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Current Affairs

A Magazine of Politics and Culture

A Quick Guide To What Is Going On With The Economy

Understanding the coronavirus recession.

The coronavirus pandemic is romping through America, with over 150,000 dead and no end in sight. With states closing, reopening and then re-closing large economic sectors, the U.S. economy fell off a cliff in February, with a recession now formally considered to have started in that month, and GDP having plummeted by a record 9.5 percent over the second quarter.  

What kind of recession will we have? How will it vary depending on the course of the pandemic? What’s the chance this spirals into a full-on depression? And what in god’s alleged name can we do about it? Let’s review the simple facts of what has happened and where we’re at. 

Shutdown Downturns

Let’s first just remember what we’re talking about when we are talking about a recession. Recessions are periods in which the amount of production of goods and services is falling, rather than growing, as capitalist economies tend to do. Also known as downturns or contractions, they tend to come with layoffs, and very severe or long ones are called depressions. As I wrote for this magazine last year, each recession has unique characteristics, including its length and how severe it is—how much the economy contracts. These differences partially depend on what developments cause the recession.

Recessions are typically demand-led, where a decrease in consumer spending means fewer purchases of goods and services, which leads to layoffs and further cuts in spending in a downward spiral, as in the Great Recession of 2007-9. The lost housing wealth as the real estate bubble popped, along with the finance crisis it also caused, led to a steep drop in consumer spending and business investment. Other downturns are supply-led, where a disruption or other development hurts the ability to make goods—the recessions caused by the OPEC oil embargoes of the 1970s are examples of these. Beyond the particulars, the long-term capitalist pattern of expansions and recessions is called the business cycle. There are huge schools of macroeconomics dedicated to a technocratic modeling of this pattern of boom and bust.

In the current recession, the central cause is, of course, a combination of (1) the state-mandated lockdowns of social and commercial activity in the first surge of SARS-Cov-2 cases in March and (2) people voluntarily limiting their social engagement due to fear of infection by the unpredictable virus. The lockdowns constitute an incredibly abrupt and dramatic decrease in demand for many goods and services, from restaurants and bars to retail to health care to education. Notably, it’s not the first modern-era recession triggered by government action—the Federal Reserve purposefully caused the terrible early 1980s recessions by dramatically raising interest rates, in order to kill off the high inflation levels of the late 1970s. But this one is far steeper.

The lockdowns led to a truly unheard-of sheer plunge in economic activity, with conservative estimates of job losses in the spring amounting to an incredible 30 million. A significant improvement followed in May-June, with 7.5 million called back to their suspended jobs and total worker hours estimated to be almost 80% of pre-epidemic levels, but that gain appears to be evaporating now as cases skyrocket again in the Sunbelt states—new unemployment claims and total recipients both swung back up in late July. More detailed data would be available through the Bureau’s Mass Layoff Statistics resource, but those monthly reports stopped being produced when the Bureau canceled the program in 2013 due to Obama-era budget cuts. (Of course, most of these people also lost their wonderful private health insurance during an epidemic too, which is great—the Kaiser Family Foundation estimates 26.8 million people newly lost their coverage as of May 2nd. This would not have happened if the United States had a single-payer healthcare system, but unfortunately both major political parties are committed to a system in which people are constantly losing and having to replace their health insurance.) 

New unemployment claims shattered their old monthly record of 695,000 in the steep recession of 1982, exploding up to many millions of claims each week in April and May. New claims steadily declined from these stunning levels and have been running a fresh 1.4 million per week until late July, when new shutdowns went into effect, leading to the increase. The filings are partially offset by some people going back to work, and data collection on this by shriveled state staff has been quite bad, but the broad picture is clear: 30 million Americans are now on unemployment, about one fifth of the total U.S. workforce. The new job losses aren’t confined to the current Sun Belt outbreak states, but also include areas that appear to have the disease for now relatively under control, like the Northeast. All these people will be paring back spending and depressing businesses’ outlooks.

Globally, the picture is similarly dark, with the International Labor Organization reporting the loss of the equivalent of 130 million full-time jobs worldwide. All these people losing their jobs will have less money to spend, meaning planetary belt-tightening, including among already very poor people. So the opening of this coronavirus recession constituted a major decrease in overall, or aggregate, demand. 

But Covid-19 is also a significant supply-side disrupter, since although white-collar and information workers can often work from home, many blue collar jobs require close-quarters shift work, meaning significant shortfalls in meat processing, and less efficient, slower performance, in the logistics and shipping sector. Closed schools have kept at home some of those workers who might work otherwise at home caring for kids, especially women, who are disproportionately saddled with unpaid care work. Still, the demand-side shock is far larger, and the virus recession is led by changes to the service sector. 

There has also been a fairly major crisis in the energy sector. In March, everyone’s favorite ambitious modernizer-cum-murderer Crown Prince Mohammed bin Salman of Saudi Arabia decided to get into a price war with Russia, its sometime partner in managing global oil supplies. But the Saudi increase in production, pouring crude into a market already well-supplied, occurred just prior to the spread of the pandemic, which meant a catastrophic plunge in energy demand as industrial production and travel plummeted. This climaxed in the famous episode of sub-zero oil prices, when futures contracts for oil dropped to -$37.63, meaning producers were paying for oil to be taken away from packed storage centers. Partially driven by speculative selling of future contracts on financial markets, prices later recovered, yes this painful, job-killing episode has been almost forgotten amid the chaos of the pandemic.

Crucially, in today’s neoliberal era, recessions mean a worsening of austerity for public programs, with a plunging tax base and soaring deficits used to demand budget reductions for important government agencies and cuts to the social safety net. It’s especially true at the state level, since state governments are mostly required by their constitutions not to run significant deficits. This means that it’s a near-certainty that in the U.S., state programs for public health will be seriously cut back, during the worst epidemic the country has seen in over a century. (Andrew Cuomo has already pushed through cuts to New York’s Medicaid program and has warned of drastic impending reductions to the state’s budget.) 

This was certainly the case last time in the Great Recession, when enormous cuts were made in funding for schools, health clinics, environmental monitoring and restoration projects, public parks, and infrastructure maintenance. Mike Davis reminds us in Labor Notes that local and state public health departments went into this emergency with 60,000 fewer staff than before the 2008 financial crisis. One core reason that many U.S. states and localities have had to simply give up on the possibility of contact tracing is that health departments do not have anywhere near the staff they need. 

The Bailed Leading the Bailed

In any recession and certainly one precipitated by an emergency, there’s an enormous role for government policy. The refusal of the government to take enough supportive action during the Great Depression is considered to have been a major factor in its scale and length, allowing endless dominos of business bankruptcies to cause deep cuts in consumer spending, leading to more businesses closures and layoffs. World War II proved that fiscal policy can potentially stimulate the economy into recovery, and the New Deal showed a social safety net can keep people from the most abject misery in the meantime.

This time, the relief packages have been celebrated as the largest ever, counting all their dollar amounts. Some are unimpeachable, like the $600 per month supplement to state unemployment insurance checks that was fought for by that rotten Bernie Sanders, which has just expired as I write, placing us on a real cliff for millions of workers as the disease rages on. The broad moratorium on evictions, though limited, has been extremely important in partially containing the economic damage and human hardship. Even more impressive is that for the first time, Congress finally decided that contractors like truckers and gig workers like Uber drivers deserve security too, and created the Pandemic Unemployment Assistance program, essentially a federal jobless insurance program for the millions of workers who fall between the cracks of the state systems. Years of conservative cuts to state budgets and added bureaucratic requirements meant workers have waited months for their checks. European states, by contrast, largely nationalized payrolls and paid large subsidies to worker wages, meaning their recovery will likely be smoothed by the fact that workers don’t need to get formally rehired.

Other measures have included more traditional bailouts, often through forgivable or low-interest loans, which the hard-hit airline industry has made heavy use of as the travel market imploded. And the Federal Reserve has embarked on another giant lending program much as it did in the last recession, to keep financial companies “liquid” through essentially free loans, so that banks don’t go under due to racking up non-performing loans whose borrowers have gone bankrupt. The mounting price tag has fiscally conservative Senators and congresspersons grumbling about the budget deficit, despite the country having run much larger deficits during previous national emergencies like World War II. If anything has the potential to turn this recession into a long depression, it’s the refusal of conservatives and neoliberals to allow regular checks or other support to the working majority. Presently the next round of stimulus looks to have a smaller supplement to unemployment checks, and potential state aid for testing.

The truly insane part, however, is the Paycheck Protection Program, in which small businesses with under 500 employees can apply for loans to cover their payroll expenses, allowing those workers to keep their jobs and paychecks, and the loans are forgivable if used for that purpose. Typical of American social programs, which could be made easy but aren’t, the PPP is highly bureaucratic with a ton of complex rules, limitations and exemptions, and famously still has not fully completed its rule set. PPP loans now total over half a trillion dollars, but this opacity has scared off use of the program by a number of small firms, who see a gigantic amount of frustrating paperwork that might not get approved, and understand that if they are found to have violated any rules (including those not yet published), they may have to pay back the processing fee and not have the loan forgiven.

Much media attention went to the lobbying shops, national restaurant chains, and even pro ball teams that were able to get PPP loans, many of whom then gave them back. But most outrageous of all is that the PPP, while managed by the Small Business Administration, only creates the structure for applying for the loans—your small company must apply for a loan from a commercial bank. This means these wee businesses have to go through the notoriously bureaucratic loan processes of modern banks, which means many will be turned away after a ton of work, and there’s an enormous advantage for companies that went into the crisis with existing relationships with lenders. (And who have whole departments and contractors whose job is to work full-time on extracting money from the government.) 

This means that some of the very banks that were bailed out last time are now running this bailout. Lenders participating in the PPP include megabanks JPMorgan Chase, Bank of America, and Wells Fargo, along with many mid-size lenders. For everything we’ve had to deal with in the neoliberal era and the dangerous, uncertain future we’re looking at, it has to be said that this is a pretty rich crock of shit. Not wanting to lay off all your workers? Go jump through a thousand hoops to appease some gigantic too-big-to-fail megabank that had its own ass rescued at public expense twelve years ago. Irony loves company!

How you’re doing depends a lot on who you are. Small businesses are folding all over the country, while the large tech companies have been doing just fine in the pandemic. Even as GDP collapses, Jeff Bezos is adding tens of billions of dollars to his net worth. When the U.S. economy finally recovers, we could see giant corporations with far more power than they already had, since they were more insulated from the recession than smaller, more vulnerable competitors. In the Darwinian world of capitalism, the weak are crushed, which means that in a crisis Amazon will only increase its market dominance. 

There’s a whole set of different Federal Reserve lending programs for businesses, in which the Fed buys business loans from banks, which can encourage lending confidence and potentially recovery. The programs include the PPP for smaller firms, the new Main Street Lending Program for midsize firms, and the Fed’s longstanding “QE” programs of loan purchases for big corporations. There are further programs lending to overseas companies and central banks. It’s good that the Fed is eager to avoid repeating the errors of the Depression, but it’s hard not to look at this all-hands-on-deck effort to accommodate businesses with bespoke programs, and hold it up next to the average worker getting unemployment plus one $1200 check with Trump’s dumb signature in May. (If they were lucky.) 

Failing the Testing Test

But it’s what the state’s not doing that’s casting the longest shadow. The Trump administration’s decision against a mobilization for testing, and mandated mass production of protective equipment and lab supplies, has meant the virus is impeded in its romping through the U.S. largely by social distancing and mask-wearing, which are famously spotty. It really matters who’s in charge in emergencies, and the timing was not lucky here. As you’ve seen on those numerous depressing graphs on social media showing new infections around the world, the U.S. is a ridiculous mess on coronavirus cases compared to the rest of the developed world, including the EU which had a dizzying peak of infections like the U.S., but has since wrestled it down. The recession is actually deeper in Europe but it’s far worse to have an economic crisis and an out-of-control virus than just an economic crisis. With a broad consensus for masks and distancing, by now several European states, like the Asian nations first affected, have the virus largely under control, limited to still-serious but containable flare-ups, allowing their economies to reopen more safely and confidently.

The principal difference is that European and Asian nations used their painful economic lockdowns to build up testing and contact tracing, so the infected and their recent contacts can be identified and quarantined, leaving everyone else free to work and have lives. Notably, the European success has been achieved in part through the dark powers of Big Tech. Technical standards developed by Google and Apple, who together produce the operating systems for all the world’s smartphones, are being used by the EU’s national governments to produce apps for contact tracing. Once their aggressive national testing identifies an infected person, the apps can be used to quickly determine who they’ve been in contact with by storing unique Bluetooth identifiers, and the exposed can then be notified to get tested and quarantine. As I argued in my international smash hit book Bit Tyrants, the ubiquity of these near-universally used operating systems makes the firms controlling them hugely important and powerful. In this case, the ease of downloading a free app on the phone you always have close by has played a big role in the Europeans getting Covid-19 under control—and the huge role played by these corporate giants is still growing. Contrast this with France, the last large EU member holding out and making its own app for contact-tracing, which lags well behind the states using Android and iPhone apps.

Meanwhile, as always the Global South gets the worst of it. Apart from the uniquely failed state that is the U.S., the highest case counts are Brazil, India and Russia—much poorer countries with chronically resource-starved public health systems. Unsurprisingly, with far less resources the countries have seen far worse outcomes, like hopelessly swamped hospitals, scattered testing, and a rampant rogue’s gallery of other heinous diseases from plague to AIDS. For gigantic masses of urban slum dwellers, even the early, short-lived lockdowns were death sentences in the constant daily scramble for survival. In India, the crisis kicked off what has been suggested to be the biggest mass migration since the partition of British India in 1947. 

In the U.S. federal system, the states have been mostly left to fend for themselves since the start of the crisis, which is completely nuts. Their resources are quite inadequate to the scale of the emergency, especially since states can’t run budget deficits, a crucial measure only the federal government can perform. They are largely way behind on testing relative to the rest of the developed world, especially in states like Florida and Texas where the disease is spreading fastest. Testing sites are running out of slots minutes after opening and increasingly turning people away—Texas recently returned to the earlier policy of only testing those with symptoms. 

The COVID tracking project has total US tests running around 600,000 tests per day as I write in mid-July, as opposed to the 1.6 million per day recommended by disease scientists like the Harvard Global Health Institute. Testing has ramped up significantly since the start of the crisis but the lagging response met with the hasty re-openings of May and June, with huge demand now swamping supply, held back by various bottlenecks from test reagents to cotton swabs to lab processing capacity. And rather than shady but successful Silicon Valley tools, state and local officials have been left to run track and tracing, since the national leadership has continued to not only refuse to coordinate and fund testing, but is now deliberately trying to get Republicans to eliminate their quite modest funding to the states for testing. Which means the virus continues to spread, and the shape of the recession will likely track the course of the virus. 

The bizarre position of the U.S. as a major outlier among developed countries is part of an old economic pattern, with the U.S. having the most business-run political system and a long-running refusal to invest in public goods. Public goods refer to economic assets that are under-produced by markets because they don’t have the right incentives, since they often have limited profitability. Roads, bridges, scientific research, vaccines and public health clinics, courts, public education, and national defense all produce more benefit to the broader society or marketplace than is captured in the price the owner can get. Most people accept that government has a legitimate role in the economy, teaching kids writing, settling legal disputes, defending against invasion, and providing other public goods and services.

But the U.S., since the advent of the neoliberal era, has been stunningly tightfisted on investing in public goods. Our bridges fall down, our dams collapse, epidemics come and we’re just supposed to accept a tsunami of nursing home ground zeroes. But that’s neoliberalism: cut public funding and then use its shitty outcomes to justify privatizing it, so all our great sources of national pride around the world physically decay. 

Of course, things don’t need to be this way. A rampant virus that infects people regardless of their social class would strongly suggest the value of a basic public health insurance program like Medicare for All. And our failing bridges and disproportionate levels of Covid-19 deaths among black and Hispanic people strongly indicate the value of a Green New Deal, which would include massive investment in environmental remediation of ambient pollution, which is far more heavily felt in nonwhite communities in the U.S. But we have a long way to go before being a basically functional country that can pass modest social democratic policies to preserve the health of the public.  

For the U.S. in the near-term, even if a massive testing drive began now, the giant scale of community spread means that it would be a monumental task to trace all the contacts of the infected, and get them to give their own contacts and to quarantine. And worse, there is a strong “culture war” element at play. Declining to wear a face mask has become a political symbol among many conservatives, who see it as more government overreach, like gun licensing and age of consent laws. When North Carolina required masks in public, a dozen local sheriffs said they wouldn’t enforce it, as did chief cops and sheriffs in California. The CDC says mask use is up overall and was over 76% by mid-May, improving but maddeningly slowly. Even in the cities, Americans have dismal records on just picking up the phone for contact tracers. (Another problem exacerbated by capitalism: Americans are deluged with so many robocalls from scammers that strange numbers are instantly highly suspicious.) 

It doesn’t look like fun will be returning soon. Some of the worst contagion risks are the bars—truly painful for a gentleman barfly such as myself. But there’s no avoiding it—they’re often busy so people talk loudly, people flirt and say sexy, breathy things to one another. It’s a perfect setting for transmitting a respiratory disease. Every public health entity has now confirmed that indoor, poorly ventilated settings are the main way the bug travels, including many working class workplaces and also churches, with their social energy and frequent singing. Painfully, it really is those precious, essential human moments where you’re with friends to have a few laughs or a bite that are most dangerous now. For the foreseeable future, masks will cover our sweet sexy smiles.

Another potentially big determinant of the course of the recession and recovery is child care. Two-income households represent a civil rights advance by freeing women to pursue careers, but also are means for households to cope with the stagnant incomes common in the neoliberal period. But sending children to school is risky, since we don’t know what could happen when a bunch of yelling kids who don’t understand social distancing start passing around filthy baseball cards. Keeping schools and campuses largely shut down are basic tools for resisting the epidemic. But closed schools mean parents who often can’t go to work during reopening, and indeed the New York Times accurately reported child care “could be the lynchpin in the broader effort to undo the severe economic damage from the outbreak.” 

If reopening does proceed and unemployment checks end, the recession may lurch toward more supply-side disruptions as industries try to run without a large chunk of their workforce. The gigantic uncertainty about future conditions created by all this whiplashing will batter corporate willingness to invest in new business, and will scare people around the world to try to save more money, to the extent they remain working and have that option. Reopenings will be marked by doubly-reluctant consumers, scared both of the virus and of spending too much money, as in most recessions. 

Washing Our Hands of It

All of this means that the crucial unknown variable in every economist’s and corporation’s models, the course of the pandemic itself, is both unpredictable and rather dire-looking. That’s much to the horror of big business decision-makers who desperately need some stability and limited certainty about basic future conditions to make long-term investment decisions. Horrifyingly, a JP Morgan Chase economist has used the bank’s credit card data to discover that spending in restaurants and bars tends to predict new Covid-19 cases by a few weeks, especially “card-present” transactions that indicate an in-person, rather than online, purchase. 

That suggests a near-term future of rapid spread of a quite contagious and unpredictably severe disease, in turn meaning large outbreaks that jam ICUs and force cities and states to re-shutdown large chunks of their economies, putting those workers back on a likely less-generous unemployment check and throwing that sector of their economies back into recession. The Wall Street Journal wrote that “The danger is the U.S. has entered an unfortunate cycle, where employment gains lead to more Covid-19 cases, and more cases lead to those employment gains getting lost.” Obviously much of the rest of the world is not facing this, due to taking mass testing and tracing seriously. 

Again, it cannot be overemphasized just how much this country has fucked up. Because Americans are not told much about the rest of the world by their media, it has perhaps not widely sunk in that our virus response is by far the worst off among the developed world. Turns out the main thing that makes America “exceptional” is its suspicion of experts, its blind trust in the divine “invisible hand” of the market to solve collective problems, and its lack of basic public health infrastructure. Oops. 

Nevertheless, the global recession will still be painful for all, with the International Monetary Fund’s last outlook report observing “For the first time, all regions are projected to experience negative growth in 2020,” and it observes that in countries struggling to control infection rates—primarily the U.S. and the developing world—longer lockdowns will take a bigger toll, both directly by closing businesses and lengthening jobless spells, and indirectly by further hurting consumer and business confidence, lowering demand and lengthening the downturn.

So rather than the economists’ present debate about the “shape” of the recovery, and whether it will be v- or u-shaped, a somewhat jagged W that goes on indefinitely looks more representative. That just means the recession could be more dragged-out than the last, terrible recession (which technically only lasted 19 months, but of course this just measures the period of falling production, not the fall in wages and salaries, which went on longer). The business press reports that “Executives are increasingly resigned to the idea that a vaccine is the only path back to normal,” and in the meantime are turning furloughs into layoffs. 

And importantly, the longer the loss of demand due to lockdowns and voluntary consumer reluctance goes on, financial losses could mount at the banks, creating a possible finance crisis due to rising bankruptcies, all of which make people spend less. In fact, bailouts of financial institutions have already happened, with the Federal Reserve repeatedly stepping in to offer rescue financing to money market mutual funds in March, and further bailed out a number of hugely indebted hedge funds when the crisis led to their cheap financing drying up. And the megabanks themselves, like Chase, Citigroup, and Wells Fargo have just set aside large hunks of money as a cushion against expected losses, with Chase cutting its quarterly profit in half—hard proof of real financial risk. Chase’s CEO Jamie Dimon said “This is not a normal recession.” If a real finance crisis happens, conditions could be so aggravated that economists will start using the dreaded D-word, which doesn’t have a formal definition in the U.S. but is often roughly described as having a 10% or more fall in GDP, or a recession lasting over two years. A Corona Depression isn’t something we need in a world already struggling with looming threats of fascism.

    Even if the present state of public policy, with an under-tested nationwide community spread, lasts only as long as the current presidential term, there may be no eradicating the virus soon. Even if Biden wins the November election and starts a crash testing program, there will be too many hundreds of thousands of new cases every day for contact tracers to ever catch up, and too much unrecognized asymptomatic transmission for apps to adequately report untested users. The disease could then become endemic in the U.S., coming back seasonally with fresh varieties like the flu, further isolating the U.S. from the world for some time and requiring Europeans to get shots before visiting, as they do before travel to the developing world. Some industry estimates project that even with quick vaccine development, it would take ten years for humanity to reach 90% immunity via shots or conferred immunity from infections. Trump may lose reelection over this clusterfuck, but he will leave a legacy of suffering that is passed on in coughs for many years to come. 

As it looks now, the developed world is moving on, but we will not be joining them for some time. Economists don’t have a good prediction record, so I’ll just say that I fear America will increasingly resemble the developing world, already the case in its dramatic economic inequality and decrepit public goods. The same America that in 1945 could not imagine defeat, now getting its economy thrashed by a microscopic pathogen we are incapable of handling rationally. The ideology of individualism, free markets, and downplaying of risks, falsely credited with creating our prosperity, may well be the source of our undoing. 

Rob Larson is Professor of Economics at Tacoma Community College, author of Bit Tyrants and Capitalism vs. Freedom, and the in-house economist at Current Affairs.

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