Ending Lockdowns Won’t Revive the Economy

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Over the past two months, the U.S. economy has shed more jobs than it had created since the 2008 financial crisis. With another 3.8 million Americans filing for unemployment benefits last week, the coronavirus pandemic has now sidelined more than 30 million U.S. workers. Unless policy-makers somehow engineer a surge of catch-up growth once the crisis has passed — a task that proved beyond them in the Great Recession’s aftermath — it will take many years for the private sector to replace all the jobs it just eliminated.

In recent days, many Republicans and advisers to Donald Trump have called for an immediate “reopening” of the U.S. economy to halt this historic contraction.

“You’re talking about real devastation. So that’s why I have been such a bull on getting the economy open quickly,” Stephen Moore, an economic adviser to the president, told Yahoo Finance this week. “Really, it’s just heartbreaking, and you see what’s happening with the food lines, with people at the Salvation Army, where trucks in some cities are a mile long. We are facing real devastation here, and the human toll is growing with each passing day.”

Moore’s position is morally odious in several respects. The supply-side economist has been fighting to deny the Americans in those food lines expanded unemployment benefits. When Moore calls on states to prioritize economic recovery over public health, he is not volunteering to sacrifice his own physical well-being on the altar of GDP; white-collar workers like himself need not choose between employment and the safety of social distancing. Rather, Moore is demanding that service workers be coerced (through the suspension of UI benefits) and coaxed (through official reassurances that the worst has passed) into subordinating their health to the restoration of the profitability of the enterprises that provide Moore and his ilk with streams of unearned income.

But the fundamental problem with Moore’s argument is less its dodgy ethics than its delusional substance. Formal lockdown orders are not what ail our economy. A highly contagious, unusually lethal virus, as well as the shock that virus has already delivered to consumers’ finances and confidence in the future, are. GOP governors may be able to “reopen” their states’ economies. But absent a COVID-19 vaccine and more robust income and payroll supports than Congress has yet mustered, no one will be able to revive growth anytime soon.

Recent economic data from Sweden and South Korea illuminate this point. The Swedish government has, somewhat infamously, adopted an aberrantly “laissez-faire” approach to containing COVID-19. While its Nordic neighbors — along with virtually every other European nation — closed down nonessential businesses to contain the spread of the coronavirus, Sweden has allowed bars and restaurants to remain open, trusting its citizens to observe social-distancing protocols and stay home should they feel sick or make contact with someone who is. Epidemiologically, the Swedish approach has yet to produce significantly worse results than the median European country has suffered. Whether this is due to Sweden’s relatively low levels of intergenerational cohabitation or other national idiosyncrasies — and thus, whether Sweden could have dramatically reduced its COVID death toll by charting a more conventional course — is unknowable. But one thing is clear: Keeping its economy “open” wasn’t enough to spare Sweden a recession. In fact, the Swedish economy is shrinking just as rapidly as its neighbors.

Finland and Denmark, both of which imposed lockdowns, will see their economies contract by 6 percent and 6.5 percent, respectively, this year, according to recent IMF projections. Sweden’s central bank released two estimates for the nation’s 2020 GDP this week: In the more optimistic scenario, the Riksbank expects growth to fall by 6.9 percent; under less rosy assumptions, it anticipates a 9.7 percent contraction. A large part of this decline is surely attributable to economic conditions in other countries — the Swedish economy is heavily reliant on exports. But then, so is the Danish economy. By all appearances, legally forbidding consumers from frequenting nonessential businesses — or merely allowing consumers to make informed choices about what businesses are worth frequenting when a potentially deadly, emergent virus is on the loose — just doesn’t make that big of a difference in economic terms. Pandemics put a damper in “animal spirits” either way.

Conditions in South Korea affirm this reality. Seoul’s response to the novel coronavirus was about as successful as any other government’s. Robust testing and containment measures kept South Korea’s COVID-19 death toll under 300. And its economy is now outperforming those of all the other G7 countries. But its economy is still shrinking — and not merely because of reduced demand for its exports in harder-hit nations. South Korea’s “nonmanufacturing” business confidence index (BSI), which covers its service sector, just fell to its lowest point since the BSI’s creation in 2003.

If consumer demand remains depressed in a country that suffered 247 COVID deaths, and vanquished its outbreak by mid-March, the futility of trying to revive U.S. economic growth by “reopening the economy” in the middle of a pandemic that’s still killing hundreds of Americans a day becomes clear. In fact, given the exceptional severity of our nation’s economic downturn, the unemployment rate is likely to remain near Great Recession highs, even after a vaccine is (theoretically) developed and distributed en masse. As Roosevelt Institute economist J.W. Mason explains:

While many businesses have been directly shut down by coronavirus restrictions, it’s clear that many others are limited by a lack of customers — airlines traffic [is] down by 95% not because airlines can’t find people to staff the planes, but because no one is buying tickets. (The planes that do fly are empty, not full.) As incomes continue to fall from unemployment — and only a fraction are replaced by UI and other forms of public assistance — the demand shortfall is only going to get deeper … once economic units have run through their reserves of liquidity, and/or start changing their beliefs about future income, the fall in spending will continue under its own power, regardless of what started it. 

If the Trump administration wants to do everything in its power to accelerate the post-COVID recovery, it should emulate Denmark’s payroll-support policies, not Sweden’s herd-immunity strategy. Although Western Europe is not escaping the COVID recession, and entered the present crisis in weaker economic condition than the U.S., it has also suffered far fewer job losses thanks to many European nations’ embrace of unlimited subsidies to employers that avoid layoffs:

Seasonally adjusted unemployment across the European Union rose by 0.1 percentage point in March, to 6.6 percent, according to the E.U. statistics agency … The jobless figures have been cushioned by vast numbers of European businesses that have signed up for subsidy programs in which governments pay up to 87 percent of workers’ salaries to avoid layoffs. The system, pioneered in Germany during the 2008-2009 global recession, has now been imitated widely in Europe

… In Denmark, the unemployment rate rose to 4.2 percent in March, up from 4.0 percent in February, according to figures released Thursday. The figure would have been far worse if the 150,000 Danish workers who have been enrolled in the salary subsidy program had instead been laid off, Hummelgaard said in an interview.

If those workers had joined the jobless rolls, Denmark’s unemployment rate would have jumped to roughly 9.5 percent.

The United States has implemented a quasi–salary subsidy policy with its Paycheck Protection Program. But unlike its Danish analog, the PPP’s forgivable loans are exclusively available to small businesses, and its total funding is capped, instead of rising to meet demand from every eligible business. As a result, the U.S. is now suffering Great Depression levels of job losses, which will take many years to undo — no matter how prematurely the U.S. economy “reopens.”

Ending Lockdowns Won’t Revive the Economy