The numbers evoke the worst economic nightmares in American history. But White House economic adviser Kevin Hassett freely admits he can’t map the path out.
“A lot of it depends on things I have no expertise in,” Hassett, previously a CNN contributor, said in an interview this past week with Poppy Harlow.
That’s the surreal reality facing President Donald Trump’s economic team as growth turns into contraction and 30 million Americans have lost their jobs. It is a Great Depression-level economic crisis that has everything to do with public health – but, unlike the 2008 financial collapse, very little to do with anything wrong in the underlying economy.
As a result, the tools economists typically use for adjusting supply and demand – targeted spending, tax cuts, changes to trade and regulatory policy – hold little power. The restoration of American prosperity lies more in the hands of the public health officials, epidemiologists and scientists racing to develop a coronavirus vaccine.
“The No. 1 rule of virus economics is, go stop the virus if you want to fix the economy,” says Austan Goolsbee, a former economic adviser to President Barack Obama. He suggested that White House economists pore over state-by-state data to identify the best ways to halt epidemic spread.
Success would preserve the possibility of the rapid “V-shaped” recovery that the Trump administration has embraced as its objective. The quest to achieve it has led Trump to allow federal guidelines to expire and goad governors into re-opening their states for business despite warnings from public health officials of resurgent infections.
The Congressional Budget Office, which rarely tracks administration optimism, also envisions a solid rebound as economic activity resumes. After plummeting at a 40% annual rate during April, May and June, the CBO forecasts, output will grow at a 17% rate in the second half of 2020.
But all forecasts for this unprecedented situation depend on factors no economist can confidently anticipate. How many businesses will have preserved enough of their workforces and customers to profitably re-open when governors flash the green light? If infections spike again, can advances in testing and treatments contain them? Or could renewed shutdowns throw the economic engine back into reverse this fall?
The mix of public fear, financial hardship and business uncertainty creates enormous doubt – which is Kryptonite to corporate planners and consumers alike.
“This isn’t going to be a V, let’s face it,” concludes former CBO director Doug Holtz-Eakin.
The job for Trump’s economic team, Holtz-Eakin says, is identifying “the right set of policies to support the economy in this new world we’re in.” That could include regulatory changes that help businesses adapt workplaces to accommodate health concerns, or expansion of broadband infrastructure to meet increased demand for telehealth and other services provided at a distance.
The pandemic threatens permanent damage to sectors requiring close-quarters contact among large groups, such as the cruise ship industry. Shuttered malls, which for years have lost market share to online retailers, may never recover.
Yet the most urgent immediate economic task is simply preserving connections among businesses, their workers, and their customers so they can restore familiar patterns when health conditions permit.
“Try to reduce the permanent destruction,” says Betsey Stevenson, another former Obama economist. “Every single day, there’s a little bit of crumbling going on.”
Too much crumbling would transform a short-term coronavirus shutdown into long-term economic blight. Business failures turn sound bank loans into defaults, which in turn could create a self-perpetuating financial crisis.
To stave that off, the Federal Reserve and Congress alike have thrown a lifeline of cash at the entire American economy. Instead of altering the economy’s path, the goal is simply to keep its head above water until the pandemic storm has passed.
“We’re just going to have to keep doing it,” says Andrew Metrick, who directs the Yale University Program on Financial Stability. “Traditional economic policy things – that’s not what we need right now.”
But that’s easier to sustain for the independent Fed through its credit facilities than for a divided Congress and President through direct spending decisions. As the trillions mount and aid priorities widen, the Republican President and Senate have begun to balk.
“The liquidity and cash phase is coming to an end,” White House National Economic Council director Larry Kudlow cautioned in recent days. He signaled a return to the president’s pre-pandemic agenda, including tax-cuts and infrastructure investment.
With Trump now trailing in crucial battleground states, election-year pressures threaten to create new risks. After other White House aides suggested punishing Beijing over the coronavirus by defaulting on Chinese-held US debt – a step certain to raise borrowing costs and damage the nation’s financial pre-eminence - Trump’s economic team rushed to publicly quash the idea.
The turn toward recriminations and traditional priorities signals confidence among some advisers – if not those responsible for public health - that progress against the virus has opened the door to economic resurgence. “We’re on the other side of the medical aspect of this,” the president’s son-in-law Jared Kushner said last week.
Hassett sounded less sure.
“Opening up will be a significant positive event,” he cautioned, “but only if opening up does not lead to a renewal of this terrible contagion.”