V Is for Very Unlikely

by

Goldman Sachs is out with a prediction that GDP will decline by 24 percent in the second quarter of 2020, far more than it declined immediately after the stock market crashes of 1929 or 2008.

But Goldman is too optimistic, because Goldman also projects that growth will resume smartly beginning in the third quarter, which is to say July—by 12 percent. That’s what economists call a V-shaped recession—quick collapse, then quick recovery.

Dream on. I know that Wall Street traders sometimes get high. I’d sure like some of what these Goldman guys are smoking.

The economy is in full collapse. Everything government is doing to keep people at home intensifies the collapse. Many enterprises will not survive. Even with all the bailouts and replacements of lost wages, the wealth effects alone—a collapsing stock market and deflated housing values—will crash aggregate demand.

A June recovery is not going to happen. The economy will still be cratering downward.

Even if government did everything right, this will be a steeper collapse than the Great Depression, when GDP fell 30 percent in three years—because necessary public-health policies are intensifying the collapse.

Doing everything right would mean literally replacing the lost income of all working people for the duration, and giving massive aid to industry conditioned on no stock buybacks or other perverse uses of the money, plus huge outlays on public health—followed by a second wave of public investment in infrastructure running well into the trillions.

But the odds of this happening anytime soon in the real world of congressional politics are zero. The best we can hope for is that Nancy Pelosi hangs tough and puts serious conditions on the package Mitch McConnell is offering, and then ups the outlays to well over $2 trillion.

But in a week or two, it will be clear that this is far from adequate, and we will need corona stimulus number four. As I recently wrote in The New York Times, avoiding Great Depression II requires World War II–scale public outlay, for infrastructure and green investments, of several trillion a year.

If we don’t get this done, and fast, V could stand for vast collapse.

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