctant to travel too far or too much from home or the workplace. In the absence of a vaccine or an easily available and effective treatment, people will perceive COVID-19 as a menace for quite some time yet. The Florida beaches may have been crowded by spring breakers a week or so back, but in my Manhattan neighborhood, the bars were quieter, some restaurants had no customers, and (having a preemptive haircut) I was the only customer in the local barbershop. People were nervous, and they will continue to be nervous. Make of it what you will, but despite signs of revival in the Chinese economy, relatively few moviegoers have returned (so far) to the cinema.

It’s a statement of the obvious, but the longer the shutdowns last, the greater the structural damage. The V-shaped recovery is, I suspect, already an illusion, but even something that resembles a very poorly drawn U is quickly disappearing beyond reach. This is not (necessarily) an argument for trying to drive the economy, however cautiously, back to the outskirts of normality (that’s a debate for another time) in the next few weeks, but it is a reminder that the destruction caused by this pause is going to take a long time to put right. To take an architectural metaphor further, conceivably, than it should go, a massive stimulus package may stop the roof caving in for now, but it won’t do much to shore up foundations that were not very strong in the first place.

To believe that the country can go through this sort of economic turmoil (and the effect it will have on so many lives), let alone the fear and the pain that any pandemic will generate, without profound psychological and thus political consequences is, I think, delusional. And the longer that turmoil lasts, the greater those consequences will be. They are not just going to be confined to November. Indeed, they may be amplified by it. The increased possibility of victory by a Democratic Party that, even if fronted by Biden, is driven to the left by events as much as (or more than) the need to retain his party’s Sanders wing, is unlikely to give business reasons to invest in recovery. And if the Democrats win . . .

On top of that, there is the question of the nation’s finances, both at the federal and state level. The appalling condition of the former is hardly a secret: Huge deficits and well over $20 trillion in gross debt are hard to hide, and that was before COVID-19. But the mess in the states too often goes unmentioned.

As Steven Malanga noted recently in City Journal:

Even before any recession actually hits, states are tapping their reserves to pay for resources in the fight against Covid-19, meaning that they’ll have even less of a budget cushion should an economic downturn become severe. . . . The problem is that prior to the crisis, states collectively had only about $70 billion in these funds — enough to run state government for just eight days, on average.

And for some states, eight days would be a luxury.

It will take luck and ingenuity to dodge a systemic financial disaster. Both now seem in short supply.