Sorry, but no, there will not be a V-shaped quick economic recovery

Earlier this week, some easily spooked Democrats bought into a prediction about the economy at Politico, your first mistake, and “very serious people” on the cable networks were called upon to “discuss.”

The report, The general election scenario that Democrats are dreading, cites Jason Furman, a former top economist in the Obama administration, predicting “We are about to see the best economic data we’ve seen in the history of this country.” Furman’s counterintuitive pitch has caused some Democrats, especially Obama alumni, around Washington to panic. OMG!

Furman’s prediction of a V-shaped quick rebound from the coronavirus pandemic, “like the economy during and after a natural disaster: a quick and steep decline in economic activity followed by a quick and steep rebound,” is based upon this standard recovery model. (It should be obvious to anyone that a global shutdown of supply and demand in the global economy is anything but standard).

The bounce back “can be very very fast, because people go back to their original job, they get called back from furlough, you put the lights back on in your business. Given how many people were furloughed and how many businesses were closed you can get a big jump out of that. It will look like a V.”

Sorry Jason. Ain’t gonna happen, and you really ought to know better. I’m not the only one who read this Politico report and immediately dismissed it.

The New Republic reports, The Implausibility of an “Explosive” Economic Rebound by November (excerpt):

Politico’s Ryan Lizza and Daniel Lippman wrote, “Furman laid out a detailed case for why the months preceding the November election could offer Trump the chance to brag—truthfully—about the most explosive monthly employment numbers and gross domestic product growth ever.”

Those explosive figures, the thinking goes, will be produced by an end to the coronavirus lockdowns later this year as the pandemic subsides.

So this rosy prediction is entirely dependent upon no “second wave” of the pandemic this fall? And what evidence do you have to support this bold assertion, pray tell? (None.)

These predictions clash with some of the data we’re being given now. Twenty states reported an increase in new cases last week, an uptick from the 13 states that reported increases in the week prior. That spike happened to coincide with the easing of lockdown restrictions around the country, and the list of states with the highest surges includes Missouri, where viral videos and images were taken of vacationers swarming pools and venues at Lake of the Ozarks over Memorial Day weekend. This is the kind of behavior that might make a large second wave of infections more likely, and epidemiologists have long said that restrictions should be reinstated if the virus begins spreading rapidly again. If that happens before the election, the growth and employment numbers won’t be anything for Trump to crow about.

But consider the voters who will find themselves on the wrong side of an economic recovery, even if we really do see one by November. More than 100,000 small businesses have already permanently closed since March, and millions more are at risk. Will the owners of shuttered shops and restaurants be jumping for joy at the latest quarterly GDP figures? What about those running businesses that might reopen to fewer customers if wary Americans avoid going out and shopping unnecessarily well into the remainder of the year? How might they assess the state of consumer confidence on Election Day? And what about the workers who will remain unemployed—those who won’t snap back to work because the businesses that employed them collapsed and because many of the ones left will be too hard up to hire again anytime soon? What about the currently employed workers who might join them or face pay cuts as broke firms and state and local governments take hard looks at their balance sheets in the months ahead? Will they be passing charts from the Bureau of Labor Statistics around the dinner table in the fall, reassuring their families and themselves that the economy has been set right again?

Moreover, even many of those currently maintaining some degree of economic stability understand that we’re now experiencing one of the greatest failures of presidential leadership in our history. As of this morning, more than 100,000 Americans have been killed by the coronavirus—a number elevated by Donald Trump’s inaction, incompetence, and commitment to spreading misinformation. That number, in all likelihood, will continue rising for many months to come. Many Americans who have lost people close to them, and others simply horrified by this ordeal, will cast their votes in November with that grief and that horror foremost in mind.

It has been widely noted that voters in 1918 did not seem eager to punish their leaders for that year’s flu outbreak—scholars have had some difficulty discerning whether the pandemic had any real political impact at all. “[T]he connection between pain and electoral punishment requires voters to imagine—however plausibly or implausibly—that incumbent leaders could have prevented or ameliorated their pain,” the political scientists Christopher Achen and Larry Bartels wrote in a 2004 paper. “In the case of the flu pandemic, that crucial attribution of political responsibility was lacking.”

It is not lacking today. A 53 percent majority of Americans disapproves of President Trump’s handling of the coronavirus, and that number has been increasing steadily since early last month.

* * *

All that said, the broad composition of the American electorate will matter less in November than the preferences of the constituencies that will be key to an Electoral College victory. And as we wait to see whether Furman’s dubious speculations play out, we should avail ourselves of some of the numbers we already have in hand. Right now, Joe Biden is seemingly ahead in almost every swing state. He’s also made eye-popping gains among some of the most reliable and reliably conservative voters—the elderly. A Fox News poll last week found him ahead with voters over 65 by 17 points. Trump won the category by seven points in 2016. The picture may well change in the months ahead, but Biden will probably be in good shape on Election Day. The same probably cannot be said for the economy.

Steven Rattner who served as counselor to the Treasury secretary in the Obama administration, also disagrees with this rosy V-shaped prediction. In an op-ed at the New York Times he writes, Trump’s Economic Advisers Are Wrong:

Like dutiful soldiers, President Trump’s top economic advisers have been ardently echoing their boss’s optimism about the likelihood of a quick economic snapback, while downplaying the need for another rescue package.

Regrettably, that’s dead wrong on both counts, as even Mr. Trump’s pick to head the Federal Reserve, Jerome Powell, has countered repeatedly.

Forget a V-shaped recovery, or even a U. Think instead about a backward check mark: an economy that begins to spring upward as Americans return to work but loses momentum well before reaching past levels.

That’s why we urgently require more help from Washington, and particularly, an effort to rebuild America, not just rescue America.

The prospect of large numbers of Americans returning to their workplaces seems to recede like a mirage; a full reopening remains invisibly far in the distance. Equally important, many pre-Covid-19 jobs won’t be around. They are gone, indefinitely if not for good.

Just a few examples:

Factories in states from Oregon to North Carolina are closing permanently. Many shuttered restaurants will never reopen. A growing number of bankruptcies, in industries ranging from retailing to entertainment, will mean more jobs lost forever. And chief executives tell me regularly that they are cutting capital expenditures, another drag on economic recovery and employment.

Rattner then offers his prescription for an economic recovery, if you are interested.

There is also this critique from Nobel Prize winning economist Paul Krugman, who is not referring to Jason Furman’s prediction per se in this interview:

Noah Smith: What sort of theories and ideas should we absolutely shun?

Paul Krugman: In both the Great Recession and now there are two classes of ideas we can immediately classify as worthless.

First, anyone who is peddling known zombie ideas like the magical efficacy of tax cuts should be dismissed out of hand.

Second, anyone who is just rolling out their usual ideas without making allowance for the special nature of the situation shouldn’t be taken seriously. Back in 2008-10 you had people talking about monetary and fiscal policy as if there weren’t an issue with the zero lower bound. Now you have people — as always, a lot on the right but some on the left — talking as if this were a garden-variety recession, not a shutdown enforced by social distancing.

In other words, it’s only worth listening to people making a real effort to grapple with the novelty of this crisis.

Given that, I actually don’t think it’s too hard to think through a lot of what’s happening. Most of the economy still works the same way as usual, which is to say more or less Keynesian in the short run. We can understand a lot of the unusual stuff just by applying usual behavior rules to an unusual situation: people may be unemployed with businesses losing sales to exotic causes, but their spending decisions will probably be like those of job losers in normal times. A lot of what’s going on in financial markets reflects the same kinds of balance-sheet spillovers we saw in 2008-9.

The hard part is quantifying cross-cutting stuff. How important are supply-chain disruptions relative to excess capacity in driving inflation? What are we missing about things driving spending? (Investment-free consumer-only models can be a very useful strategic simplification — hey, I did that to think about the liquidity trap — but they may miss a key factor right now).

But the truth is that among economists who are making good-faith efforts to respond to unusual times, as opposed to saying what they always say, I’m actually seeing a lot of common ground. I don’t see battling orthodoxies this time around.

Krugman does tend to agree with Jason Furman, but with some big caveats:

My take is that the Covid slump is more like 1979-82 than 2007-09: it wasn’t caused by imbalances that will take years to correct. So that would suggest fast recovery once the virus is contained. But some big caveats.

One is that we don’t know how long the pandemic will last. Right now, we’re probably opening too soon, which will actually extend the period of economic weakness.

Another is that even if we didn’t have big imbalances before, the slump may be creating them now. Think of business closures, which will require time to reverse.

All that said, right now I don’t see the case for a multiyear depression. People expecting this slump to look like the last one seem to me to be fighting the last war.

One economist who does see a long depression is Nouriel Roubini, who correctly predicted the Great Recession in 2008. Why Our Economy May Be Headed for a Decade of Depression:

A decade later, “Dr. Doom” is a bear once again. While many investors bet on a “V-shaped recovery,” Roubini is staking his reputation on an L-shaped depression. The economist (and host of a biweekly economic news broadcast) does expect things to get better before they get worse: He foresees a slow, lackluster (i.e., “U-shaped”) economic rebound in the pandemic’s immediate aftermath. But he insists that this recovery will quickly collapse beneath the weight of the global economy’s accumulated debts. Specifically, Roubini argues that the massive private debts accrued during both the 2008 crash and COVID-19 crisis will durably depress consumption and weaken the short-lived recovery. Meanwhile, the aging of populations across the West will further undermine growth while increasing the fiscal burdens of states already saddled with hazardous debt loads. Although deficit spending is necessary in the present crisis, and will appear benign at the onset of recovery, it is laying the kindling for an inflationary conflagration by mid-decade. As the deepening geopolitical rift between the United States and China triggers a wave of deglobalization, negative supply shocks akin those of the 1970s are going to raise the cost of real resources, even as hyperexploited workers suffer perpetual wage and benefit declines. Prices will rise, but growth will peter out, since ordinary people will be forced to pare back their consumption more and more. Stagflation will beget depression. And through it all, humanity will be beset by unnatural disasters, from extreme weather events wrought by man-made climate change to pandemics induced by our disruption of natural ecosystems.

Roubini allows that, after a decade of misery, we may get around to developing a “more inclusive, cooperative, and stable international order.” But, he hastens to add, “any happy ending assumes that we find a way to survive” the hard times to come.

Now you know why his nickname is “Dr. Doom.” But his analysis is deeper and more nuanced than what Politico reported earlier this week.

I highly doubt that we are going to see a robust economic recovery in the third quarter as the coronavirus pandemic will continue to weigh down the global economy, especially if a “second wave” develops early in the fall. There will be some economic recovery over the coming months, but not enough to offset depression-level numbers over the entire year. And if there is no safe, effective COVID-19 vaccine widely available by October when people are voting early, there is no reason to believe that voters are going to change their negative views about Donald Trump.

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