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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…

 

A “Pity Party” About Unemployment? Seriously?

The April jobs report showed the U.S. labor market falling off a cliff, as have the past seven weeks of weekly initial unemployment insurance claims data. A more aggressive federal policy response is desperately needed. Now, a full pendulum swing away from constructive policymaking, economist and White House trade adviser Peter Navarro is publicly bemoaning a “pity party” in reporting about the rising unemployment rate:

Concerns about the rise in unemployment are very much merited, and in no way amount to hand-wringing. Navarro’s correct that certain comparisons with the Great Depression are misplaced, but trivializing double-digit unemployment is eerily reminiscent of the Hoover Administration’s playbook, something about liquidating labor…

Governors Cannot “Turn On” Economic Activity: The Reopening Fallacy

Discussion of “reopening the economy” is too often being presented as a false dichotomy: It’s not a choice between prioritizing the economy versus our public health response—we simply won’t be able to fully restore economic activity and employment without first meaningfully containing the virus. Some governors are now easing their stay-at-home orders and closures of nonessential businesses, but they’re about to learn that you can’t simply will economic activity back. If people still feel unsafe, they won’t go out to restaurants, bars, movie theaters, bowling alleys etc., certainly not at pre-COVID rates. And prematurely reopening may greatly exacerbate this problem and delay eventual economic recovery.

About that fallacy: The government did not “turn off” economic activity with the flip of a switch, and won’t be able to turn economic activity “back on” by abruptly ending statewide closures. Let’s hone in on consumption, far and away the largest chunk of U.S. economic activity. We’re seeing a collapse in personal consumption expenditure that’s being driven by three key factors: Preferences and perceived health risks, disposable (i.e., after-tax) income, and supply constraints. State governors only have partial control over the latter.

First, our preferences and perception of health risks related to economic activity have been markedly altered by the coronavirus—and rightfully so. Consumption of some goods and services now feels (or objectively is) riskier; and some of this consumption can be delayed or forgone, e.g., vacations and travel, elective surgeries, and restaurant meals. A health-related increase in patience will depress present consumption demand (what economists would call a “discount factor shock”). This preference shock may be fairy persistent for many industries; I don’t understand why anyone would get on a cruise anytime soon.

Second, disposable income is taking a big hit, as workers lose jobs, hours, or anticipated pay increases. Uncertainty about future income has surely risen and expectations about future income have surely been revised downward for many households. The CARES Act cushioned some of this decline, but the scale of the response has been inadequate, and disposable income is still going to take a big hit. The major CARES Act income supports for households—unemployment benefits, one-time checks, and food security programs—are estimated to total $592 billion. That may sound like a lot of money, but compared with annualized wages and salaries of $9.4 trillion, it would replace only about 6.3% of labor income for this year. That’s a drop in the bucket when roughly one in five workers have lost their job. The checks have largely gone out, and the Pandemic Unemployment Assistance program was only authorized through July, when the U.S. unemployment rate will surely remain painfully high, in the double digits. If Congress fails to extend and expand such income supports, consumption demand will remain depressed for quite some time.

Third, our ability to consume many goods and services that we enjoy has been curtailed by closures of nonessential businesses. This supply-side shock is the result both of state closures of non-essential businesses (now being eased in some states) as well as business owners’ concerns about either the safety of their employees or the financial viability of operating with fewer costumers. Some businesses will remain closed or operate at significantly diminished capacity even after mandated closures are eased, because we’re in the midst of a pandemic and suffering a huge negative aggregate demand shock.

So easing statewide shutdowns will not reverse widespread job losses. The collapse in air travel and restaurant bookings in March pre-dated stay-at-home orders. Similarly, TheUpshot recently published a piece—based on recent work by economists Raj Chetty, John Friedman, Nathaniel Hendren, and Michael Stepner—underscoring that the collapse in consumer spring, small businesses in operation, and hours worked at small businesses all predated state-wide closures. And now we see that states trying to partially reopen on the early side, such as Alaska, Georgia, and Oklahoma, are not seeing a rapid rebound in economic activity. Go figure. Recommended reading:

Getting the virus under control—with testing, tracing, and eventually a vaccine—remains necessary to getting everyone back to work and promoting everyone’s wellbeing. Prematurely reopening nonessential economic activity, on the other hand, could prove counterproductive, by spreading the virus and increasing perceived health risks associated with economic activity, or prolonging the period of depressed disposable incomes. Related recommended reading on the risks of prematurely reopening, via Vox:

Federal leadership on curtailing the public health risks and adequately cushioning the loss in disposable income remains conspicuously lacking. State governors could really use some more help from the White House and Congress, as could the rest of us.


Update: From Anthony Fauci’s Senate testimony: “Top federal health officials are being pressed during a highly anticipated Senate hearing Tuesday on whether the country is ready to reopen, with Anthony S. Fauci, the nation’s top infectious-disease expert, warning that “consequences could be really serious” if states move too quickly.”

Breaking All Kinds of Bad Records: The April Jobs Report

The Bureau of Labor Statistics (BLS) released the April jobs report this morning, and boy was it ugly. The newspaper headline version was that the U.S. unemployment rate shot up to 14.7%, the highest rate since the Great Depression (June 1940, to be precise), and that payroll employment fell by 20.5 million jobs:

But we knew the headline unemployment rate would understate the economic fallout of the coronavirus, as I explained in yesterday’s post on initial unemployment insurance (UI) claims. As economist Heidi Shierholz of the Economic Policy Institute points out, about one-third of coronavirus job losses are showing up as workers leaving the labor force, as opposed to activity searching for work and thus being classified as unemployed. And many affected workers appear to be misclassified as “employed, not at work” instead of “temporarily unemployed.” With these adjustments, the U.S. unemployment rate would register either 19% or 23.6% for April:

Looking at relative changes in employment circumvents the measurement issue of workers being treated as leaving the labor force (though misclassification of workers as “employed, not at work” instead of “temporarily unemployed” remains an issue, again understating the severity of the labor market’s abrupt collapse).

U.S. employment has fallen by 14% between February and April. For a sense of scale, the cumulative decline in U.S. employment during the Great Recession was “only” 6.3%, and that was far and away the worst on record since WWII. Employment has fallen off a cliff at an unprecedented rate, as nicely depicted by economist Bill McBride:

Relatedly, the employment-to-population (EPOP) ratio, which measures the share of the adult population that is employed, fell to 51.3%, a record-low since the start of the data series in 1948. The EPOP ratio has plunged 10 percentage points in the past two months:

Longer-run comparisons of employment shares are somewhat muddied by changing demographic trends, such as the baby boomers retiring: A higher share of the adult population would be expected to be out of the labor force today than a decade ago, right before the first baby boomers began retiring in 2011. Stripping out such demographic factors by honing in on the employment-to-population ratio for “prime age” (25-54 year old) workers, we again see employment plunging, albeit to the lowest share since 1975:

Any way you measure it, the relative drop in employment over the past two months is twice the cumulative loss in employment throughout the Great Recession, in a fraction of the amount of time.

Moreover, the 6.3 million initial UI claims filed in the past two weeks—data collected after the survey period for the April jobs report—guarantee that the May jobs report will show an even worse drop in employment and employment shares. Bad news all around.

I can’t see the “recovery” phase looking like a “V” in the labor market. There’s no way the share of employed adults rebounds by 10 percentage points in a comparable two-month window. It’s likely going to be a long slog back for much of the labor market, just as it was following the Great Recession.

Related recommended reading:

To ‘V’ or Not to ‘V’? A Question About Recovery

Are we likely to see a ‘V-shaped’ recovery from the coronavirus-induced recession? And what’s a ‘V-shaped’ recovery anyway?

Economists and economic reporters have coalesced around a veritable alphabet soup for characterizing types of recessions and recoveries, picking letters that somewhat resemble the path of aggregate economic activity, or real gross domestic product (GDP).

The ‘V-shaped’ recovery refers to a steep downward contraction followed immediately by a rapid recovery: Business cycle peak to trough and right back to peak. Recent data releases on initial unemployment insurance claims, the Weekly Economic IndexGDP, and personal consumption all but guarantee the steep downward contraction part. So a V-shaped full recovery is the best-case scenario at present. But both the depth of contraction and our subsequent trajectory for recovery remain very much TBD.

Recent U.S. macro forecasts from Goldman Sachs, JP Morgan Chase, and the Congressional Budget Office (CBO) all show a steep contraction in the first half of the year, on the order of 12-15% cumulatively, followed by rapid growth rates in the second half of the year. These forecasts partially resemble a ‘V’, but are missing the return back to peak: Consensus forecasts show the economy contracting 5-7% on net for the year, a substantially larger decline than cumulatively experienced during the Great Recession, as depicted in the figure below. Call it a ‘V-shaped’ partial recovery:

Fig_GDP_GR copy

Rapid growth rates in the second half of the year would certainly be welcomed news, but even if such forecasts prove accurate, it would be premature to declare “mission accomplished.” Even with such rapid growth rates starting mid-year, CBO is forecasting unemployment rates averaging in the low double-digits throughout 2020 and 2021.

Big caveat: Current macro forecasts involve far more ad hoc guesswork than usual, and are effectively assuming that we get a handle on the coronavirus and economic activity can sustainably resume in the second half of the year.

What could go awry? The biggest downside risk is that a relatively quick end to the public health crisis does not materialize. Perhaps because states prematurely end stay-at-home orders, only to be followed by new waves of cases and renewed regional lockdowns, or because the virus mutates, or there are setbacks in developing a vaccine…

Enter, from bad-to-worse, letters ‘U’, ‘W’, and ‘L’.

The ‘U-shaped’ recession is similar to the ‘V’, but with more of a prolonged struggle to jumpstart the rebound phase. Business cycle peak to rather prolonged trough and then eventually a sustained recovery. The long U.S. recession of 1973-75 is one such example. At present a more prolonged public health crisis and long-lasting social distancing norms could easily delay the recovery phase, morphing a ‘V’ into a ‘U’.

Then there’s the ‘W-shaped’ “double-dip” recession, where an economy contracts, starts to rebound, and then contracts again. The U.S. experienced a severe double-dip recession during 1937-38, upending our recovery from the Great Depression. The second dip—widely blamed on policy blunders of premature monetary and fiscal tightening—caused the unemployment rate to jump from 11% in July 1937 to 20% in June 1938. Here’s a visualization based on industrial production (indexed to 100 in July 1929), via FRED:

IP_1929_39

More recently Italy experienced a severe double-dip recession during the Great Recession, and then a “triple-dip” recession; these recessionary setbacks have totally stymied recovery, and Italian real GDP is roughly 5% smaller today than at the onset of the Great Recession.

Premature withdrawal of fiscal and monetary policy support could easily induce a “W-shaped’ double-dip. (I’m far more concerned about Congress and misplaced concerns about rising public debt than the Fed on this front.) The virus coming back with a vengeance and forcing renewed lockdowns midway through a recovery in the second half of the year, or early next year, could also push us into a double-dip.

The worst-case scenario is the ‘L-shaped’ recession: Economic activity falling off of a cliff, and then flat lining. The most recent example of an L-shaped non-recovery is Greece’s ongoing depression following the 2007-09 crisis and their subsequent sovereign debt crisis. Greece is a tragic case study in what can happen when a country loses both independent monetary policy and fiscal policy, and the pain of austerity programs without monetary accommodation or the ability to devalue. The Greek economy is roughly 25% smaller today, adjusted for inflation, than it was in 2007. The ‘L’, via FRED:

Greek L

I’m growing more pessimistic about even a ‘V-shaped’ partial recovery by the week. More to follow on the major downside risks against a rapid recovery…

More Than 30 Million Workers (1 in 5) Have Filed for Unemployment

Another 2.8 million initial unemployment insurance (UI) claims were filed the week ending May 2, bringing the total number of claims filed to 30.7 million in the past seven weeks (ignoring seasonal adjustments). Initial UI claims have now been falling for four straight weeks, again an encouraging trend, and today’s report showed the fewest number of initial claims since they shot up over an order of magnitude in mid-March.

Improvements aside, we’re still seeing a continued flow of workers from employment to unemployment in staggering and, until mid-March, truly unprecedented numbers. The 2.8 million claims filed this last week was 14 times higher than 204,000 claims filed the comparable week of last year. The full Bureau of Labor Statistics (BLS) report can be found here.

Taking the 30.7 million initial UI claims as a very conservative floor for job losses, employment has likely fallen 20% since February, when 152.5 million people were employed. Roughly one in five workers who were employed in February have subsequently lost their job and filed for unemployment (state-level UI, not necessarily the broader Pandemic Unemployment Assistance program). Again, this understates the severity of the labor market fallout from the coronavirus, because other workers have lost hours or lost jobs without qualifying for state-level UI.

The BLS will release the jobs report for April tomorrow morning. Many news reports will focus on the headline unemployment rate, which will surely spike to the highest rate since the Depression. (MarketWatch is reporting a median forecast of unemployment hitting 15.2% and nonfarm payroll employment dropping by 22.1 million.) But the better metric is going to be the relative drop in employment. It’s a safe bet that the employment-to-population ratio—the share of the adult population currently employed—is going to plunge to the lowest rate on record. It dropped by 1.1 percentage pints to 60% in March, based on survey data predating these 30.7 million unemployment claims:

Economist Heidi Shierholz of the Economic Policy Institute points out that 24.4 million UI claims were filed by the survey window for the April jobs report, which, everything else being equal, would translate to an unemployment rate of 18.3% for the month. But many workers who have lost their jobs will not meet the definitional requirement for being counted as unemployed of actively seeking work in the past four weeks, and will instead be reflected as dropping out of the labor force. So the headline unemployment rate is likely to be rather misleading and understate the severity of job loss, hence the value in looking at the percentage change in employment or the share of adults who are employed (as was the case during our sluggish recovery from the Great Recession). 

For more in-depth coverage of the UI report, here’s my recommended reading:

The 6.3 million initial UI claims filed since the survey window for the April jobs report indicate that the May employment report is also going to look far worse than the ugly numbers for April that are released tomorrow morning.

Despite significantly scaling up our fiscal response in late March and early April, Congress does not appear to grasp the scale of federal lifelines required to ameliorate this economic fallout from the virus. We’re still at an impasse over further fiscal relief for state and local governments, and the Pandemic Unemployment Assistance Program will surely need to be extended past its current cutoff at the end of July. Hurry up…

Economist sign-on statement to support a sustained public health response to the Coronavirus crisis

I’m appalled by our failure to rollout widespread testing, and by the number of states now rushing to prematurely reopen nonessential activity before they have significant testing or contract tracing capacity, let alone a deceleration in new case rates. I fear that Georgia is about to shoot itself in the foot and get a lot of people killed in the process.

Prematurely restarting social and economic activity, seeing new waves of coronavirus cases, and then needing go back to square one (i.e., shutting down again, for longer) is also a huge downside risk against the best-case-scenario “V-shaped” recovery.

Relatedly, I recently signed on to a letter of economists calling on policymakers to prioritize our public health response, and not prematurely reopen economic activity. Here’s a copy of the full letter, which is being circulated by Equitable Growth:

Economist-sign-on-statement-to-support-a-thorough-public-health-response-to-the-Coronavirus-crisis-4-15

 

The current list of signatories can be found here. If you are an economist and would like to add your name the sign-on form is available here.

Staggering Job Losses Continue: More than One in Six Workers File for UI

Another 3.5 million initial unemployment insurance (UI) claims were filed the week ending April 25, bringing the total number of claims filed to 27.9 million in the past six weeks (ignoring seasonal adjustments to the data). The report showed a third straight week of declining claims filed and the fewest number of claims since late March—an encouraging trend—but the volume of claims was nonetheless staggering, up more than 17 times the number filed (205,000) this week of last year. The full Bureau of Labor Statistics report can be found here.

The 3.5 million workers who initially filed for unemployment last week represent about 2.3% of total U.S. employment as of February, bringing the cumulative decline in employment to at least 18.1% in two months. That’s nearly three times the cumulative percentage decline in U.S. employment experienced during the Great Recession. More than one of six workers employed in February has subsequently lose their job and filed for unemployment, while others have lost hours or have not qualified for UI.

The BLS jobs report for April will be released next Friday, May 8. Economist Heidi Shierholz of the Economic Policy Institute points out that the job loss from initial claims imply an unemployment rate of just over 20%, everything else being equal:

For more in-depth coverage of the UI report, here’s my recommended reading:

In other news related to a rapidly deteriorating labor market…

The Bureau of Economic Analysis also released the Personal Income and Outlays report for March this morning, which showed a larger-than-expected 2% decline in disposable income (i.e., after-tax income) for the month. Real personal consumption expenditure fell 7.3% for the month, which was in line with the drop in consumption in yesterday’s advanced read on first quarter GDP. The real kicker: The personal saving rate—defined as personal saving as a percentage of disposable personal income—jumped to 13.1%, the highest level in nearly four decades. Much of the increase was likely driven by precautionary savings, as households decreased spending out of fear and uncertainty about loss of income or jobs. The BEA report can be found here. Via FRED:

PSR_March_2020

First Look at the First Quarter Contraction

This morning the Bureau of Economic Analysis (BEA) released its advanced estimate of U.S. gross domestic product (GDP) for the first quarter of 2020 (also known as January through March, or 2020Q1). Real GDP—our broadest aggregate measure of economic activity, adjusted for inflation—contracted at a seasonally adjusted annualized rate of 4.8%, the sharpest rate of contraction since an 8.4% drop in the fourth quarter of 2008, the worst of the Great Recession. Via FRED:

2020Q1_GDP_Advanced

As for the annualized rate? U.S. real GDP shrank 1.2% between 2019Q4 and 2020Q1, and annualizing this quarter-over-quarter contraction to 4.8% makes for a better comparison with annual or year-over-year growth rates. Put differently, U.S. economic output would be 4.8% smaller by year’s end if this quarter’s pace of contraction continued for a full year (which it surely won’t—2020Q2 is going to be way worse, discussed below).

The headline numbers came in slightly worse than expected: MarketWatch was reporting a median economic forecast of a smaller 3.9% annualized contraction.

The first quarter contraction was heavily driven by an unprecedented collapse in the service economy. Major areas of weakness in today’s report: Personal consumption of long-lasting, big-ticket durable goods plunged 16.1%, private investment in equipment fell 15.2%, and personal consumption of services fell 10.2% (all expressed as seasonally adjusted annual rates). Durable goods and private investment are interest rate sensitive, relatively volatile, and typically crash during recessions. The collapse in services is far more unusual, and reflective of the pandemic and interpersonal nature of many services. The worst decline in consumption of services during the Great Recession was -1.4% in 2009Q1—nearly an order of magnitude smaller! And the drop in personal consumption of services contributed -5.0 percentage points to annualized real GDP growth of -4.8% for 2020Q1—by far the biggest drag from services on record.

For a more detailed take, economist Dean Baker of the Center for Economic and Policy Research (CEPR), a DC-based think tank, has a great rundown on the advanced GDP report. Recommended reading:

This morning’s release is called “advanced” because our GDP data see a lot of revisions, as the data series used to construct GDP are themselves revised. A revised “preliminary” second estimate of 2020Q1 will be released May 28 and a third “final” estimate will be released on June 25 (BEA’s release schedule is available here). The term “final” estimate is also somewhat misleading; the BEA later revises the last five years’ worth of data each summer (a recent explainer can be found here).

Throughout the Great Recession our initial reads on GDP proved overly rosy, and subsequent downward revisions showed us sinking into a larger hole. Take that annualized contraction of 8.4% in 2008Q4 as an example. The advanced estimate for 2008Q4 showed a quarterly contraction of 3.8% (see this archived BEA release from January 2009), which was revised down to 6.2% in the preliminary report (archived release from February 2009) and again to 6.3% in the final report (archived release from March 2009). The BEA’s annual revisions released in July 2011 abruptly showed a much larger contraction of 8.9% for the quarter…

It’s a safe bet that subsequent revisions will show the U.S. economy falling into a deeper hole in the first quarter, before falling off a cliff in the second quarter. Goldman Sachs, JP Morgan, and the Congressional Budget Office are all forecasting annualized declines on the order of 35-40% for 2020Q2, meaning that economic activity will shrink roughly another 9-10% relative to the first quarter. The advanced read on U.S. real GDP in the second quarter of the year won’t be released until July 30.

The latest update of the New York Fed’s Weekly Economic Index, scaled to annualized real GDP growth, suggests an economic contraction of 11.6% if current levels of activity persisted—a substantially larger contraction than shown in this morning’s GDP report:

WEI_4_28_20

Failure to Rollout Widespread Testing

The severe U.S. economic fallout from the pandemic is being cushioned with aggressive monetary and fiscal policy responses, but it’s also being exacerbated by policy choices, both past and present. In many respects the U.S. was always poised for a particularly rough experience with a global pandemic, relative to our advanced economy peers. Past policy failures exacerbating our current situation include the underprovision of health care and high un-insurance rates, widespread closures of hospitals in recent decades (particularly rural hospitals), a lack of paid sick leave, and a threadbare social safety net (as recently underscored by Florida’s inept unemployment insurance system). To name just a few.

Atop the more recent policy failures: Both the loss of life and depth and duration of this recession will be exacerbated by our failure to quickly roll out widespread testing and contract tracing. Public health experts agree that these are prerequisites to safely and sustainably resuming activity. Many states are now gambling by starting to reopen their economies even though their testing and  tracing capacity is negligible. And the U.S. is still nowhere close to widespread testing. Congress just appropriated $25 billion for more aggressive testing and tracing last Thursday—roughly three months after our first confirmed case and seven weeks after the first emergency response was enacted.

This testing debacle is a seismic policy failure: It didn’t have to be this way. Economists at the St. Louis Fed underscore as much in a new article. Recommended reading:

It’s widely cited that the United States and South Korea saw their first confirmed case of COVID-19 within a day of each other, in late January. The subsequent divergent public health responses of the two countries is staggering and, from an American perspective, scandalous.

Key takeaways: “Within roughly two weeks of the first confirmed case (February 7), South Korea was producing 100,000 test kits per day… By the end of February, South Koreans were urged to stay home and the South Korean government had created drive-through testing centers designed to screen as many people as possible, as quickly as possible.”

Simply put, the U.S. squandered this time

“[B]y the U.S. national emergency date (March 13), its daily testing rate was only 19 tests per 1 million people, while South Korea’s daily testing rate had reached 267 tests per 1 million people, higher by a factor of 14 (Figure 2).” Here’s Figure 2 from their article:

TestingRates_US_SK_FRBSL

A similarly divergent story is told contrasting the U.S. with Germany, as previously noted.

Sustainable economic recovery from this pandemic recession will first require containing the virus, and we wasted months on that front, exacerbating loss of life and economic hardship alike. It didn’t have to be that way.

Rebutting McConnell RE State Fiscal Relief

Senate Majority Leader Mitch McConnell (R-KY) is already invoking misplaced concerns about public debt to spike further lifelines to state and local governments, as I noted yesterday. Via Politico: “My view is: We just added another $500 billion to the national debt. Let’s see how things are working… We need to weigh our obligations vs. [states and cities], since they have taxing authorities as well, and how to divide up the responsibility.”

McConnell also invoked the “bail out” pejorative to deride further state fiscal relief, which is patently ridiculous. We don’t refer to checks and employment benefits as “bailing out” households, or PPP loans as “bailing out” small businesses, or emergency funding for hospitals as “bail outs,” and for good reason. All are lifelines to sectors of the economy that have seen incomes collapse (or demands for emergency care surge) because of this pandemic—just as state and local public finances are taking a beating through no fault of their own. No state could be expected to have a rainy day fund sufficient for the revenue shortfalls they will be facing, or be able to close said revenue shortfalls with tax rate hikes while economic activity remains deliberately paused.

But don’t take my word for it. Michael Leachman, Senior Director of State Fiscal Research with the Center on Budget and Policy Priorities (CBPP), hits back. Recommended reading:

Key Takeaways: “In total, we project $500 billion in state shortfalls over fiscal years 2020-2022. This figure doesn’t include the shortfalls many local governments will face… Sales and income taxes account for 70 percent of state tax revenue, but sales tax revenues have fallen through the floor because the places where people shop are closed. Income tax revenues also are collapsing due to mass layoffs and the stock market plunge. And state costs are up as states respond to the crisis and millions of newly jobless people turn to government assistance.”

Punchline: “strong fiscal relief for states is one of the most important and badly needed steps federal policymakers can take now. Senator McConnell’s misunderstandings and misrepresentations on this matter do nothing to alter that reality.” Seconded.

I would love to see Congress quickly enact the $500 billion in additional fiscal relief for state and local governments recently proposed by Senators Bill Cassidy (R-LA) and Bob Menendez (D-NJ), and requested by the chairs of the National Governors Associations.

Midd Faculty at Home Webinar on Friday

Tomorrow I’ll be hosting a webinar for Middlebury College’s newly launched Faculty at Home series. Professor of Political Science Bert Johnson kicked off the series yesterday with a great talk about the political implications of the coronavirus for the United States. I particularly enjoyed his explanation of U.S. GDP forecasts for 2020Q2 as being “out-of-sample,” in the parlance of social scientists, for forecasting electoral results in November. (JP Morgan is forecasting a 40% contraction for 2020Q2, measured at an annualized rate.)

My short talk will focus on the U.S. economic fallout from the coronavirus, recent federal policy responses, prospects for recovery, and the risks ahead, all followed by some Q&A.

  • When: 12:15-1pm EDT on Friday, April 24
  • What: The COVID-19 Recession: Economic Fallout and Prospects for Recovery
  • How: You can register here
  • Over: Zoom, or a Youtube live stream if the webinar hits capacity on Zoom

I’ll post my slides and a link to the webinar video after the talk…

More Than 1 in 7 Workers Have Filed for Unemployment in 5 Weeks

Another 4.3 million initial unemployment insurance (UI) claims were filed the week ending April 18—more than 20 times the number filed (212,000) this week of last year. The full Bureau of Labor Statistics report can be found here. Ignoring seasonal adjustments to the data, 24.4 million claims have been filed over the last five weeks, after the volume of weekly claims shot up more than an order of magnitude in mid-March:

More than 1 in 7 workers who were employed in February have since lost their jobs and filed for unemployment insurance (it’s closer to 1 in 6). This again understates the degree of labor market fallout, because other workers have seen their hours cut or lost jobs without qualifying for UI. The Pandemic Unemployment Assistance program enacted by the CAREES Act, which expanded eligibility (e.g., to contract workers) is not yet operational, so eligibility for initial claims is still set by state-level requirements.

Taking these 24.4 million initial claims as a conservative proxy for job losses since the March jobs report, U.S. employment has fallen at least 16.4% since February. For a sense of scale, employment cumulatively fell 6.3% during the 2007-09 recession (in 26 months) and 2% during the 2001 recession (in 29 months). The 2007-09 recession (a.k.a. the “Great Recession”) was by far the worst since the Great Depression, and now we’ve seen more than 2.5 times the degree of job losses experienced in 2007-09 in one-twelfth the time:

Percentage Change in Employment During Recessions

There’s also a huge degree of regional heterogeneity in recent job losses. As economist Ernie Tedeschi points out, roughly 1 in 3 workers have lost jobs and filed for UI in Michigan, Kentucky, and Rhode Island:

Some of the initial claims in recent weeks reflect earlier job losses that are just now being processed because of capacity constraints (or terribly run UI systems, see Florida). Economist Heidi Shierholz estimates that about 7 million workers who have filed for claims (29% of the recent filers) have yet to receive them:

For more in depth coverage of the initial UI claims and labor market fallout, you should both follow Heidi Shierholz on twitter and read her latest take:

Visual representation of the bleak, unprecedented nature of the last five weeks, via EPI:

EPI_UI_April_23_2020

Congress Nears Fourth Fiscal Response: PPP Deficiencies, No State Fiscal Relief

Update: The House passed the $484 billion Senate bill (the Paycheck Protection Program and Health Care Enhancement Act) on a 388-5 vote margin on Thursday evening (4/23/20). President Trump is expected to sign the bill into law shortly…


Yesterday the U.S. Senate approved a $484 billion (2.2% of GDP) bill to expand lifelines to small (and not-so-small) businesses and hospitals, and to finally ramp up testing and contact tracing efforts. Regrettably, the bill does not expand the existing federal lifelines to state and local governments, as Congressional Democrats had originally proposed. The U.S. House of Representatives is expected to vote on the bill, which would be the fourth emergency fiscal response to the coronavirus, on Thursday. Related reading:

Crux of the bill: The main provision of the bill appropriates an additional $310 billion for the Paycheck Protection Program (PPP), which provides business loans that will be forgiven if used to maintain payrolls. The CARES Act had provided $349 billion for PPP loans, but that funding was depleted in under two weeks, leaving applications in limbo.

The good (PPP) news: The program has seen high take-up, despite a glitchy start and initial skepticism about participation by several major banks. The bad (PPP) news: Funds ran out well before many loan applications were processed, and the first-come, first-serve nature of the program has disadvantaged smaller mom and pop businesses (e.g., Ben’s Chili Bowl, an iconic fixture in my native Washington, DC, hasn’t seen their PPP loan application processed, much to their frustration).

The PPP loans were notionally intended for small business, defined as establishments employing 500 people or fewer. Defined as such, small businesses accounted for 47% of private-sector employment in 2017, with the subset of businesses employing under 20 people accounted for 33% of private-sector employment (see the U.S. Census Bureau’s annual Statistics of U.S. Businesses Survey data). Keeping these smaller business afloat and these jobs intact would help prevent a slow, painful recovery. But in a nod to restaurant chains and hotels, the CARES Act loosened the eligibility requirement to businesses or franchises employing under 500 people in one location. Consequently, over 100 publicly listed firms have received PPP loans, contributing to the rapid depletion of the initial loan funding—and frustrating members of Congress and smaller businesses alike. Public ire and backlash even induced burger chain Shake Shack—which employees nearly 8,000 workers—to return $10 million in PPP loans.

This wouldn’t have been an issue if Congress had created the PPP program as an unlimited authorization. It’s likely that an additional $310 billion will again be depleted, and Congress will have to revisit the issue, leaving many applications in limbo in the interim. If the lifeline is a sensible way to maintain employment and help small businesses survive, make it a big enough lifeline to satiate all demand!

Other major provisions: The Senate bill would also provide an additional $75 billion in emergency funding for hospitals and $25 billion to finally roll out a widespread coronavirus testing and contact tracing program. (The latter seems like a major omission from the first three bills, no?) Lastly, the bill would provide an additional $60 billion for the Small Business Administration’s Economic Injury Disaster Loan program for low-interest rate bridge loans.

What’s missing from the bill: There is zero state and fiscal relief in the Senate bill, an issue that will be separately revisited (with less leverage for its proponents) unless the House amends the Senate bill. State and local budget cuts pose a major risk both to the public health response and to a rapid economy recovery. Senators Bill Cassidy (R-LA) and Bob Menendez (D-NJ) recently introduced a bipartisan bill to provide $500 billion in additional state fiscal relief, as recently requested by a bipartisan group of governors led by Governors Larry Hogan (R-MD) and Andrew Cuomo (D-NY). But Senate Majority Leader Mitch McConnell (R-KY) is already trying to spike the effort, citing misplaced (or bad faith?) concerns about rising federal debt:

Related reading:

Brace yourself for the coming asinine news and punditry cycle of handwringing about rising federal debt as multi-trillion dollar deficits become the new (and necessary) norm… Misplaced concerns about public debt (and bad faith fear mongering) greatly impeded our recovery from the Great Recession. Let’s not repeat that mistake again.

Framing the Fed’s Policy Responses

Bloomberg has a nice rundown of the Fed’s aggressive policy responses, framed as falling into one of three categories:

  1. Lender of Last Resort
  2. Fiscal Partner
  3. Investor of Last Resort

Recommended reading:

The line between “investor of last resort” and “fiscal partner” is often blurry. For instance the new Municipal Liquidity Facility for buying up to $500 billion in municipal debt involves the Fed acting as an investor of last resort (directly buying bonds in the primary market, as opposed to merely lending against municipal bonds) to provide fiscal relief, with some financial backing provided by Congress via the CARES Act. And the novel lending objectives seem more important than Congress’s blessing and partnership.

I would underscore that the Fed quickly reactivated its 2007-09 playbook for lowering both short- and long-term interest rates as well as relaunching its alphabet soup of credit facilities—rather than having to invent the wheel—and then veered aggressively into the unchartered territory of buying loans and bonds directly (not merely conducting open market operations and lending against a wide array of collateral).

To the former point, “They have in a matter of weeks rolled out every program and more that former Federal Reserve Chair Ben Bernanke worked years to develop,” as economist and venerable Fed watcher Tim Duy aptly put it.

And if you’re interested in following the Fed’s moves more closely, Tim Duy’s Fed Watch blog is a must-read.