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Blog: Econ Fallout of the Coronavirus

In addition to living through a global pandemic, we’re living through a highly unusual and frightening economic crisis play out in real time. The U.S. economy is surely careening into a severe recession, although economic data releases only began indicating as much with today’s report on initial unemployment insurance claims surging to a record-breaking 3.3 million (Thursday, March 26, 2020).

I created Canvas discussion threads for my Macroeconomic Theory class and Macroeconomics of Depressions seminar, to share articles on the economic fallout of the coronavirus and offer some perspective as we transition to “distance learning.” I’m also going to cross-post everything here, in case it’s of broader interest…

 

Bungling the U.S. Emergency Response: An Infuriating Chronology

I highly recommend this comprehensive, infuriating chronology of the administration’s denial and dithering nonresponse to the looming and inevitable spread of the pandemic:

The administration’s bungling of the emergency response—and squandering two months’ heads-up—will greatly exacerbate the loss of life and economic fallout from the coronavirus in the United States.

Update: The Associated Press (AP) has a new, related piece out about the federal government squandering two months that should have been used to rebuild our Strategic National Stockpile of emergency medical supplies and equipment, such as N95 masks and ventilators, which is rapidly dwindling. As the Post article noted, the emergency stockpile was “already woefully inadequate after years of underfunding” and replenishing these critical supplies has been impeded by supply chain disruptions, as much of the equipment is manufactured in China. Time was of the essence. From the AP: “More than three months after China revealed the first COVID-19 cases, Trump finally relented last week, saying he will order companies to ramp up production of critical supplies. By then, confirmed cases of COVID-19 within the United States had surged to the highest in the world.” 

And turning abroad, the New York Times has a related article out surveying Germany’s relative successes in combatting COVID-19—they have the fourth most cases, but the lowest fatality rate, at 1.4%. The chief medical factors identified by epidemiologists: “early and widespread testing and treatment, plenty of intensive care beds and a trusted government whose social distancing guidelines are widely observed.” Germany had developed a test in mid-January and began stockpiling test kits before their first case was reported in February. “By now, Germany is conducting around 350,000 coronavirus tests a week, far more than any other European country. Early and widespread testing has allowed the authorities to slow the spread of the pandemic by isolating known cases while they are infectious.” Quite the striking and lamentable contrast with the United States.

Subsequent recommended reading:

Lighter, Longer Reading: Econ Book Recs for the Age of Social Distancing

The last few posts have been err, not exactly uplifting.  Here’s a lighter post for the age of social distancing.

I offered to share some econ book recommendations with my students, on the off chance they find themselves cooped up, with ample free time on their hands, or discover a newfound imperative to support their local independent bookstore. Here’s my current running list, which is admittedly reflective of my research and teaching fields:

Contemporary Econ:

  • The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon (industrial organization, America’s abandonment of anti-trust, and consequences of market consolidation)
  • The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay by Emmanuel Saez and Gabriel Zucman (income/wealth inequality, tax shelters, and progressive tax policy)

 Macroeconomics/Financial Crises:

  • The Big Short: Inside the Doomsday Machine by Michael Lewis (the subprime crisis compelling told through the lens of a trio of characters traders betting against subprime—the book is better than the movie, but I’d recommend the movie as well)
  • Irrational Exuberance 3rd ed. by Robert Shiller (behavioral finance and economic bubbles from the prescient, authoritative expert on the subject)
  • The Return Depression Economics and the Crisis of 2008 by Paul Krugman* (macroeconomic crises and policy mismanagement: a 20th century survey)
  • After The Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan Blinder* (the best general survey of the causes and policy responses to the Great Recession, imho)
  • Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph Stiglitz (an excellent tomb on the Great Recession, a bit more of a polemic and broadside to the economics profession)
  • In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel* (great inside account the financial crisis of 2007-09 unfolding and policy responses through the lens of the Bernanke Fed)
  • Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History by Barry Eichengreen (fascinating comparison of the Great Recession and Great Depression by one of the world’s preeminent macroeconomic historians)
  • The World in Depression, 1929–1939 by Charles Kindleberger (excellent global take on the Great Depression from more of an international political economy and institutionalist angle)
  • The Great Crash: 1929 by John Kenneth Galbraith* (great narrative of the stock market crash and onset of the U.S. Great Depression, witty and acerbic to boot)

 Public Finance/Political Economy/Inequality:

  • The Fifth Risk by Michael Lewis (U.S. federal budget policy through the lens of defunding public goods/emergency response capacity, and terrifyingly prescient)
  • The Color of Law: A Forgotten History of How Our Government Segregated America by Richard Rothstein (U.S. housing policy and urban economics through the lens of government-driven segregation and institutionalized racism)
  • Shaky Ground: The Strange Saga of the U. S. Mortgage Giants by Bethany McLean (U.S. housing finance policy and the mortgage meltdown through the lens and fascinating histories of Fannie Mae and Freddie Mac)
  • Concrete Economics: The Hamilton Approach to Economic Growth and Policy by Stephen Cohen and Brad DeLong (U.S. economic history and growth through the lens of American industrial policy)
  • The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity by Robert Kuttner (U.S. political economy and a remarkably prescient pre-Great Recession take on structural problems with America’s economy, corporate sector, and political institutions)
  • Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class by Jacob Hacker and Paul Pierson (two renowned political scientists weigh in on how systemic failures of the U.S. political system have contributed to rising income inequality)
  • Capital in the Twenty-First Century by Thomas Piketty (blockbuster tomb on income and wealth inequality in the advanced economies)

 

*These books are also on my Econ 418: Macroeconomics of Depressions reading list.

March Jobs Report: Ugly Numbers, Ugly Foreshadowing

The Bureau of Labor Statistics (BLS) monthly jobs report showed the U.S. unemployment rate shooting up from 3.5% to 4.4% in March, and non-farm payroll employment falling by 701,000 workers. The 0.9 percentage point increase in the unemployment rate is the fastest increase for a single month since the 1973-75 recession. The drop in employment abruptly ends 113 months of consecutive employment gains, and is the worst monthly drop in employment since April 2009, in the depths of the Great Recession. The full BLS summary can be found here:

The report was simultaneously 1) much worse than expected and 2) a frightening indicator of how much worse things are going to get in the April report.

To the former point, the median private sector forecast for this report was 82,000 job losses and a much smaller uptick in the unemployment rate to 3.7%, as reported by MarketWatch. Job losses came in worse-than-expected by almost an order of magnitude.

To the latter point, there’s a big caveat to this report: The BLS surveys for this report were conducted the week of March 8—March 14. That predates the recent staggering deluge of initial unemployment insurance claims: 3.3 million initial UI claims were filed for the week ending March 21 and 6.6 million initial claims were filed for the week ending March 28 (both on a seasonally adjusted basis, just like the headline BLS number in today’s report). Broadly speaking, the March jobs report essentially predates social distancing and stay-at-home orders. California was the first state to issue such an order on Thursday, March 19. As of yesterday, all but five states had issued some kind of lockdown order (six had ordered only partial stay-at-home orders). Related reading:

From the BLS: “It is important to keep in mind that the March survey reference periods for both surveys predated many coronavirus-related business and school closures in the second half of the month.”

Nonetheless, there were plenty of signs in the March report reflecting early yet severe economic fallout from the coronavirus. The leisure and hospitality sector got walloped, with 459,000 job losses, heavily concentrated in food services and drinking places (417,000 jobs). And the abrupt drop in payroll employment is especially staggering given that it effectively predates the rollout of stay-at-home orders. Visualization via Heidi Shierholz at EPI:

The BLS conducts two surveys: The Current Population Survey (CPS, or the “household survey”) and the Current Employment Statistics survey (CES, or the “establishment survey”). The employment figures I’ve quoted so far all come from the establishment survey of firms. (Here’s the BLS primer on comparing the two surveys.) The household survey showed the number of people self-reporting as employed plunge by 3 million, driven by 1.4 million people reporting as unemployed and another 1.8 million people leaving the labor force (this would include retirees, but could also include workers who lost jobs but are not counted as unemployed because they are not actively looking for work, thinking they will be rehired). During the Great Recession the biggest one-month drop in employment, as measured by the CPS, was 1.2 million jobs lost in January 2009.

And a lot of workers still classified as employed reported being absent from work. From the BLS: “If the workers who were recorded as employed but absent from work due to “other reasons”… had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 1 percentage point higher.”

The household survey also indicated a big, unwanted cutback in hours for those still retaining a job: The number of people involuntarily working part-time for economic reasons (i.e., they want full-time employment) jumped by 1.4 million as well.

In another important caveat, the BLS warned that both the method and response rates for this survey were adversely affected by the coronavirus: “Data collection for both surveys was affected by the coronavirus. The household survey is generally collected through in-person and telephone interviews, but personal interviews were suspended during the collection period for the safety of interviewers and respondents. The household survey response rate, at 73 percent, was about 10 percentage points lower than in recent months… The collection rate for the establishment survey, at 66 percent, was about 9 percentage points lower than average.” So these data may be noisier and less of a clean apples-to-apples comparison with recent reports than usual.

Big picture: The U.S. labor market was deteriorating at a frightening and much-worse-than-expected clip even before the widespread rollout of stay-at-home orders. The April report will be astronomically worse. And labor market data to date only underscore that Congress is woefully far behind the curve…

Related recommended reading:

And So It Begins… State Budget Cuts Edition

Following up from my previous detailing why the CARES Act will provide an insufficient lifeline to state and local governments, among other sectors:

The rapid collapse of employment and forced pandemic pause in economic activity will induce a much faster deterioration in state and local public finances than we saw during the Great Recession. These state and local budget cuts will, in turn, further drag at economic output and employment, just as they chronically did during the anemic recovery from the Great Recession. Via FRED:

Congress could instantly alleviate pressure to cut state and local budgets by increasing the federal matching rates for state Medicaid programs, as we did in the Recovery Act of 2009. And the state fiscal relief provisions in the CARES Act don’t even pass the mediocre bar set by the Recovery Act.

Staggering 10 Million Jobless Claims in Two Weeks

Update: Seasonal adjustment factors to the UI data are pushing up the headline numbers a bit above the unadjusted number of initial claims in March. Without the seasonal adjustment, 5.8 million new claims were filed last week, on top of 2.9 million claims the week before. The loss of 8.7 million jobs is still a staggering clip, amounting to a little less than a 6% decline in U.S. employment in just two weeks. Seasonal adjustments generally make for much better data comparisons within a year, as the spikey unadjusted figure below suggests. Unless otherwise noted, all data presented here are seasonally adjusted…

Original Post: Another 6.6 million people filed initial unemployment insurance (UI) claims in the week ending Saturday, March 28. This follows an unprecedented 3.3 million initial claims filed the previous week, ending Saturday, March 21. This is truly unprecedented, as depicted by this graph via Heidi Shierholz, Director of Policy at EPI:

Scary contrast with job loss during the Great Recession via economist Martha Gimbel at Schmidt Futures, another great labor market expert to follow on Twitter:

In a recent post I did some back-of-the-envelope math for last week’s initial claims report: If we see, say, 4 million 10 million workers transition from employment to unemployment in March, the unemployment rate would surge from 3.5% in February to 5.9% 9.6% in March (15,787,000/164,546,000=0.096). That’s nearly the peak unemployment rate we hit during the Great Recession, of 10% in October 2009.

Not all of these job losses will be reflected in Friday’s release of the March jobs report by the Bureau of Labor Statistics, largely due to the timeframe for statistical sampling.  So some of these job losses will be reflected in the April report, which comes out in early May. On the other hand, remember that these UI claims understate the severity of job loss because many workers do not qualify for UI: Part-time workers not meeting hours requirements, workers who recently moved states, some independent contractors, and anyone who voluntarily quit a job, e.g. to take care of children or sick family members.

I recently noted that economist Miguel Faria-e-Castro at the St. Louis Fed has warned that, based on back-of-the-envelope calculations, the U.S. unemployment rate could rise to somewhere between 10.5% and 40.6% by June. Perhaps that sounded alarmist or sensationalist to some, when first reported. But based on today’s UI claims, the U.S. labor market will almost surely have deteriorated so much as to fall within that lower bound when the April jobs report is released.

A different way to think about the staggering and heartbreaking magnitude of job loss in the past two weeks is to look at cumulative changes in employment. U.S. nonfarm payroll employment totaled 152.5 million in February. Using 10 million job losses as the proxy for job losses to date, we’re looking at a 6.6% collapse in employment in just a month or two, if not substantially worse two months out. Here’s a comparison with other recent recession, again via EPI:

EPI Cumulative Job Losses

U.S. employment cumulatively fell 6.25% during the Great Depression over the course of two years. That was by far the worst of any downturn since the Great Depression. We’re now surely looking graver relative job losses in the span of just two months. Congress has much more work ahead in providing lifelines to households, states, and businesses—the CARES Act won’t cut it.

Further related reading:

 

 

Making Sense of the $2 Trillion

Does $2 trillion seem like enough to you?” That’s the two trillion million dollar question. I’m surprised that Congress passed a $2 trillion bill in just over a week, but no, it doesn’t seem like enough. Let me elaborate…

During the Great Recession, analysis of the economic effects of fiscal policies (mine included) would often go something like this:*

  1. Determine the near-term budgetary cost of each major provision of the bill
  2. Apply an appropriate “bang-per-buck” fiscal multiplier to the cost of each provision (essentially reflecting how well targeted the provision was to people with a high marginal propensity to spend) to spitball the GDP impact of each program
  3. Sum the likely GDP impacts from various provisions and calculate a total counterfactual percentage change in U.S. GDP from the change in fiscal policy
  4. Compare the boost/hit to GDP to the existing output gap—how far actual GDP was depressed relative to potential GDP, the level of output consistent with full employment and stable inflation. Does it close the hole, or make things worse?
  5. Use the estimated percentage change in GDP to make back-of-the envelope calculations about job gains/losses or changes in the unemployment rate.**

This doesn’t strike me as the appropriate treatment of the CARES Act, for two reasons.

First off, policies that stimulate aggregate demand (e.g., unemployment benefits, tax cuts) and thus boost employment will likely do the former to a lesser extent than usual, while the latter remains further constrained by public health policy (e.g., stay-at-home orders, closures of non-essential businesses). The Keynesian re-spending multiplier effect would almost certainly be dampened if factories, stores, restaurants, and bars must remain shuttered and if consumption preferences have been temporarily altered by health concerns. No amount of tax cuts (or interest rate cuts, for that matter) will induce a rebound in airfare sales until the health risks of flying greatly subside. And statistical relationships that were estimated from post-war, sans-pandemic data could be quite misleading when public health mandates are deliberately restraining the consumption of many goods and services we (normally) like to consume, or labor supply in many sectors.

Second, we have no idea how big the hole will be—in terms of the output gap or job losses—and we won’t for a while. Advanced estimates for 2020Q1 GDP (January—March, catching just the beginning of the U.S. crisis) won’t be released until April 30, and the advanced estimates for 2020Q2 GDP (April—June) won’t be released until July 30. (Preliminary GDP data are released as an advanced estimate, then a revised second estimate, then a revised third estimate, and later multi-year revisions; the Bureau of Economic Analysis release schedule for GDP data can be found here.) Job loss numbers for April—likely far worse than the March report due to the timing of layoffs and surveys—won’t be released until Friday, May 8. Macro forecasting models are also estimated from sans-pandemic data, and adaptation of such models to stay-at-home orders and an unknown duration of this pandemic pause is mostly ad hoc guesswork; take these forecasts with a considerably bigger grain of salt than usual. That said, here’s some suggested related reading on forecasts for the U.S. economy:

“But as usual, something can be said,” to borrow a line from John Kenneth Galbraith. With the CARES Act we’re looking at something more like a lifeline to the shuttered U.S. economy rather than a traditional stimulus package trying to jump-start economic activity (though much of the bill will still serve as traditional Keynesian stimulus). We’re deliberately trying to pause nonessential economic activity, to ameliorate the harm of COVID-19 to our population and our hospitals. And in the interim we need to cushion the loss of income for households and keep businesses from failing or firing everyone. (I would recommend Josh Marshall’s similar take from his perspective of running Talking Points Memo, a small business, for the last twenty years). Paul Krugman is aptly calling this “disaster relief with a dash of stimulus” (his recent, related column is also worth a read). But for thinking about the scale of policy responses to date, I think it’s perhaps more constructive to frame and separately analyze the CARES Act as follows:

  • Lifelines to households
  • Lifelines to state, local, and tribal governments
  • Lifelines to businesses, big and small
  • Emergency funding for hospitals and health-related agencies
  • A grab bag of corporate welfare and misc. business tax write-offs, sold as lifelines

Let’s think about the scale of the first three lifelines, then zoom back out to the whole package. (The fifth is too depressing to touch at the moment and I’m not the person to speak to the fourth.)

Household Lifelines: The major lifelines to households in the CARES Act are the $1,200 checks, expanded unemployment benefits, and increased safety net spending. These major income support provisions are estimated at $592 billion ($290 billion for the checks, $260 billion for unemployment benefits, and $42 billion for food security and housing programs). To put this in perspective, employee wages and salaries in the United States totaled $9.4 trillion in 2019Q4 (measured at an annualized rate). So the income support provisions would amount to transfers effectively replacing 6.3% of annual wages and salaries. But the emergency unemployment benefits only last for four months, and the checks and other income support measures will essentially be exhausted in the second quarter of 2020. So we’ll likely be be replacing 22.4% of wages and salaries in the second quarter but only 2.8% of wages and salaries in the third quarter.***

So if the pandemic’s forced curtailment of economic activity hasn’t ceased by mid-June, Congress will need to significantly expand such income support measures. A group of Senate Democrats recently proposed more comprehensive legislation for lump-sum payments that would send additional checks in July and October if 1) the public health crisis is ongoing or 2) the unemployment rate is rising. I’m a big fan of such automatic triggers for fiscal stimulus, rather than trusting Congress to enact subsequent stimulus measures as proves necessary (see discussion below of the Recovery Act of 2009).

State/Municipal Lifelines: State and municipal budgets are about to get absolutely walloped, likely way worse than they did during the Great Recession. The major CARES lifeline here is $150 billion in grants to state, local, and tribal governments and a $30 billion education grants fund. There’s also $25 billion for infrastructure grants, some of which will go to state and local governments. For a sense of scale, state and local budget expenditures totaled $3.1 trillion in 2019Q4 and their revenue collections totaled $2.8 trillion (both on an annualized basis). So the grant money in the CARES Act could offset a decline of up to 6.5%-7.4% in state and local government revenues, or help pay for an increase in state spending of up to 5.7%-6.5%—one or the other, not both. On this front, the CARES Act gets worse marks than the American Recovery and Reinvestment Act (ARRA) of 2009—the largest fiscal stimulus response to ameliorate the Great Recession—despite this state fiscal relief proving woefully inadequate during the Great Recession.

ARRA provided roughly $153 billion in additional grants and Medicaid funding for states, which could have replaced either 8.0% of state and local governments’ pre-recession revenue or 7.4% of their spending. Excluding those federal transfers, state and local tax revenue fell 6.8% during the Great Recession, while spending surged 9%. And these figures understate the severity of sub-federal budget shortfalls: States were actively hiking tax rates and slashing programs as their revenue base collapsed and safety net spending automatically increased. State and municipal budget cuts and tax hikes threaten to significantly compound the economic fallout from the coronavirus, just as they continuously slowed recovery for 3.5 years after Great Recession had ended.

The Fed’s forthcoming loan/loan guarantee program, which is being backed by $454 billion from the CARES Act, is supposed to support up to $4.5 trillion in lending to businesses, states, and municipalities. There’s not enough public information about this loan facility to assess its likely efficacy, or how much non-business lending to expect. Regardless, I think Congress will need to get serious about state fiscal relief by funding a greater share of Medicaid, as we did in 2009-11, and to refocus aid to municipalities from subsidized loans to grants. State fiscal relief via Medicaid matching rates also boasts the shortest policy implementation lag of any fiscal policy: The payment infrastructure is there to instantly bolster state budget coffers with just two votes and a stroke of a pen.

Small Business Lifelines: The U.S. Treasury Department recently released the details of its new Paycheck Protection Program, which authorizes $349 billion in forgivable loans to cover payrolls and incentive employment retention. This is a great policy, and I hope there’s a ton of take-up. But if the program does take off, I’m dubious that $349 billion will cover demand for long enough, as I loosely sketched out in this post. The Economist recently estimated that the program could cover compensation for at-risk workers for up to seven weeks. Regardless, I hope Congress is willing to satiate unlimited take-up so long as the pandemic pause must persist. And if take-up languishes, Congress will need to go back to the drawing board stat. (Federally subsidized mortgage refinancing programs struggled with take-up during the Great Recession, but we never revisited the issue.)

Zooming Back Out: The Committee for a Responsible Federal Budget’s budgetary analysis of the CARES Act suggests the price tag will total $2.27 trillion. To put that in perspective, U.S. economic output was $21.7 trillion in 2019Q4 (at an annualized rate), so the cost of the stimulus bill is equivalent to 10.5% of annualized U.S. GDP. Even netting out the loan/loan-guarantee fund and misc. business tax write-offs (provisions furthest from traditional Keynesian stimulus), the CARES Act totals $1.5 trillion, or 7.1% of GDP. That’s not chump change. But again I don’t think it will be enough, particularly for the three lifelines discussed above.

To put that overall price tag of the CARES Act in perspective, ARRA was initially estimated at a $787 billion price tag, amounting to 5.4% of U.S. GDP as of the quarter before its enactment.**** ARRA was effectively spread out across 2009-11, whereas the CARES Act will be heavily concentrated in 2020, so this is undoubtedly a larger near-term fiscal response. On the other hand, ARRA was way too small, which should have been obvious to policymakers in 2008-09, and was painfully obvious in 20/20 hindsight. Monetary policy remained stuck at the zero-lower bound until prematurely lifting off in December 2015, and the U.S. labor market had not fully recovered within a decade of the Great Recession’s onset. ARRA should serve as a painful reminder that it’s better to err on the side of bolder when it comes to U.S. fiscal policy: The risks from overshooting vs. undershooting are asymmetric, and much graver from undershooting.

More importantly, this isn’t a question of how much money we throw at the fallout from the pandemic. First and foremost it’s a question of providing all necessary resources to the public health response. And it’s a question of throwing adequate, sensible lifelines to those people, businesses, and sectors adversely affected by the pandemic pause required for the public health response. Neither the framing of the CARES Act as “Phase Three” stimulus (its predecessors were paltry) nor the initial discussion of “Phase Four” measures bode well on this front… but I’d be more than happy for Congress to throw another $2 trillion at infrastructure when inflation-adjusted U.S. Treasury rates are negative. Related suggested reading:


*See this EPI report by Josh Bivens for a great overview of methodologies for estimating GDP and employment responses to fiscal policies.

**As a rule of thumb, the U.S. unemployment rate falls about 0.4 percentage points for every 1% increase in output growth (a relationship known as “Okun’s law,” see pp. 180-181 in Blanchard’s Macroeconomics 7th Ed textbook).

***This BOTE calculation for 2020Q2 assumes 100% of the checks and safety net spending are distributed in between April and June, and that 75% of the four-month unemployment benefits are distributed between April and June.

****ARRA’s price tag was later revised up to $840 billion, or 5.7% of GDP. The price tag of the CARES Act will almost surely be revised up as economic forecasts used to ballpark mandatory spending, such as unemployment benefits, prove overly optimistic.

Environmental Regulations During the Pandemic

Guest post by my colleague and Assistant Professor of Economics Akhil Rao:

The Environmental Protection Agency (EPA) recently announced it won’t be enforcing environmental regulations during the pandemic. The announcement on March 26th (feels like it was at least a month ago) specified the following:

  • The EPA will “exercise enforcement discretion… for noncompliance” during and resulting from the COVID-19 pandemic.
  • States and tribes can take a different approach where they have the authorities to do so.
  • This doesn’t apply to any criminal violations, Superfund sites, or imports.

As usual, Vox has a nice summary article. The piece mentions some important context: Prior to the pandemic, the American Petroleum Institute (API) was among industry trade groups lobbying for laxer enforcement. And unless you’ve been living under a rock for the last four years, it’s pretty easy to see this as part of a pattern of the Trump administration reducing regulatory oversight, environmental and otherwise. The Trump administration has also been working to undercut states’ authorities to regulate emissions, e.g. the challenge to California’s vehicle emissions standards.

I think the API lobbying context is especially relevant here given the freefall oil markets are currently in. With prices in some areas going negative (subject of a future post), the U.S. oil and gas sector is experiencing unprecedented stress. That stress will continue while demand for oil products (e.g. airplane fuel) stays low. A number of producers will likely go out of business as deposits made economical by fracking and horizontal drilling become uneconomical. From a national security perspective, maintaining a healthy domestic energy production capacity is a plus. If you were really just trying to keep this sector alive till demand picks up and OPEC stops feuding, a targeted approach would have been better. But then there’s that deregulatory pattern from this administration…

A couple notes on incentives and externalities, taking the policy in good faith and at face value:

  • There are clearly worker safety issues here. Our electric grid, for example, is critical infrastructure, and many generating plants produce emissions. Sending workers to check on many plants could spread the virus to critical infrastructure. So far we haven’t seen a wave of illnesses force natural gas or coal plants offline. But were it to happen, it could be bad. Hospitals and ventilators need power. Electricity demand also seems to be falling as economic activity slows down, which may allow for some buffer against supply disruptions.
  • There are health concerns from pollution. Back on the energy example, coal plants are especially nasty for folks with respiratory or cardiovascular conditions (like a certain virus…). Power plants are intensive emitters, and where they’re in populated areas (e.g. Houston) the additional emissions will likely induce more asthma and heart attacks. So reducing monitoring and enforcement will add more stress on our medical infrastructure at a time when we can ill afford it, and in a way that could interact with the pandemic. As a health expert quoted in the article notes, “There is no known threshold below which air pollution has no effect.”

So even if you take this in good faith and at face value, it’s complicated and unclear you’d want to do something as sweeping as the current rule. We don’t want companies to face incentives to unnecessarily expose workers to pandemic risk (it’s not clear how the EPA will distinguish between virus-related violations vs. other violations). But we also don’t want to do things that might put more stress on medical infrastructure. Balancing these two externalities as the pandemic unfolds is not a trivial job, even for an administration with credibility on regulatory policy.

New COVID-19 Coverage by St. Louis Fed

The Federal Reserve Bank of St. Louis provides an invaluable service in producing and hosting their FRED statistical database and FRASER economic history digital library. (My Macro Theory slides are a testament to the former.) They have recently compiled an ongoing list of preliminary analyses by their Research Division economists related to COVID-19 and the economic fallout from the pandemic:

They are also maintaining an ongoing interactive timeline of events related to the pandemic.

St. Louis Fed President James Bullard recently made headlines when he issued a dire warning that the U.S. unemployment rate could soon skyrocket to 30% (for context, unemployment hit roughly 25% during the Great Depression and 10% during the Great Recession). But there is a huge amount of uncertainty surrounding such forecasts. Relatedly, economists at the St. Louis Fed have warned that, based on back-of-the-envelope calculations, the U.S. unemployment rate could rise to somewhere between 10.5% and 40.6% by June. Related reading, and one of the COVID-19 Research Resources links:

During crises, back-of-the-envelope calculations or novel forecasting techniques play a larger role in informing policymaking, because time is always a constraint and current statistical analysis is constrained by data availability lags.

2008-09 vs. 2020+ Redux

Vox has another good piece out contrasting the economic uncertainty and challenges posed by coronavirus relative to that of the 2007-09 financial crisis and Great Recession. (I think we’re going to see this genre proliferate.) Recommended reading:

I like former Rep. Barney Frank’s (D-MA) take: “This one is scarier to me, because we knew how to handle the other one.* The other one was a result of human error and bad decisions. This is different.” Rep. Frank was the Chairman of the House Financial Services Committee during the Great Recession, and the “Frank” namesake of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

That said, I think today’s policy responses are shaping up to be much more similar to 2008-09 than the authors suggest. That’s certainly true of the Fed’s aggressive playbook of late. On the fiscal side the $1,200/$2,400 lump-sum tax cuts in the CARES Act are roughly a scaled-up version of the lump-sum tax rebates from the Economic Stimulus Act 2008 (enacted in February 2008, a year ahead of the Recovery Act of 2009). And Congress should take a nod from 2009 and turn on the spigots to state budgets by increasing the Federal Medical Assistance Percentages (FMAP), the federal cost-sharing rates for state Medicaid programs. State fiscal relief via FMAP increases was a significant chunk of the Recovery Act. House Democrats were recently pushing for FMAP increases, and this issue will almost certainly be revisited as state revenues dry up, Medicaid programs are walloped by the pandemic, and balanced budget amendments start to force budget cuts in the midst of a recession… balanced budget amendments are truly ill-conceived budgetary policies that exacerbate recessions, but I’ll save that for a future post.

*Important caveat to Frank’s point: Knowing does not always translate to doing. A premature withdrawal of federal stimulus and pivot to fiscal consolidation in 2010-14, forced by House Republicans, greatly stymied our recovery from the Great Recession. State-level spending cuts and tax hikes, necessitated by balanced budget amendments, further slowed recovery. It took the U.S. labor market over a decade to recover—which amounts to an abject policy failure, with one aisle of Congress largely to blame. Recommended related reading:

Economists Reject False Dichotomy of Social Distancing vs. the Economy

More pushback against the false dichotomy of social distancing vs. the economy:

Key takeaway: “according to a new poll of leading economists from the University of Chicago’s Booth School, there is very little support among experts for the idea that officials must choose between saving lives through continued social distancing and saving the economy by ending the practice.”