By Edinaldo Tebaldi, Ph.D., MA, MA, BA, Professor of Economics
SMITHFIELD, RI – GDP and unemployment forecasts for 2020 made by “dismal scientists” are bleak. No surprise. It is also not surprising that the accuracy and reliability of their forecasts are also dismal. Economic analysts have no clue what will happen to the economy right now. They are in a dark room looking for a black cat that is simply not there, yet still making assumptions about the cat. We know that until a COVID-19 treatment and vaccine become available (allowing a restart of the economy), GDP will sink, and the number of unemployed people will mostly likely jump to historic highs, possibly surpassing unemployment rates seen during the Great Depression.
A well-designed policy must consider the data that are becoming available and leverage factors that promote economic resilience and growth.
It is time to ignore unreliable economic forecasts. Short-term data are becoming available and will help to understand the impact on the economy and calibrate the policy response. For instance, record initial unemployment claims indicate that unemployment rates quickly skyrocketed. A well-designed policy must consider the data that are becoming available and leverage factors that promote economic resilience and growth. It is also imperative to analyze factors that propel an economy to recover in the aftermath of a crisis that dismantles global trade and financial markets and reduces overall short-term economic activity.
It may take a year or longer to get there, but history has proven that human ingenuity prevails during crises.
Humankind will prevail
There is strong evidence that a vaccine and treatment for COVID-19 will eventually be available. The degree of uncertainty is very high. It may take a year or longer to get there, but history has proven that human ingenuity prevails during crises. Once we get there, the economy will start to recover; most likely at a fast pace.
In the long-term economic growth is driven by well-established fundamentals: human capital (people), infrastructure (physical capital), access to land and other natural resources, entrepreneurship potential, technological innovation, and quality of institutions (how societies are organized). The COVID-19 pandemic disrupted short-term economic activity, but its effects on fundamental drivers of long-term growth are less significant. A 2007 study by the Federal Reserve analyzing the 1918 influenza pandemic—which killed way more people than what is currently projected due to COVID-19—found evidence “that the economic effects of the 1918 influenza pandemic were short-term.” Let us hope that this is the case with COVID-19. Fortunately, the fundamental drivers of long-term growth remain intact and ready to be activated as soon as the pandemic subsides, which is critical to support an economic recovery down the road.
Poor policymaking extended the depression and caused significant pain to families and businesses during the Great Depression. We can do better this time.
Stimulus Bill is a start, BUT
The fiscal stimulus approved by the U.S. Congress is the largest in history, but it will likely fall short to meet the challenges posed by this pandemic. For instance, people who had little or no income tax liability will get a one-time payment of $1,200. In addition, people who made over $100K in 2018 will get nothing. After all, these people may lose their jobs now and have no income in 2020. A one-time, lump-sum payment is a myopic response to a crisis that has no end in sight. Poor policymaking extended the Great Depression and caused significant pain to families and businesses. We can do better this time.
U.S. lawmakers have more work to do. They must be more pragmatic, avoid ideological biases, back small businesses, avoid corporate socialism, and offer support that goes beyond a one-time, lump-sum payment to families of all social statuses. Continued financial support is needed to get families to the other end of this pandemic. In addition, states are experiencing large declines in tax revenues and running out of cash, thus they need additional support from the federal government to face this pandemic. Policymakers should not lose sight that household spending—not corporate socialism— becomes revenues for businesses and generates tax revenues for state governments. Thus, financial support to households might mitigate both the huge socio-economic impacts of this pandemic and stimulate the economy at the same time.
The United States should be in the forefront of efforts to ensure that trade and global financial institutions continue to operate, and international relations are preserved and enhanced.
The U.S. must lead
International trade and strong partnership and collaboration among nations are central to promote peace and prosperity, particularly in a time of crises. This is not the time to look inward, turn away from our allies, and disregard international agreements. The United States leadership shaped the global geopolitical structure after WW2. This time is no different. A failing global governance structure would hurt Americans and America’s interests for years to come. The United States should be at the forefront of efforts to ensure that trade and global financial institutions continue to operate, and international relations are preserved and enhanced.
Former World Bank economist Edinaldo Tebaldi, Ph.D., is Professor of Economics at Bryant University, a member of the Council of Economic Advisors to Rhode Island Governor Gina Raimondo, and former advisor for the New England Public Policy Center for the Federal Reserve Bank of Boston.