The Coronavirus Economy
Life-threatening pandemics aren’t easy to manage. On the medical side, isolation and quarantine are the best answer because it stops the spreading of the virus. However, on the impact to the economy, isolation and quarantine are the worst of all possible options. True, some can work at home, but farming and food production can’t be run out of one’s living room.
This is the problem facing the national leaders around the world. And, each is trying to balance these two sides of the problem in their own way, based on the advice they are receiving and their own common sense.
In the United States, the solution is to throw money at the problem, then to get the population back to work in a few weeks, and count on the medical profession to limit the spread of the virus.
It appears that the US is ready to start throwing money at the problem. Early Wednesday morning, Senate leaders and the White House announced that a $2 trillion agreement had been reached to provide economic relief to the Corona virus epidemic.
The broad outlines of the deal include the following:
Direct cash payments of about $1,200 for each adult earning under $75,000 for single people and $150,000 for couples. The amount received will taper off over these figures, but they will receive the whole amount initially. The excess they receive will be owed in next year’s taxes.
The bill provides $367 billion in forgivable loans to employers with less than 500 employees. The amount that will be forgiven will depend on how many employees are laid off. The fewer laid off, the more of the loan is forgiven.
An interesting prohibition in the bill states that businesses controlled by the President, Vice President, Members of Congress, and heads of executive departments can’t receive loans or investments from any Treasury programs.
The $500 billion loan program for larger companies includes an inspector general and a five-member congressional panel for oversight.
The bill increases unemployment benefits for those laid off. According to Senator Schumer, the Democratic Leader in the Senate, the deal increases “the maximum unemployment benefit by $600 per week and ensures that laid-off workers, on average, receive their full pay for at least four months.”
Schumer also said the bill includes $150 billion for state and local governments.
The goal of this bill is to keep consumer demand up even as many consumers are staying at home.
On the positive side, by stimulating consumer demand, when it looks like it was about to take a dive, the proposed bill keeps many sectors of the economy (and their workers) operating. This will make it easier to restart the economy when the pandemic has passed – especially if the money is handed out quickly and the workforce is able to leave their homes.
The problem is the size of the stimulus. The planned (before the pandemic) federal budget for FY 2021 was to be $4.829 trillion. Revenue was to bring in $3.863 trillion, but that assumed a good economy. The deficit would be about one trillion. That means coronavirus emergency spending has already boosted federal spending by 50%.
The result is that the amount that the government must borrow to pay for the emergency spending will cause this year’s budget deficit to triple. Unfortunately, with no one to buy the additional Treasury bills and notes, the Federal Reserve will be forced to step in and buy the debt with newly created money. And, as any economist will tell you, when demand, caused by additional money, goes after a limited supply of goods, inflation will occur.
Whether the money is just created by entries in the Federal Reserve computer or a couple of trillion dollar coins are minted, the result is just the same – the money supply will be increased without an increase in the economy’s ability to produce more goods and services.
With each adult receiving $1,200 and each child receiving $500, the boost in spending will be considerable. However, given the current coronavirus situation, it won’t go equally into all sectors of the economy. Based on recent spending patterns, the money will surge into the grocery sector – causing more empty shelves in stores and more inflation. The question is how much.
In 2017, the agriculture and food industries contributed $1.053 trillion to the economy. That is 5.4% of the nation’s GDP.
If consumers that receive a government check decide to buy groceries with the bulk of their money, the food sector could see an additional $250 billion in spending. Unfortunately, increasing food supplies takes time either to raise the cattle or grow the crops. The result could see food prices climb 25%, depending on imports and some consumers deciding to shift their spending away from food as food prices go up.
In the meantime, some sectors of the economy like housing, automobiles, brick and mortar retail stores, and traditional restaurants will see very little of that stimulus money, although drive-in restaurants and internet stores will gain.
In turn, these other sectors of the economy will not be buying supplies from their suppliers and paying rent to property owners. As Bloomberg News noted, what happens to the billions in rent owed for business that have closed? Since most property owners have high levels of debt themselves, what are they to do?
These and other issues mean that a stimulus bill can’t by itself solve the problem. The economy can only operate if everyone can go back to work. This is the issue Trump is facing. Can the economy recover if everyone can go back to work, while current medications and potentially new vaccines keep enough people healthy to get the economy working at full capacity?
Unfortunately, there is little information to work with. The last major pandemic was the Spanish flu that started in the last year of World War One. The war and the lack of data collected make it hard to base policy on a pandemic that occurred over 100 years ago. As a result, politicians are forced to rely upon models of epidemic growth and decline. And, there are as many models as there are experts. And many of the experts are willing to inflate the risk in order to help their organizations.
While some models forecast a future with millions of deaths, bankruptcies, increased suicides, and a depression unknown to the modern world, there are others that see the virus coming under control soon. Politicians are left to make the hard choices based on a variety of models and theories.
One fact that makes it more likely for politicians to ignore the doomsday predictions has been the failure of the more pessimistic models to accurately predict events. One of the pessimistic groups is COVID Act Now, which has used a model from the Imperial College, London, which was the one to predict 2 million American deaths. It was widely quoted and used by governors and mayors of both parties to make decisions.
However, its predictions have been inaccurate. They claimed that by March 19th, 5,400 New Yorkers would be hospitalized. Only about 750 were hospitalized by the 19th. They predicted 13,000 hospitalizations by March 23rd in New York. By the 23rd, the actual number was only 2,500.
The COVID Act Now model was also wrong in predictions about Tennessee, Georgia, Florida, Oklahoma, and Virginia. Now COVID Act Now has admitted the problems of its model and has stated, “The model does not adjust for population density, culturally determined interaction frequency and closeness, humidity, temperature, etc. in calculating.” They also admitted to many other problems with the model.
This isn’t the model that the President is basing his decisions on. In the case of President Trump, he sees a more optimistic pandemic track. His desire is to keep the US economy going, while trying to limit physical contact, and allowing doctors to use medications currently used for malaria.
The Wall Street Journal has come in on Trump’s desire to get the people back to work. It noted that the third coronavirus stimulus plan will cost a lot, but so will a shutdown of the country. They note, “Each month of a national shutdown costs the economy about a trillion dollars. The damage will become harder to fix as businesses fire workers and close forever…A blanket lockdown can’t go on.”
They go on to note that keeping every business closed and every worker unemployed won’t work. Nor will replacing the private economy with borrowed money won’t work. They also noted that the private sector was taking steps as many businesses were already tailoring their businesses to working in the current environment.
Will the Trump plan work? That is an unknown currently. The President is aware that a shutdown of the nation will have serious side effects that may take years to recover. On the other hand, an early return to “business as usual” may mean the number of coronavirus cases will rise, along with deaths.
Currently, Trump is looking at the number of new cases, hospitalizations, and deaths. If those numbers are trending down by Easter and the anti-malarial drugs are shown to limit the severity of the coronavirus, he will probably try to get people back to work. If he can do that, the stimulus money that everyone gets will be less likely to be spent solely on food and may flow into other sectors of the economy. A family that is confident that there will be food at the grocery store may use the stimulus money for a down payment on a new automobile.
If Trump can do that, he will have reassured his reelection.
An Increasingly Aggressive Iran Warrants New Emphasis on Missile, Rocket Defense
By Thomas Spoehr
March 24, 2020
On March 11, about 30 rockets rained down on Taji Air Base in central Iraq, killing two American troops and one British soldier. Three days later, more rockets landed on Taji, wounding another three U.S. service members. Last week lawmakers pressed Pentagon officials regarding the lack of missile and rocket defenses on Iraqi bases housing American forces. Why wasn’t our Army using the Iron Dome system or other capabilities to protect our troops? Similar concerns had been raised earlier, following Iranian missile attacks on the al-Asad and Irbil air bases, launched in response to the killing of Qassem Suleimani. The short answer is: our current missile defense systems are not optimized for use on remote bases. Our rocket defenses have progressed no further than what we fielded in Iraq from 2004 to 2010.
Read more at:
Syria Is the War Nobody Wins, Except Maybe Trump
By James Jay Carafano
March 11, 2020
Many forces are waging war in Syria, all of them willing to fight to the last Syrian. But in this conflict, the United States is MIA. Thank goodness for that. The war in Syria is likely to devolve into another interminable, unwinnable conflict. Fighting recently flared in the Syrian province of Idlib. A year and a half ago, Russia and Turkey had negotiated a demilitarized zone in the province, one that separated the area controlled by the forces of President Bashar Assad from the territory held by rebels. Russian and Turkish patrols made sure that zone remained heavy-weapons-free until late last month, when the Syrian army moved in with the assistance of air cover from the Russians. From a military perspective, what happened next could not have gone worse for the Syrians. Years of war had already decimated their air and ground forces. Now, the Turks have gutted what was left. The Syrians lost the equivalent of two mechanized divisions and virtually all of its fixed wing and helicopter air force.
Read more at:
Russia and Saudis in a Knife Fight Over Oil—But We May Be the Victims
By Simon Henderson
March 10, 2020
A train wreck is about to occur in the oil market, and there will be casualties. Russia and Saudi Arabia, which previously had cooperated in making the world market well-supplied, no longer can agree on how to share the benefits. Today Riyadh announced it will step up output to a record 12.3 million barrels per day in April, the vast majority of which is exported. Russia also is increasing production but its incremental volumes are smaller. It’s a game of bluff: Who can survive longer? And we are the spectators…
Read more at: