A Coronavirus End Game That Avoids A Depression Laurence Kotlikoff
https://www.forbes.com/sites/kotlikoff/2020/03/21/a-coronavirus-end-game-that-avoids-a-depression/#9543e1f5798f
The federal government is playing tragic catchup with the Coronavirus, which is now quickly turning into economic and health Armageddon. Absent immediate articulation of a clear and effective national health and economic policy, our governors need to step in to guide federal policy with a clear and single voice.
Short of the Trump Administration immediately taking appropriate steps (discussed below) to control the spread of Coronavirus or the discovery of a miraculous cure, we’re heading toward a full-scale depression. Goldman Sachs is forecasting a 24% drop in second quarter GDP. To put this figure in perspective, the maximum GDP-decline in the Great Depression (GD) was 26% and this took three years, not three months. The unemployment rate peaked during the GD at 25%.
In today’s economy, unemployment at such a rate would entail 36 million people out of work. The process has started. Over the past week, claims for unemployment jumped 70,000 — the biggest increase since the Great Recession. Kevin Hassett, former Chairman of the President’s Council of Economic Advisor, believes we could see 1 million people lose their jobs over the next month. Secretary Mnunchin recently raised the specter of a 20% unemployment rate if congress doesn’t pass a fiscal relief package. Since such a package will likely have very little impact on employment, he’s actually simply predicting one in five working Americans will be tossed to the street.
GM, Ford, and other automakers define the problem. They just announced a two-week production suspension. But in two weeks, all the horrific infections and death numbers will be worse. It will be virtually impossible for the automakers to order their employees back to work. The optics would be terrible, not to speak of potential legal liability. Furthermore, no amount of “fiscal stimulus” will stimulate these companies to rehire once the two-week periods has passed and their layoffs begin.
The story for all larger employers is the same. None will want to be first to order their employees to risk their lives. Instead, they will be laying their workers off and waiting for others to make the first move to rehire. Hence, unless the president is willing to take the heat and vigorously urge everyone to go back to work, when it’s safe to do so, it won’t happen.
To get to that point of safety, we need a coordinated federal plan that applies to all states. What we’re now doing — leaving 50 states plus DC to make their own disorganized, differentiated, and collectively self-defeating decisions — is no answer.
Even if rehiring were politically correct, there’s a major economic roadblock involving expectations. Why rehire to produce until you’re sure you’ll have customers? But if no one rehires, there will be no customers, i.e. no one with the salary to purchase what you’re selling. This chicken and egg problem, which economists call a coordination failure, largely explains why the Great Depression lasted so long. It took WWII for businesses to realize they had a customer for sure, namely the federal government.
In short, the economy is like the first car — a decade-old, 1960 Alpha Romeo — that my brother and I owned. It was a dream to drive, but had a crappy starter and a frozen emergency break, neither or which we could afford to fix. If you were parked on a hill, you could push-start it easily. But park at the bottom and it was a nightmare getting it going. We’re now parking our economy at the bottom of the hill.
Absent anyone telling them what to do, each state is going its own way. As a result, only 1 in 5 Americans has been ordered home. Such state-specific policy would have a better shot of working if states could shut their borders. Whether doing so is legal is unclear. But if it’s not, we have another coordination problem. Say Texas begins to get the virus under control, but it spirals out of control in Mississippi. The sick in Mississippi will be free to head to Texas, reinfecting the state when they arrive.
All these concerns suggest that uncoordinated lockdowns will go on for months, if not for one or two years. Is this affordable? It’s definitely not. A year’s loss of income for American workers comes to $13 trillion. Congress and the administration are talking about providing $1 trillion to households to “stimulate” the economy, but it’s really to help people pay some bills. But $1 trillion won’t cut it for even one month. So, let’s say the Treasury borrows $1 trillion every month to help workers cover their lost wages. In a year’s time, this will increase national debt by over 65%, leaving us with a debt-to-GDP ratio of 135%. This is roughly Italy’s current ratio.
Of course, we could just give workers and retirees money for food and medicine. That bill would be a lot smaller. But without the wherewithal to buy other products, the producers of those other products will go broke. As it is, we’re looking at tens of thousands of failing restaurants, retail outlets, not to mention automakers, airlines, cruise ship companies, etc…
To summarize, we’re facing economic and, potentially, health Armageddon unless we develop a true national strategy. While testing is ramping up, we are still far behind relative to other countries.
Our best answer is for the National Governors Association (NGA) to convene immediately, if remotely, under the leadership of NGA chair, Maryland Governor, Republican Larry Hogan, and NGA Vice Chair, NY Governor, Democrat Andrew Como. The governors need to formally authorize their two leaders to devise and announce a national health and economic rescue plan and invite the federal government to work with them to carry it out. In effect, the NGA needs to advise the President and Congress, with one voice, what to do and how to do it.
Given the experiences in Asian countries that are having initial success containing the virus, the solution should, I believe, involve these elements.
1) Hospitals in NY, CA, and other virus hot spots are, this very moment, being overwhelmed. Immediately mobilize all federal supplies of ventilators, high-flow oxygen equipment, personal protective equipment, and military medical personnel. Make this resources available as SWAT teams to the areas of most critical need.
2) Set up large capacity hospital areas for symptomatic individuals. ICU beds appear to be half of what’s needed. Establish facilities, equipment, supplies, and military medical staff in these locations, be they convention centers or hotels. Mobilize all health professionals – nurses, dentists, veterinarians, medical students, …
3) Rapidly expand testing, starting with medical personnel.
4) Immediately quarantine in place all non-essential workers in all states for as long as needed to produce hundreds of millions of tests kits, produce tens of thousands of ventilators, masks, hazmat suits, and other essential Coronavirus-fighting medical equipment, develop capacity to test millions upon millions of Americans, and develop a nationwide electronic medical-record database that can physically track and contact everyone in the country. If we could build entire B-24 bombers inside an hour during WWII, we can do these things.
5) Gradually lift the quarantine and begin mass testing via a combination of temperature checks and virus tests. Ideally, every American would be tested every week. And each would be asked to record their close contacts and whereabouts over the prior week. Checking temperatures, developing the tests, swabbing the public, and running the tests will require an army. We have one. Let’s use it. We also have many large-scale electronic medical record system companies that can join forces to build the single, universal record system needed. If enough tests aren’t available, we need to randomly test each city and town in the country. This will determine which populations should be told (not asked) to go back to work and which should be told to remain in their homes.
6) When the rate of new cases is acceptably low, the public needs to be told by the NGA to go back to work. When an outbreak occurs, the area needs to be quickly locked down and a cadre of health detectives need to track down, isolate, and test anyone who was in close contact with the person infected. This is the method South Korea is successfully using to limit reemergence. We also need to spend the national lockdown period in testing, on a random basis, households in each county of the country and collect other data, which can be used to determine those counties that are safe enough to go back to work and those that are not.
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