the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics: Reflections on the Corona Epidemic and the Macroeconomic Policy Response

Dr. Michael Sakbani is a professor of economics and Finance at the Geneva campus of Webster-Europe. He is a senior international consultant to the UN system, European Union and Swiss banks. His career began at the State university of NY at Stoney Brook,then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation, and UNCTAD`s Special Programs. Published over 120 professional papers.

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· Michael Sakbani

Tuesday, March 24, 2020

Reflections on the Corona Epidemic and the Macroeconomic Policy Response

Dr. Michael Sakbani

Confusion and Lack of Credibility

Fox News and President Trump have over the last three months succeeded in confusing a significant portion of the American public about the COVID 19 virus. In December and early January, the President repeatedly said that the virus is confined to China, it is a Democratic hoax, and that in couple of weeks it will be over. He even said there are only 15 cases in the US. Fox News echoed the same message and further added to this confusion.

After the Virus had spread communally in Washington State, in New York and California, the President changed his tune and started in February to let the scientists and health officials have a say on his daily TV show. Yet the President could not help himself making declarations on medicine, the virus and the state of medical supplies that have been either wrong or misleading or plain uninformed,

The President main fear revolves around his reelection chances and the interests of his supporters; the interests of the country enter only from this personal purview. A USA free of the virus is what he wants but that is not what he is seriously accomplishing in reality

The reality is that the USA has been seriously unprepared to deal with a pandemic on this scale. President Trump blamed President Obama and other predecessors for this state of unpreparedness but forgot his actions and budgetary cuts of the Pandemic Preparedness Office and the bureaucratic failures of the testing protocols of his administration.

There are evidently, two related problems facing the World as well as the USA: the COVID 19 health epidemic and the consequent economic problem. Mixing up these two problems in approaching a solution is harmful since they do not fall on the same time-line. First, the world has to deal with the epidemic and then with the economic fallout.

For the USA, science and health data and experts are unanimous that the curve of the virus spread has to be flattened in order not to overwhelm the health support system and allow time to reduce the percentage of the population not yet affected, the portion not immune, to less than 50%. However, it is not scientifically settled what immunity develops and for how long it is effective unless wide-scale testing for the antibodies are administered.

Nonetheless, drastic social distancing and isolation measures have proved effective in China, South Korea , Singapore and Taiwan. Thus, early on before the virus spreads communally, such measures must be taken. The USA, Switzerland, the UK, Spain and Italy have fallen short in taking timely action. Still, social distancing is necessary to lessen the overloading of the health system. Mr. Trump has refused so far to use his Federal authority to order nation-wide social distancing and closure.

The other problem is the woefully insufficient supply of medical instruments, medical protective ware and medical supplies to hospitals and health facilities. The President and his cheerleader VP, have announced the coming on line of millions of test kits, apparels and medical supplies from the government as well as voluntary suppliers. None of that turned out to reacht state hospitals and health officials in various states. For example, the Governor of New York, Andrew Cuomo, said that his state needs 30,000 ventilators to meet the demands of 45,000 cases. All he received were 4000. Other governors echoed the same complaint. The President, reportedly in response to the lobbying of The US Chamber of Commerce, has so far refused to use his authority provided by the Defense Production Act to force production and procurement nationwide of these necessities. The Governors of New York, California, Illinois and other states have appealed to him to invoke and force nationwide standards to stop price gouging and the dearth of supplies and put a limit to the misguided religiosity of Governors like the Mississippi Governor who asked people to flock to churches for prayer and the indifference of the Governor of Florida to beach crowds. But so far he has not done so. More seriously, impelled by his re-election fears, he is now invoking trade-offs between closure and resumption of economic activities in some geographic areas!!!

The Macroeconomic Policy Response in the US

Turning to the economic problem, it is evident that there are two imperatives at play: keeping people employed and remunerated and helping industries hard hit by the cessation of activities. There has been simultaneous destruction of aggregate demand and aggregate supply. And the destruction is worldwide. Hence we are witnessing a global shrinkage of the international economy. Responding to that that, the Administration first came out with £250 billion to pump cash into workers' hands and some $ 350 billion other money into small and medium-sized enterprises, plus some other amount into affected big industries rounding up the total to $ 1 trillion. It soon became obvious that these proposals were lacking in crucial details and involve amounts insufficient for dealing with the crisis.

The Congressional negotiations are now about a package of at least $2 .2 trillion, which puts roughly $ 250 billion directly into workers hands, some $350 billion in guarantees and bank loans to keep small and medium-sized enterprises in business and some $500 billion as loans and loan- guarantees, $250 billion for augmentations in unemployment benefits by $600 and, importantly, an increase of the coverage period from 26 to 39 weeks. tax refrains and other debt moratoriums measures. The business support will be under specifically agreed conditionality on big businesses. As modified by the Democrats, the conditions and warrants are to stop big business of doing what they did with the tax cuts and the aid extended to them in 2008. It is to be recalled that big business at these times spent the bulk of the funds on buying their own stocks and giving their executives big bonuses. At the time of writing, the agreed package had not been announced. in detail.

On the monetary side, the Fed has already announced unlimited support to the financial-system in emitting liquidity through purchases of Federal government bonds, local and municipal bonds as well as private commercial bonds. The Fed`s pro-activeness might, if needed, lend directly to businesses thereby operating on the liability side of its balance sheet. Of particular note is the Fed.`s action in activating the dollar swap lines to supply dollars into the international market to fund obligations and halt the dollar exchange rate rise.

The fiscal and monetary packages should not be limited nationally. It is essential that there should be coordination at the international level to combat this global crisis. The G.20 is moving in that direction. And in Europe, a great deal of coordination is underway. However, the G.20 will essentially be limited to national governments' actions and not to extraterritorial actions. That means poorly equipped developing countries will essentially face the onslaught on their own.

Macroeconomic Considerations

Several substantive comments might be useful.
a. The best approach is to keep workers employed by supporting their employers. Released workers will have a difficult time being re-employed. And a service dominated economy like the US` would be difficult to restart if there are massive layoffs and massive failures of small and medium-sized enterprises. This author believes that the $350 billion allocated for small and mid-size enterprises will not be enough. Many of the small enterprises are ill-equipped to deal with complicated procedures and banks. These enterprises account for the bulk of US employment and preparing them to restart business will be critical. We know that employment is always a lagging indicator after recovery starts.

b. For big businesses, the aid should be conditioned on not buying their own equity, on spending it on workers and not on enhancing equity holders stock value Good advice is to prioritize extending guarantees and lending support on existing credit lines and using government support when these are exhausted.

c. Sick leave and hospitalization expenses should be fully covered and not the usual 20% of the cost and fifteen-day leaves

d. In the case of offshore businesses, which does not pay US taxes, like the Cruise industry, the related hospitality and transport business should be covered.

e. For released workers, the coverage should include furloughed salaries up to a substantial amount, like 80% of previous wages, and over as many months as necessary.

sg. The size of the macroeconomic package is unprecedented. Added to the existing budgetary deficit of Mr. Trump`s administration, there are worries in some economic commentaries about the size of the combined deficits and the burden of public debt.
uch worries are not new and they go back a long time in both contemporary macroeconomics academic teaching and government actions.. For a decade or more, European governments followed very restrictive austere policies to fix what was called " the public finances". Deficits must be related to the GDP and its growth and also to the kind for which the borrowed funds are used and the cost of borrowing. Condemning deficits per se is rather simplistic and lacks economic sense. To begin with, public debt is a burden only when the service of the debt in percentage exceeds the rate of growth of the GDP. Additionally, if the rate of return on the used borrowed funds is higher than the cost of borrowing, i.e. interest rate and amortization, then borrowing is desirable. At present, interest rates are historically lower than they have ever been. At such rates, the neoclassical worry about the addition to the public debt does not arise. Furthermore, saving the economy from collapse is an imperative which leaves out no choice. The crisis has exposed the vulnerability of the US health -care system, its unpreparedness and the gaps in its coverage as well as its enormous and unjustifiable costs. A crisis like this should induce serious consideration of the system and an opportunity for advancing lucid ideas of reforming it in the months leading to the November elections