America is not Committing Economic Suicide — a modest critique of an ill-conceived essay
The coronavirus outbreak sucks. Three months into living with the virus in Hong Kong, I’ve never been so irritable or depressed wondering when things will get better — which is good since I evaluate economies for a living. So when a friend of mine forwarded me an article with the provocative title “America is Comitting Economic Suicide”, my interest was piqued. After reading the article, I was disappointed with not only how wrong I felt the conclusions were, but also how simplistic the analysis was to come to these conclusions — from the charts to its titular metaphor (Not doing enough to save the economy is different that committing suicide.) So I decided to write about it.
Before, I get into how Mr. Haque’s article is, he did get some things right in his article.
#1. “The American economy is undergoing the largest shock in history.”
True! At least going back for decades, economists and analysts on Wall Street expect economic growth to essentially sink to depression levels during the second quarter of 2020 — a record drop.
#2. “…the stimulus is inadequate because it’s simply far too little”
That I would also agree with. Going just by the pure numbers, America’s fiscal response is far from the highest relative to its GDP. And certainly, I believe American policymakers could take a page from their European counterparts to guarantee wages for at least three months amidst the coronavirus outbreak.
Okay, so now let’s get into the misleading and flat out wrong things Mr. Haque asserts in his essay.
#1. See that chart above? You are watching an economy begin to die. That, my friends, is what economic devastation looks like. It says that unemployment claims skyrocketed to 7 million last week. That’s a number so high, so fast, that there’s no parallel in all of history — even remotely.
Fig.1 — Chart that Mr. Haque posted.
Source: Medium as of 9 April 2020
Fig 2. Or what I think the chart should be
Source: U.S. Department of Labor Statistics and the BBC as of 9 April 2020.
Besides, the rather harsh characterization of the chart, let’s take a step back and ask ourselves: “What is the chart from Mr. Haque actually describing?”. Fig 2. is what the chart should look like: it’s a chart of the initial jobless claims, the number of people filing for unemployment claims, which captures the devastation Mr. Haque rightly suggested. Notice the difference? One of them captures the devastation that has no historic peer that Mr. Haque is referring to. The other one has the latest data point being just shy of another comparable data point of around 700,000 some time back — not nearly as bad as the near 7 million initial jobless claims that was recorded last week. While griping about charts seems trivial, I’m belaboring the point because for someone who’s writing an essay about economic policy this is a basic thing to get correct and a poor start to a bad essay.
#2. The first reason the economy is dying is that the stimulus is inadequate because it’s simply far too little. We’re going to do a little math together — don’t get scared, it’s math any grade schooler can handle. How large is the US economy? It’s $20 trillion per year. Of that, about 99% of the number of firms are small businesses. How large is the portion of the stimulus outlined to support businesses, especially small ones? $500 billion. …The portion of the stimulus meant to support business is enough to keep the economy going for…just one week.
This is misleading. While it is true that small firms make up 99% of all companies in the U.S., and that many of those don’t have balance sheets that can support people for the weeks or months of the coronavirus lockdown, small businesses account for less than half of GDP and employ less than half of the labor force. Large corporations account for the rest of private employment. It’s those types of companies — the Apples and Amazons of the world — where many millions will still be on payroll through this difficult time and those companies will not need the $500 billion allocated to small businesses through the CARES Act. In other words, while many businesses do need a lifeline from the government, the situation is far, far less dire and many companies will last far longer than the “one week” that Mr. Haque suggested especially since more money is likely on its way.
#3. How much is “ten million people”, anyways? The US labour force is about 164 million people. Ten million is already six percent of it. That might not sound like a lot, but it is: it’s about 3 percent a week. If that trend continues, it’ll be twelve percent in a month. 24 percent in two months. That’s a quarter of the economy, filing for unemployment…in a matter of weeks. That’s fifty percent in four months. How long do you think Coronavirus will last? Two months? Three? Four? Bang!
When I went to debate camp in grade 8, we learned that these sorts of arguments are “slippery slopes.” While the math seems correct, Mr. Haque assumes that the American economy is made out of very few jobs that have a linear progression disappearing during an economic shock. That could be true if everyone in America worked at a restaurant that’s shutting its doors during a lockdown but not in an economy as diverse as America’s. It is true that some sectors will get battered — retail, food and beverage, hospitality, and manufacturing are particularly vulnerable. However, even before the coronavirus outbreak, millions of people worked from home in the US. Many millions more likely joined, since the start of the year. Furthermore, some jobs aren’t prone to be lost — from talk show hosts, to video game designers to President — even during this very challenging time. This very basic conclusion could have been made if the author had bothered to open an employment report from the Bureau of Labor Statistics.
#4. Why have ten million people filed for unemployment in just two weeks? Because there’s not enough support to keep the economy going, and because what little there is isn’t producing a feeling of confidence.
That’s misleading! The Bureau of Labor Statistics reported more than 15 million filing for unemployment in the last three weeks. Why? It’s because of cashflows, not a lack of confidence. Let’s say you own a restaurant and your foot traffic will disappear in the next 1–3 months during a lockdown. Of course you will lay off some workers in that sort of circumstance, no matter what sort of government stimulus will be announced. In fact, many of those workers are eligible for the enhanced-unemployment benefits to the tune of $600 a week. Moreover, for some businesses, the CARES Act allows government-backed loans to keep people on payroll. Most Americans should see some form of a relief, and more stimulus could also come.
Want more proof? In fact, even if you take Japan, which plans to spend 20% of GDP in coronavirus-related spending, double the relative amount compared to the U.S., the unemployment rate will likely skyrocket there too as a reaction to the coronavirus and the lack of cashflows.
#5. Meanwhile, the media is touting a $1,200 check to every American. The truth is very different. That $1,200 has all kinds of tests attached to it. If you make this much as a single person, that much as a married couple, and so on.
This is up for debate but I think it’s misleading to say that it has “all kinds of tests attached to it.” There’s a very simple one. Do you earn $75,000 or less as an individual, an amount greater than 75% of Americans’ annual income? If the answer is yes, you’re eligible for the $1,200 direct deposit check from the CARES Act.
#6. The government can and should support the economy for as long as it takes, guaranteeing both business and personal incomes, as well as writing checks every single month. That doesn’t plunge a society into “debt.” It’s not money we are “borrowing” from anyone else, like say China. We are just lending it to ourselves, which means that we can cancel the debt afterwards with no ill consequences, either. The central bank can literally write off whatever debt is accrued the day after the crisis subsides. And if you doubt that, go ahead and think about who it’s owed to. The government owes money to whom, exactly? The answer is: nobody. It has only borrowed from itself, and therefore it can cancel the debt, too.
Mr. Haque is touching upon Modern Monetary Theory, which, when boiled down, asserts that the government should print money to achieve maximum employment. While parts of the theory are still up for debate, economist usually use the collapse of the Zimbabwe economy from the late 1990s to mid 2000s as an example of how printing money is not the panacea to an economy’s ills: things got so bad so fast that 1 Zimbabwean dollar was worth 1.54 USD in 1980 and then $100 billion Zimbabwean dollars could buy only three eggs in 2008.
That would be disastrous for the U.S. Frankly, if printing money was an option, particularly under this President, things may very well end up like Zimbabwe. In other words, hyperinflation would be a horrific consequence of that overzealous printing of money rather than the “no ill consequences” Mr. Haque alluded to.
Furthermore, “cancelling the debt” is not as simple as it seems. U.S. government bonds are considered the safest in the world and trillions of dollars of financial securities are based on their stability and value. If the U.S. were simply to “cancel” some of its debt as a result of it’s money-printing activity, it would almost certainly result in its debt being worthless since confidence in the U.S. bonds would evaporate. The immediate collapse of the U.S. Treasury market would certainly soon follow, hitting pensioners, institutional investors, and normal everyday people and lead to the collapse of the global financial system and the idea of money as we know it. That, would truly be economic suicide, unlike the recent fiscal policy announcements used to combat to coronavirus. In short, Mr. Haque’s rather blunt solution, without any robust or quantitative analysis to back it up, is a dangerous pipe dream.
#7. Because when a society reaches even about 25% or so of sudden, irreversible, long-term, hardcore unemployment, the economy is more or less finished. It cannot recover for generations.
This argument is flawed for two reasons.
First, here’s a history lesson. The Great Depression starting in 1928 lasted for years with unemployment levels reaching as high as 25%. Somehow, America, and its economy still survived. One generation later, it enjoyed a post-war boom. Two generations later, it enjoyed the 1980s boom years.
Second, while the unemployment rate could hit 20% or even 25% in the U.S. this year, I’m confident that the economy is resilient enough to bounce back quickly. Before the coronavirus, there were no obvious signs of imbalances — like the overleveraged housing market that precipitated the 2008 financial crisis — that were present in the economic system. In fact, the U.S. economy was still experiencing a boom with unemployment rate at its lowest in decades and the Federal Reserve was not in the middle of a rate hike cycle,a usual precursor for recessions, and didn’t plan to any time soon. So, while the coronavirus is a devastating exogenous shock, there’s no implicit economic reason why the unemployment rate would last so high for so many years after.
And finally, here’s an assertion that I would very much like to take the opposite stance on:
#8. All that collapse is now very much in America’s near future — not next year, but this summer.
That is preposterous.
Planning on the economic collapse by three months without much analysis is silly especially when private businesses, the backbone of America’s economy, are still very much in business and with many of them reporting their first quarter earnings this week. The American economy will persist, even through an extremely short time horizon like the summer, although probably in worse shape than prior to the coronavirus outbreak. However, things will get better. As a net buyer of U.S. equities this year, I’m betting on it.
The coronavirus outbreak is a historic challenge to the American economy. Bad ideas are also another challenge to America’s economy — especially when they lead to dangerous conclusions. We can debate about how effective America’s fiscal and monetary response is (the latter of which Mr. Haque did not even mention), but it’s flat out wrong to assert that America is comitting “suicide.” If I seem overly harsh in my critique, it is because Mr. Haque’s essay and all the things wrong with it strike a personal nerve.
If readers can take away one thing, it’s probably this quote from Warren Buffet: “We always live in an uncertain world. What is certain is that the United States will go forward over time.” I never thought I’d be a cheerleader for America. These are terrible times, and without the current fiscal and monetary policy (of which wasn’t touched upon in Mr. Haque’s essay) announced so far to cushion the blow, America’s economy would be in far worse shape. Better days are ahead.
Special thanks to Silke Cummings for hearing me rant and editing down my ramblings into something coherent