109.6台灣銀行家雜誌第126期 / By David Stinson
The US Has Learned the Wrong Lessons from 2008Bankers Digest
The 2008 bailouts by the US Federal Reserve were shocking at the time, but modest in retrospect. The Fed deemed it impossible to save Lehmen Brothers, letting it implode to devastating consequences, and political pressure also inhibited the size of the accompanying fiscal policy response.This time around, not encumbered by concerns about non-existent inflation, the Fed hasn’t hesitated to apply extraordinary firepower. In an emergency meeting on March 15, it cut interest rates before the first lockdowns in the mainland US had even come into effect – prompting comedian Michael Nguyen to quip on Twitter, “This makes me realize that if america was attacked by aliens, our first response would be to lower interest rates.”It will need this resolve for the coming months (and even years.) Delinquent loans are typically only recorded after 60 or 90 days; the impending tsunami of corporate bankruptcies has not even started. Bad debt trends are closely correlated to the unemployment rate, which is forecast to reach about 20% in April. Meanwhile, government disease experts warn that the fall will see a new resurgence in cases. There is no prospect for short-term recovery.This flood of money, like the lockdowns that caused the current economic, was a necessary short-term response to an extremely fast-moving situation. It has bought a small amount of time to plan for the later stages of the response, but it solves few of the underlying problems.The New CovidnomicsThe centerpiece of the stimulus plan has been the CARES Act, the largest-ever stimulus package in US history, worth US$ 2.1 trillion, or 10% of GDP. Within that, the US$ 669 billion Paycheck Protection Program (PPP) allowed small businesses to apply for loans worth 2.5 their monthly payroll costs, which could eventually be forgiven and turned into grants if they keep their current staffing levels. These measures have been backed up by seemingly infinite monetary power. The Federal Reserve has added US$ 2.5 trillion, or 15% of GDP, to its balance sheet in just two months.Certain elements of the US response, such as direct payments to individuals, might have been welcome at any time from 2008 until 2020. During this time, it seemed that production itself was never a challenge; rather, the most promising businesses focused on scaling their user bases of cash-scrapped consumers as quickly as possible, using a cloud computing model that allowed infrastructure to scale invisibly.Now the US faces a genuine inability to produce the things that Americans need. The most immediate problems are goods like personal protection equipment (PPE), ventilators, and meat. These shortages cannot be solved through monetary policy or fiscal allocations, but rather exist in the real economy and require some sort of direct resource reallocation.On a more abstract, but even more important level in the longer term, the scarcest commodity right now is the ability to go out. The price of failure to contain the virus is not just the deaths of tens of thousands of patients (mostly elderly). If it were simply a question of safety, it would be much easier to compute the costs of lockdowns – although the putting a price on life is an ethical minefield, once a number is found, optimization becomes straightforward.The deeper problem is that as health systems get overwhelmed, further lockdowns become inevitable. Bill Gates, who has been actively involved in the COVID-19 response through the Bill & Melinda Gates foundation, noted that ‘it’s very tough to say to people, “hey, keep going to restaurants, go buy new houses, [and] ignore that pile of bodies over in the corner. ’ Along these lines, even if governmental restrictions on movement are lifted, consumer confidence is another question. Countries further along in their epidemic response cycle, such as China and South Korea, are now discovering this issue.The economic problem will not be solved without addressing the underlying medical issues. The US strategy on that front is however much more confused than its demand-side firefighting.Local Governments: Too Much Responsibility, Too Few ResourcesAfter its initial effort at border containment failed, the administration of President Trump left much of the decision making to the states. On some level, this orientation makes sense. The US is geographically comparable to Europe, and effective measures in other countries have been implemented on a hyperlocal level, involving individual parts of town and even buildings. Unfortunately, this level of responsibility has not been matched by power. A comparison with China, the only other country as large as the US to experience a widespread outbreak so far, can be useful.The Chinese response was more locally-oriented than often perceived by outsiders. Although the central government deployed resources from across the country to Wuhan, much of the actual implementation has been coordinated by local governments. The well-known ‘stoplight’ color-coded apps, for instance, were developed locally are still not unified across the country.One of the key powers retained by local governments in that case has been the ability to shut down borders. After all, political boundaries are only relevant from the perspective of the virus if they correspond to human movement. In China, provincial authorities were given so much power that border skirmishes broke out between the police forces of Hubei and Jiangxi provinces over the issue of freedom of movement.The US has however been much more skeptical than China of internal travel restrictions. As a result, the center of gravity of growth in new cases has gradually shifted from New York City, where it could have initially been contained, more broadly across the country. A comparison of the sizes of county clusters in the week up to April 10 (when new cases plateaued at about 30,000 per day, where they have remained ever since) and a month later shows a pronounced shift to the left. Despite national totals that remain flat, any given new case in the US is now likely to come from a county with about 100 cases, rather than about 300 as before, thus the cases are coming from a greater number of counties. Moral Hazard Turned on its HeadIn the financial sphere as well, states are also being given lots of responsibility but less in the way of guidance or resources. One of their most important financial tasks is to provide for people who have lost work. This is not just a matter of social welfare, or demand-side stimulation, but an incentive not to further spread the disease. Despite the federal stimulus checks to all citizens, worth US$ 1,200, unemployment benefits are mostly the responsibility of the states.The US is generally more tolerant of unemployment than Europe, which does much more to encourage firms to “hoard labor” for as long as possible (notwithstanding the temporary payroll assistance through the PPP program). There may be some benefits to this arrangement as the crisis wears on. It allows for the possibility that business may look very different after the economy opens back up, as sectors like travel are replaced in the medium and long term by other services that involve less personal contact. The disadvantage is that many of these stabilizers are not automatic and depend on the continuing willpower of legislators.Worse, unemployment funding in some cases may be affecting decisions by some states to open prematurely. Several states have signaled that employees who are offered their old positions back as businesses reopen, but refuse due to concern over their safety, could lose their benefits. State finances are often a contentious political issue because of pension debt that has been building over decades; Senate Majority Leader Mitch McConnel even suggested that states be allowed to declare bankruptcy.States will face revenue pressures this year, and raising taxes will be politically difficult in the short term. The Fed has broken decades of precedent to buy up municipal bonds, but states are still generally bound by balanced budget requirements. These purchases may improve overall fiscal health, but they will not be able to directly finance pandemic response activities.No Free LunchPrevious US bailouts have generally targeted the money supply rather than the real economy, and thus been costless in real terms. All of the bailouts following the 2008 crisis made money, except for the subsequent automotive industry bailout which lost about 15 cents on the dollar. The 2020 crisis response will be different. Shutting down a major portion of the economy will most definitely involve real costs for somebody – the only question is who.The US needed a major fluid infusion simply in order to survive its trip to the emergency room. Now, for its longer-term plan, it needs a new model of crisis management. One concept that might be worth further study comes from the field of sustainable manufacturing. The “circular economy” refers to the use of waste as inputs for other processes. Plenty of wasted human and material resources are currently available for alternative use.Armies of human staffers will be needed in short order for contact tracing, providing an excellent opportunity for classic Keynesian spending. Similarly, prison labor is being used to produce items like disinfectants – why not ordinary unemployed workers? Centralized quarantines for less serious cases have been used to good effect in Asia, while hotels sit empty in the US. (New York City has implemented a pilot scheme to repurpose hotels in this way). Medical workers are being laid offen massedue to the cancellation of elective procedures, in one of the most concrete manifestations of the chaos in US strategy. Stimulus measures should specifically target this sector.In this way, deficiencies in the epidemic response can be matched, one by one, to stimulus measures. Stimulus is traditionally meant to be costless, but it will only be that way if it is associated with productive investments. If the problem is a lack of spending power, as in a classic financial recession, that problem can be addressed on its own terms. The US currently has entirely different reasons for its weak consumption, however.