Seth Wenig/AP Photo
On Friday, shelves that held hand sanitizer and hand soap were mostly empty at a store in Jersey City.
The fallout of the virus pandemic is now having cascading effects comparable to those of a major economic depression. The cause is unprecedented, but the dynamics are familiar to anyone who has studied great depressions.
Economic activity shrinks. That causes other economic activity to shrink. The knock-on shrinkage in turn reduces consumption, which in turn reduces production, which reduces more consumption, in a deepening and self-reinforcing downward spiral.
The cratering of the economy began with the travel industry and its far-flung effects: reduced tourism, business travel, cruises, and in turn hotels and restaurants; canceled conventions and conferences, with lost business for airlines and aircraft orders; and layoffs in all these sectors.
As layoffs occur, people put off discretionary purchases, and other layoffs occur, reducing demand in the economy generally. This in turn affects everything from auto sales to Zumba instruction.
But the economic impact of an epidemic, if anything, is more severe than that of a financial collapse—because the necessary public-health responses themselves depress economic activity.
People are being advised to avoid crowds. That reduces attendance at sports events, theaters, movies, concerts, and shopping malls, further contracting purchases.
Several public schools and universities have already closed. Harvard and Amherst are moving all classes online. Brandeis, where I teach, has prohibited all gatherings of more than 100 people, and made contingency plans for all classes to be virtual.
We are weeks if not days away from a much larger wave of school closings, which will create hardships for parents, and more lost economic activity. This wave of economic implosion is moving like a tsunami.
There will be further knock-on effects as corporations, banks, and hedge funds that borrowed heavily to finance speculative activity or even legitimate expansion find themselves with debts they can’t pay. Speculative luxury-housing developers will find themselves without buyers.
While Trump dithers and stumbles, the Democrats should organize a task force to figure out how to do all of this right.
In the oil and gas industry, the collapsing prices are good for consumers, but catastrophic to regional economies and companies that have invested in expanded production, and of course for their workers. All this undermines local retail sales, in the usual downward chain.
Only one entity can brake and eventually reverse the slide—the federal government.
Low interest rates have achieved next to nothing, nor have fire sales. Cheaper prices for everything from cruises to concerts would usually have the effect of increasing purchases. But the pandemic has partly suspended the usual laws of supply, price, and demand. No low price will make me take a cruise.
The measures suggested to date by both parties are feeble. Trump’s proposal to give everyone some pocket money via a payroll tax cut is far too small. Corporate tax cuts will do even less. On the Democratic side, the proposal by Nancy Pelosi and Chuck Schumer for paid sick leave, expanded unemployment insurance, and free virus testing is sensible, but a bare down payment.
What’s needed is a massive infrastructure and public-health program running into the trillions of dollars. We should start by taking stock of essential activities where government spending could produce economic expansion despite the epidemic, as well as long overdue public improvements.
This should be complemented by significant increases in public-health investments. Both should include significant job training or retraining.
For instance, the bill for deferred investment in basic public infrastructure is pegged at $3.4 trillion by the American Society of Civil Engineers. The Prospect recently devoted an entire special issue to laying out needed and practical investments associated with a Green New Deal.
In a national health emergency, certain vital workers will necessarily stay on the job. They include police, fire, first responders, hospital and medical workers, and also the workers who tend our electric, gas, and water systems. They may need special protective garb, but they will keep working.
With global climate change upon us, this is the time for massive increases in public outlays to upgrade water and sewer systems, invest in greener systems of power generation, and repair crumbling bridges, highways, public buildings, and public-transit systems. All of this would create millions of jobs directly, and boost overall demand in the economy.
The coronavirus, which is spread globally, has also upended the conventional assumptions about globalization. For the foreseeable future, we will need less globalization, not more. We will need a major set of industrial policies to reclaim domestic supply chains.
And we have been here before. During World War II, the United States was essentially autarchic. We had to produce everything we needed both for the civilian economy and the war effort. That imperative, in turn, led to a massive wave of invention, and of course jobs.
On the public-health front, we also need to be on a wartime footing. Hospitals are already at or near capacity. So we need to build temporary, emergency field hospitals, as armies do in combat zones, and train people to staff them.
As my mother was cared for in assisted-living facilities and then in a nursing home, I was impressed by the kindness and skill of nurse aides, known as certified nursing assistants. Many such people would love to be upgraded to licensed practical nurses, which is a one-year training program, but hardly any can afford the tuition or the time off. LPNs do a lot of what RNs do. The government should launch a scholarship and paid-leave program to train and graduate needed nurses at all levels, as well as other public-health workers.
It goes without saying that all needed medical supplies must be produced domestically. The law provides emergency powers for government to either make them directly or contract for their manufacture. It is idiotic that there are shortages of surgical masks, test kits, and other urgent basic supplies.
It also goes without saying that all treatment as well as testing for the coronavirus should be free and paid by the government, while this nation gets its act together to organize true universal health coverage financed publicly.
The deficit, courtesy of Trump’s perverse tax cuts, is already a trillion dollars a year and it will worsen as economic activity and tax receipts fall. But with interest rates effectively zero, the deficit can and should be much larger. The Federal Reserve can also expand its own balance sheet, as it did in the financial collapse, to buy special infrastructure bonds.
In a normal presidency, both parties would come together to legislate such an emergency program. But Trump is in so far over his head and so committed to partisan point-scoring that the necessary cooperation is unlikely. The risk is that we will lose ten vital months before a Democrat takes office next January, during which time both the epidemic and the economic collapse will needlessly worsen.
A similar tragic delay occurred between October 1929 when the economy crashed and March 1933 when Roosevelt took office. But it took all the way until the even larger World War II spending for the economy to fully recover.
The hopeful news is that while Joe Biden, the likely Democratic nominee, is neither an economic radical nor at the top of his game, he has heard of the New Deal. Indeed, FDR was still president when Biden was born in 1942. A big public (and public-health) investment program would be very Biden.
While Trump dithers and stumbles, the Democrats should organize a task force to figure out how to do all of this right. They should invite sane Republicans to join them, in a coalition of the willing.
The virus is a wake-up call on so many fronts. We not only need to wake up. We need to proceed with all deliberate speed, at the necessary scale.
