After the war

“Nous sommes en guerre.”

— French President Emmanuel Macron

 
Your life has been upended by the novel coronavirus. Your quotidian routines, your relationship with your immediate family, your news consumption, your wealth, quite possibly your income — all of these have changed in ways that were unthinkable just a few weeks ago. At some point, they will change back.

Why it matters: This is not a shooting war, but in important ways it looks and feels like one. Understanding the similarities and differences is a useful way to judge the potential economic consequences of the pandemic.

The big picture: In a war, three big things tend to happen to an economy: Private-sector employment plunges, a large proportion of the labor force is injured or killed, and a substantial part of the country’s infrastructure is destroyed.

  • In the fight against COVID-19,the central strategy of the war effort — social distancing — is forcing layoffs in dozens of industries. That’s a big similarity.
  • The other side: The labor force is — with tragic exceptions — largely untouched, willing and eager to get back to work as soon as it can. And the economy’s asset base — its buildings, production plants, intellectual property, internet backbones, and the like — is not being harmed at all.

This is good news from a medium-term economic perspective, and explains why the likes of Goldman Sachs expect a sharp rebound in economic activity — and also stock prices — once America is allowed to get back to work.

  • The country’s infrastructure might be temporarily retooled to support the war effort — GM and Ford, and maybe even Tesla, are consideringmoves to start making ventilators instead of cars.
  • Either way, the core ingredients of America’s pre-crisis economic strength will largely be in place after the pandemic has run its course.

Caveats: There are far too many known unknowns to have any certainty about the medium-term economic prognosis. And since no major economy has experienced all-out war on its own soil since 1945, the utility of the simile is limited.

  • The world is also retreatinginto national borders, both in terms of travel restrictions and hoarding medical supplies. That doesn’t bode well for global supply chains.

The bottom line: Shooting wars are horrible, devastating things, so “better than a shooting war” is in no way reassuring. But wars are not that bad for capital markets, and capitalism has proved extremely resilient many times in the past. It’s far too early to count it out this time.

 

– The bailout arrives

The White House has pledged to spend “whatever it takes” to win the fight against the novel coronavirus, and to that end has put forward a $1 trillion bailout package.

How it works: Half the sum will be spent directly, in the form of checks being sent to American households. Details are still being worked out, but there will be an element of means testing, with poorer Americans getting more money.

  • That makes sense, because richer households are already getting an involuntary cash injection of their own, in the form of foregone consumption expenditures.
  • A personal datapoint: I looked at my 2019 credit card summary, and fully 40% of my spending went towards travel, entertainment, and restaurants. My enforced frugality on those fronts will be worth well over $1,000 to me by the time I’m out and about spending again.

The other half of the bailout goes to corporations, who already received a trillion-dollar giveaway in the form of the 2017 tax cut.

  • The corporate bailout isn’t a cash grant,  Instead, it takes the form of secured loans. That’s a smart way of giving businesses the liquidity they need to keep on operating, without the money going to shareholders or even bondholders.

Small businesses will also be eligible for government-guaranteed loans — but it’s not obvious how they’re supposed to be able to repay them.

  • One good ideacomes from Adam Ozimek and John Lettieri of the Economic Impact Group. They suggest that the loans should amortize over 20 years, with a three-month grace period, and carry an interest rate of 0%. The loans should also be available for much more than just maintaining payroll, which is the focus of the Treasury Department’s proposal.
  • Another good idea comes from Toby Scammell, the CEO of Womply, a payments data company. Take every small business merchant account in America, and simply deposit their average daily volume into their bank account every day until the crisis is over. The money then would be repaid over time with an automatic 5% charge on new inflows.

Why it matters: As my credit card gathers dust, businesses around New York and the world are losing income, unable to make payroll. The Danish government has offered to pay as much as 75% of the wages of employees in businesses hit by the coronavirus. That, or something even bigger, would help a lot of U.S. businesses weather the present storm.

Πηγή: axios.com

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