Of unemployment, fiscal deficits and the testing times to come
In the past five weeks since lockdown, jobless claims in the USA have risen to 26.5 million. Put another way, the total claims since mid March have now erased the number of jobs created since the Global Financial Crisis (GFC) in 2008-09. Fiscal stimulus has rightly been applied to cushion the blow and help people through an expected short down-time. But what if the economy doesn’t have a V-shaped recovery?
Unemployment in the USA went to 10% in the GFC and took eight years to get back down to the 5% level. Despite a string of very good years for the economy, too many businesses and consumers were too close to the wall going into this crisis: a problem with our economic model perhaps? They have too much debt and few resources to carry them through difficult times. Core workers with steady jobs, good salaries and benefits can manage this turbulence. Many in the service industries cannot. The same applies to small businesses.
If the crisis drags on and the recovery becomes an extended U-shape, we are likely to see a combination of a weak economy, disastrous corporate earnings, ongoing high unemployment and a complete blow-out in the fiscal deficit... meaning a need to raise taxation a lot at some point. President Trump’s tax cuts already had taken the fiscal deficit to $1 trillion. Now we have added another $2.8 trillion of stimulus expenditure at a time when tax receipts are bound to collapse. Across the developed world, public debt is going to soar to levels last seen at the end of WWII. Historically low interest rates, of course, mean the cost of servicing debt is cheap, particularly for the USA which benefits from having the world’s reserve currency. And central banks can continue to rollover debts or monetize them...as long as inflation stays low. But the fiscal problem is still an overhang for the economy.
All of this plays into what could be a very difficult 2-3 years ahead; a period of potentially tremendous political, economic and societal change across the globe. This offers both opportunities and risks. The crisis has laid bare huge problems in our societies...from unsustainable levels of inequality to insufficient social safety nets; from a purely quantitative (as opposed to qualitative) measure of economic growth to just-in-time business food chains that have come unstuck in the face of the pandemic. And at the same time that all of this is happening, we also have global warming and other environmental problems that need to be urgently addressed, not just with lip service, but with real changes in economic structures and priorities. (It is this latter subject that my upcoming blog will seek to address.)
The reality is that we were already in a state of transition between long term economic policy cycles (think Keynesianism to Friedmanite economics to...?). Such transition periods historically have often been accompanied by heightened geo-political risk and, yes, conflict. Will the global pandemic bring nation states closer together so we can better deal with the issues at hand, or will the populist, beggar-thy-neighbor approach of the Trump administration be triumphant, with its intentional undermining of international organizations and alliances that have helped keep the peace, among major powers at least, for the past 70 years.
The hope is that this period of change will lead us to a better, more sustainable and more just world. We shall see.
Steve Beecroft
(Watch out for my upcoming blog: “Confluence: Where the Environment, Economy and Capitalism Meet”)