March 16, 2020

The Pandemic Will Cause A Global Depression - We Need Demand Side Measures To Counter It

Last week's post on Boeing ended with this line:

The pandemic, and the global depression it will cause, now make it certain that Boeing will have to ask for a gigantic government bailout or go into bankruptcy.

With most flights grounded due to the pandemic Boeing is now thinking about cutting its production and laying off workers.

In the quoted sentence I used the words "the global depression it will cause" with care. I do indeed believe that a sustained, long-term downturn in economic activity in many countries will be one of the results of this pandemic.

The airline industry is just one of many that will be hit hard. About 70% of the U.S. GDP is generated by the service industry. Travel, entertainment, gyms, restaurants and bars, hotels, education will all be hit extremely hard by the finally coming shutdown. The U.S. will, like Germany did today, soon shutdown churches, brothels and other entertainment outlets. Only a few service industries, like healthcare, online gaming and gun sales, will continue to strive.

The pandemic will be with us as a major danger for probably two or three years during which it will race around the globe in several large waves. Each wave will require another shutdown. To develop a vaccine against the SARS-CoV-2 virus is likely to take over a year but may take much longer. We may be more lucky with a new medication that can reduce the symptoms of the Covis-19 disease the virus is causing.

Restrictions on major parts of the service industry are therefore likely to be with us much longer than the one or two months that are currently anticipated. After the restrictions are over many people will have have changed their habits. The travel industry will not come back for a long time. The cruise industry will probably die. That is personal to me as the place where I learned to work metal depends on it.

There will also be lots of layoffs caused by this crisis which guarantees that demand will fall further off the cliff.

On Sunday's the Fed cut its interest rates to zero. That was a push on a string. Today the stock markets tanked another 10%. Crude is now below $30 per barrel and may well go down to $20/bl. The Fed move was likely demanded by Trump who last week remarked that he has the power to fire Fed chair Powell. The Fed should take care that the credit markets stay liquid as many companies will need additional resources. A credit crunch right now would increase the general damage. But Trump and the Fed should stop to push supply side measures like interest rate cuts and tax relieves. There is no lack of investment or supplies but a lack of demand and that will continue for at least the rest of the year.

Last week the House passed a bill with some emergency help. It was mostly fake. House leader Nancy Pelosi sold it as covering way more than it actually does:

The legislation secures paid emergency leave with two weeks of paid sick leave and up to three months of paid family and medical leave, according to Pelosi. It also enhances unemployment insurance. The legislation also increases federal funds for Medicaid, and bolsters funding for food assistance programs.

Those were a number of lies and even the neoliberal editors of the New York Times called her out:

House Speaker Nancy Pelosi on Friday night celebrated the coronavirus legislation that passed early Saturday as providing paid sick leave to American workers affected by the pandemic. She neglected to mention the fine print. In fact, the bill guarantees sick leave only to about 20 percent of workers. Big employers like McDonald’s and Amazon are not required to provide any paid sick leave, while companies with fewer than 50 employees can seek hardship exemptions from the Trump administration. “If you are sick, stay home,” Vice President Mike Pence said at a news conference on Saturday afternoon. “You’re not going to miss a pay check.” But that’s simply not true. Sick workers should stay home, but there is no guarantee in the emergency legislation that most of them will get paid.

When even rightwing Republican Senators think that the Democratic leader of the House is not socialist enough something has changed:

Tom Cotton @SenTomCotton - 12:21 UTC · Mar 16, 2020 The House relief bill doesn’t go far enough & fast enough. We’re going to do everything we can to get cash into the hands of affected workers & families as quickly as possible so we can all get through this pandemic together.

There are way more measures needed than Pelosi's bill allows for. The government must cover all costs for virus testing and Covid-19 care. It must pay sick leave to everyone who has to stay home independent of their job status. Not providing such will prolong the crisis as infected people who need to work because they lack money will otherwise continue to spread the virus.

The U.S. and other economies will also need a fiscal injection on the demand side. Send a $5.000 check to every household which makes less than $100,000 per year and include the homeless in it. The money can be taken from the defense budget. A 355 ship navy will never stop a pandemic.

The last global social and economic shock of this size came after 9/11. The fall of the towers changed the world. It became the justification for militarized policies and large defense budgets. The pandemic will cause changes of a comparable size.

Public demands and political priorities will change. Health crisis preparedness and response will become a new priority issue. Globalization will become more restrained while global cooperation on health issues will likely increase.

This crisis is not the end of the world but it will be the impetus for significant changes.

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Previous Moon of Alabama posts on the issue:

Posted by b on March 16, 2020 at 18:34 UTC | Permalink

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