Tuesday, March 24, 2020


The global economy is again in the grip of a financial crisis and economic contraction of unknown depth and duration.

In 2008, reckless behavior in financial markets — subprime mortgage lending — undid the real economy, whereas this time the equivalent of a natural disaster is panicking investors and businesses.

As COVID-19 shut down Chinese manufacturing, inventories kept U.S. store shelves stocked and factories that rely on Chinese components operating. However, as the virus invaded the United States investors became fearful of business closures here.

The stock market slid into a bear market because when investors buy shares they are betting on future corporate earnings. They could not evaluate how quickly the epidemic in America would spread, and how long it would last and businesses would be shut down.

Federal Reserve interest rate cuts could do nothing to ensure imports from China resumed or halt the spread of COVID-19 in America. Successive waves of bad news about the contagion have pushed markets sharply lower after brief, insincere rallies — with good reason.

Many restaurants, schools, factories and retailers are now closed, and heathy folks are working from home and not traveling. What began as a potential supply-side crisis — a shortage of Chinese products and components — is now at least a Keynesian recession: Consumers are not spending.

While some businesses are experiencing surges — medical supply manufacturers and Walmart from panic buying for household supplies — many more are laying off workers.

Unite Here represents 300,000 employees in hospitality, restaurants, airports and other industries. It estimates 80 percent to 90 percent of those will be laid off. State unemployment offices are seeing overwhelming surges in new claims.

Businesses facing declining sales and losses became desperate to fortify cash balances and ran down lines of credit. They sold Treasuries and other securities usually held for liquidity. That cratered stocks, bond and commodity markets — and pressured lending limits of banks and threatened money market funds, which also provide short-term credit to businesses.

The Fed and Treasury moved quickly to shore up banks and money market funds, offer direct loans to businesses and support markets for state and municipal bonds and consumer credit. The Treasury is seeking authority from Congress for additional capital for Fed efforts.

Fed and Treasury credits cannot replace lost sales to business, and whatever loans they extend will add to debt burdens in thin-margin industries. Massive fiscal stimulus is needed to save the real economy.

With duration of the pandemic uncertain, economists are challenged to estimate the impact on the economy. Morgan Stanley expects unemployment to jump to 13 percent in the second quarter and the St. Louis Federal Reserve estimates 30 percent.

Coupled with lost productivity from reduced hours and awkward work at home situations, a jump in unemployment of just 10 percentage points could subtract more than $3 trillion from GDP this spring and $5 trillion by summer.

Seen in this context, the $2 trillion Republican stimulus plan pending in Congress, including direct payments to individuals, enhanced unemployment benefits and assistance to small businesses and heavily impacted industries like airlines, may prove hardly enough. If the virus does not peak by May, the economic contraction will deepen to levels not seen since the Great Depression.

Loans to small businesses will not bring customers into stores. Many operate on narrow profits, and loans eventually must be repaid. Aid in the range of $1 trillion for small enterprises alone is likely needed to avert bankruptcies and millions of permanently lost jobs.

Treasury foresees mailing out checks to individuals starting in April. That will challenge the IRS and be much delayed because Congress is scaling payments according to family incomes and size. Much of the aid to businesses is subject to time consuming, uncertain and unrealistic conditions to maintain employment and cap salaries.

Expanded unemployment benefits, though attractive on equity grounds, will be paid out over several months but will not give the economy the large, quick jolt that loading all the aid to individuals into quicker direct payments could provide.

By May, the economy could be in free fall because of all the complexity imposed by Congress and the limited resources provided.

It would be better to simply write checks for $1,200 to virtually every American every month through September and offer businesses more access to low interest rate credit.

Another Great Depression is in the offing because of the lack of a large enough immediate action.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

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