What is going to happen to the economy in the short run,
which is to say over the next twelve months?
I am not competent to construct reliable econometric models, but certain
things seem obvious. Tens, perhaps
scores, of millions of workers are already out of work. Many millions more will be laid off as
businesses large and small fold.
Consumer spending will plummet for three reasons: because laid off workers do not have paychecks,
because those threatened with job loss will hang onto what money they have, and
because millions of those whose jobs and salaries are secure will hesitate to
risk infection by going out to shop.
Amazon and Instacart may flourish, but an economy 70% of which is fueled
by consumer spending will go into a deep depression.
Before the crisis started, slightly less than half of all
Americans had health insurance provided by their employers. Tens of millions of those laid off and their
families will thus join those already without health insurance. The pressure will, I suspect, be irresistible
for universal health insurance unconnected to employment.
Regardless of how and when businesses open up again, and in
what sequence, the lack of adequate consumer spending will condemn many of
those businesses to failure unless
some form of guaranteed minimum income puts money in the hands of those who can
be counted on to spend it more or less immediately. Since MMT has become the de facto new orthodoxy, and borrowing costs are currently close to
zero, the federal government will, under Democratic control, essentially spend
whatever it takes to recreate adequate consumer demand. Some small businesses that have failed will
reopen, calling back as many of their employees as they can locate, and little
by little, the economy will start to function again, albeit with public health
precautions that will slow the recovery considerably. There will be a severe hunger problem, starting
this summer, and there will be a rise in preventable deaths caused by treatable
conditions not being promptly addressed in doctors’ offices and hospitals.
The rich will seek out ways to get richer. If a Biden administration follows the path
broken by the Obama administration, they will succeed, to the detriment of the
99%. However, a much more progressive
House and an emboldened progressive caucus in the Senate will begin exploring a
wealth tax that, if implemented, could make some measurable difference in America’s
grotesque inequality.
In the short run we are in for worse times than have existed
since I was an eight year old.
And all of this assumes that a vaccine can in fact be found,
something that is not at all certain.
Hayek's most important economic insight, IMHO, was about how competitive markets (& the price mechanism) aggregate information and knowledge that is widely distributed. A complement to this is how organizations (e.g., business firms) act as repositories of information, skills and knowledge.
ReplyDeleteBack when Ben Bernanke was a young scholar, perhaps his most important article focused on the role of bank failures in prolonging the Great Depression. The channel he considered was banks as repositories of information, in particular about (business) customers' credit worthiness. The conventional view of bank failures in crises emphasized the decline in wealth, and thus demand, when banks failed and their creditors (primarily depositors) lost their assets. Deposit insurance was one of the primary responses following the GD.
Bernanke, IRRC, examined the availability and cost of business loans following bank failures. Information about the business prospects and credit-worthiness of specific businesses was tightly held within specific banks, and when a bank failed, it took this knowledge with it. Firms that had been its customers were not able to get loans at the cost and in the quantity to which they were accustomed and had, at a minimum, to reduce the level of their operations until they were able to re-establish their credit at another bank; until that other bank had, over time, built up its information on the credit-worthiness of that firm.
This story from Bloomberg, Layoffs Start Turning From Temporary to Permanent Across America. Small and mid-size firms are closing their doors; not only are they laying off workers, with its well-known, immediate impact on demand, but the knowledge & relationships they have, of suppliers, of customers, of products and of production, will disappear with them and this will have long term effects on both demand and supply.
It's not my subfield in economics, but macroeconomists certainly have much too little appreciation for the important contribution of firms in the organization of production beyond, perhaps, economies of scale and scope (Bernanke excepted, at least at one time).
Very interesting. I freely admit it had not occurred to me, but I can see its importance.
ReplyDeleteIt's possible we could "reopen" the economy with a thoughtful, rational plan rather than the "all or none" approach that we are experiencing now.
ReplyDeleteThis ROAD MAP TO PANDEMIC RESILIENCE from the center for Ethics at Harvard gives us a promising blueprint:
https://ethics.harvard.edu/files/center-for-ethics/files/roadmaptopandemicresilience_updated_4.20.20_0.pdf
If Biden were intelligent and prudent given the circumstances, he would select Elizabeth Warren as his vice president and incorporate a large chunk of her platform and Bernie's platform. If he selects Warren as his VP, I think he will significantly increase his chances of winning the election (e.g. due to greater turnout from progressives).
ReplyDeleteIf elected, Biden can serve as the elder statesman president and he can defer to Warren's brains and policy expertise in terms of Medicare for All (or at least a robust public option), a wealth tax, Wall Street regulation, anti-corruption, climate change, and possibly basic income. If the Democrats control the House and Senate with a super-majority, they could pass many of these policies.
However, I'm not sure Biden has the guts, intelligence, and awareness to do this. I think he is still trapped in the centrist, corporatist, neo-liberal ("neo-proprietarian" as Piketty would say) paradigm, which is exactly the wrong paradigm for this juncture in history.
One thing holding Biden back from picking Warren is that the current governor of Massachusetts is a Republican who would surely appoint a Republican to finish her term, thus decreasing the Democrats' chances of getting a majority in the Senate. I haven't seen anyone, before your post, suggest that the Democrats had a chance of a super-majority, regardless of who headed the ticket who was #2.
ReplyDeleteDemocrats have enormous veto proof majorities in both Massachusetts chambers. They can pass a law requring the governor to appoint a replacement for five months of the same party.
ReplyDeleteSo if the virus doesn't kill us, we are doomed to slow destruction through rampant global warming.
ReplyDeleteProf. Wolff
ReplyDeleteThat would solve the Massachusetts seat problem. I still don't see any way to a super-majority in the Senate. Most stories I've read see a possible one or maybe two vote majority, but that depends on Doug Jones in Alabama and apparently the Democrats have written the seat off. He is reported to be getting no funding from the Democratic Senate Campaign Committee.
Dr. Wolff,
ReplyDeleteThe DSCC, DCCC and DNC have a long history of under, or not funding, candidates whose poll numbers don't look good early in a race. It's a stupid policy. One can't predict the future, and especially in volatile times, the candidate one left hanging may turn out to have a good chance. Rahm Emanuel and Howard Dean went head to head on this point many years ago.
You don't need elaborate models to see that the economy is in for a world of hurt over the next few months. We are probably already experiencing about 20% unemployment. That might get worse. That is a lot of people that were doing some sort of hopefully productive type activity that are no longer doing that- and not necessarily receiving incomes from that.
ReplyDeleteI think a reasonable assessment starts out with 'we aren't in a good situation at the moment' and goes on from there.
I think it's important for all of us on the Left to continue using the term "capitalism" as much as we can right now, rather than simply defaulting to "the economy" in more general, euphemistic terms. In continually substituting "the economy" for capitalism (and I've been susceptible to this, too), we're accepting the dominant framing of the consensus media and the corporate-political alliance ("re-open the economy," etc.). Capitalism's inability (in its neoliberal, free-market fundamentalist U.S. form) to adequately distribute social goods for the masses of people, along with its for-profit health care system, is on trial right now, and its defense attorneys are looking pathetically ill-equipped.
ReplyDeleteThis opportunity presented itself in 2008 (following the last economic collapse), and there were some small victories following Occupy Wall St: Kshama Sawant in Seattle, an improvement in minimum wages due to 15 Now organizers, a rise in the number of people who self-identified as socialists or joined DSA, and even Bernie coming to prominence. (I guess there was also Dodd-Frank, but that was pretty limited.) Nonetheless, even as millions of people lost their homes, the banks got bailed out while everyone else got hit with austerity. That was called "going back to normal."
Despite the pain and uncertainty we're all going through right now, let us embrace this unique opportunity to push for radical changes that seem much less radical at the moment (universal health care, universal basic income + wrap-around supports, abolition, etc). If we leave it up to the elite power brokers, we know what we'll get -- and the return to "normal" will be even more unequal than it was after the last recession. And we'll still be talking about "the economy" as if it's some gentle, quaint, benevolent neighbor sipping lemonade on the front porch swing.
That Biden/Dem Establishment would pick Warren is a pipe dream. I hope I'm wrong but I agree with the argument that Trump-era Democrats are Bush-era Republicans ("https://consortiumnews.com/2020/05/05/five-things-revealed-by-democrats-rehabilitation-of-george-w-bush/) Besides, Warren doesn't have much to offer. She just isn't popular.
ReplyDeleteA more likely scenario is that the Clinton-Obama-Pelosi-Biden/Jamie Dimond cabal will feel more comfortable with and their political calculations would favor more Amy Klobuchar. (Interesting to me is that Harris has teamed up with Bernie to endorse the 2k per person per month - as long as the covid crisis exists - proposal. Hardly a position to be taken by someone campaigning for the VP slot with Bideb - unless she knows that it will be DOA and cynically believes that the charade will boost her and Biden's left cred).