the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

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 100 professional papers.

Saturday, April 04, 2020

Analysis of the Macroeconomic Crisis of the Pandemic: lessons Learned

 Analysis of the Macroeconomic Crisis of the Pandemic; Lessons Learned
        Dr. Michael Sakbani

Confusion and Opaqueness at the Top
The first lesson is that a global epidemic cannot be fought in one country or one region at a time. The virus respects no border and spares nobody.  Although the timeline might be different for various regions, and countries, the epidemic will come everywhere. The time to lessen its impact is before it arrives. Thus, the country that has not yet gotten the virus must prepare for what is coming. Belittling the crisis to come for political calculations courts a major catastrophe.

The US Federal response to the crisis has been anything but competent. The Pentagon in early march offered masques and ventilators but no civilian Federal official took that up. Furthermore, the ventilators in the national stock have maintenance and repair problems. There are Press reports (NBC, MSNBC, ABC, CNN) that business has exported abroad thousands of medical supply items needed in the US. the Secretary of the Public Health  Alex Azard raised the epidemic issue with the President to no result. the director of the US National Institution of Allergies and Infectious Diseases, Dr. A. Fauci as well as national security officials and two memos by Dr. Peter Navarro did not succeed in convincing the President of the seriousness of the epidemic. The task force set up by the President promised millions of masques, protective apparels and tests. But state officials report having gotten little of all that. The VP`s  task force over-promised and under-delivered
The Federal government did not coordinate purchases of medical supplies and instruments. The result has been that states are outbidding each other, thereby jacking up prices. Regardless of party affiliation, Governors complain about this price competition. Many businesses are practicing price gouging; a masque price is now 10 times higher than before the crisis. On top of that, FEMA is competing against the states and increasing this mess.
Half of the states still do not have strict measures of social isolation because the Federal government has not set common standards. The FDA and the Center for Disease Control had very outdated protocols evidently not suitable for such a large scale epidemic. They hampered testing and froze the use of national stocks for a long period. To add to this cascade of ill steps, they refused to use the WHO test for unknown reasons. Furthermore, they dissimulated their failures and took no responsibility therein.

Why is the USA trapped in this dysfunctionality?
The President's main concerns seem to be having a prosperous economy which assures his re-election. Given this preoccupation, he first dismissed the virus as a Chinese remote happening, then he called it a democrats hoax, then on February 27, he declared the US is in no danger of being affected. By the time he took the matter seriously, the virus had spread communally in various parts of the land.
Quite astonishing, the President refused to take responsibility for the shortages of Federal preparations, and the patchwork of state responses. Predictably, he blamed his predecessors for the Administration's poor performance. He has been in charge for three years and his security and intelligence agencies signaled the shortages early in February, but he has done nothing. Conveniently, he forgot that his Administration cut off the budgetary allocations to the Office of Epidemics Prevention, which was a part of the National Security Council. 
The result has been confusion and lack of credibility regarding the highest levels of leadership.

The Federal government has been very unwilling to impose common standards of purchasing, procurement and distribution by enforcing its authority under the Defense Production Act. The press reports that the President has been lobbied by the US Chamber of Commerce not to do so. Only late in March, he did use his authority to force production of the needed supplies. And to add to his hesitant stands, he voiced out at mid-March his wish to reopen the economy for business at Easter in areas that are not largely affected by the virus, a truly uninformed and dangerous idea.
The behavior of the President is not unique among US politicians. Many Governors who support the President: Florida, Mississippi, Missouri, Alabama, just to name a few, have decided matters without due regard to science and Data. In a partisan political atmosphere where there is no respect for the truth, for data, for knowledge, the US finds itself at least partially, in the dangerous culture of “alternative facts” and science denial.

As a historical incident, lying about an epidemic, dissimulating its spread and fear-ridden state behavior goes way back in history. Examples abound: the Bubonic plague,  the Spanish flu, and the repeated Cholera epidemics are cases in point.
The US has to chart out a strategy for dealing with the epidemic. There are only three scenarios: let the virus run and have people go back to work; close up the economy for months; and finally, reduce the spread of the epidemic by flattening out the curve to not overwhelms the hospitals and eventually find a treatment and a vaccine. The first scenario means at least two million dead, and so far to far as we know, there is no long-term immunity The second a collapsed economy, while the third is the only feasible strategy. The US  has made no choice because the President filters everything through his election perspective.

The Role and Perception of the Public Sector
The advent of the Coronavirus, like the HIV has some origin in man`s intrusion and encroachment upon the animal and the jungle kingdoms. It is reported that a bat has transmitted the  Covid -19  to another animal eaten by humans. For long science has not provided proof or counter proof on cross-species transmission. If this hypothesis is true, then at the bottom of such epidemics is man`s multiplying demography. The world as we still remember it was a planet of 5 billion people in the 1950`s Today, we are about 7.5 billion, polluting and consuming.

 In all countries, when the crisis struck, people looked to Governments and public bodies for dealing with their problems. Indeed, it was the Government that took command of the situation albeit with various degrees of success. Businesses and voluntary civilian bodies were only organs of help to the Governments in charge.
For at least four decades, the public, especially in the USA, has been skeptical of the role of Government outside law and order and national defense. President Reagan famously said The government is the problem and not the solution. So many people find the public sector lacking in efficacy and without a bottom line. Its bureaucracies are thought of as heavy, cumbersome and lacking in qualifications. This widespread belief is based on stereotypes and does not stand for careful examination. To be sure, the public sector tolerates failure and needs periodic calling into account. But the record of business is not always better. It is precisely the lack of bottom line that exposes the government to such criticisms because what they do does not have a market price.

In the USA, the size of Government in 1952 was 5% of the labor force serving less than 180 million residents  Today, it is only 2% of the employed serving 330 million residents. The public sector might have incompetents but it is rich with devoted public servants whose best elements are as good as the very best in the private sector.
The public distrust of the Government finds support in the concocted rational justifications offered by the new Macroeconomics taught in the academe over the last forty years. This macroeconomics postulates the rationality of the homo economicus, the rational expectations of the individual, the efficient working of the markets and the multiple lags of fiscal policies and the biased self- interested political calculus of election cycles. In the crisis of 2008, all of these postulates proved empirically invalid. The government saved the economies and the financial systems by following the old stuff carrying the insights of John Maynard Keynes. This time again, the macroeconomic policy responses are in the same vein. In a public lecture in 2017 at the graduate institute in Geneva, the eminent economist and public intellectual Paul  Krugman called this “the old stuff”. Another adjective richly deserved is ”the largely valid stuff”.

Analysis of the  Macroeconomic Crisis
The macroeconomic packages in all countries have a basic aim of putting cash in people's hands: consumers and laborers. The virus has destroyed  both Aggregate Demand and Aggregate Supply; and it did that simultaneously. Thus, it shut down  business, destroyed investment and strangulated consumption.  And it did that globally, shutting off for a while, international trade and the international supply chain. The world economy moved fast into a gaping recession perhaps more intractable than the 2008 recession.
This week (beginning April)  Goldman Sachs predicted an unemployment rate of 15% for the US. From March 19 to April 2, the number of workers applying for unemployment compensation in the USA increased by 10 million. In Europe, the same unemployment disaster seems to be taking hold. In Spain, France and the UK applications for unemployment compensations have registered unprecedented levels. A major problem with the current recession is that unlike the previous four recessions, the upper income 25% of the population in the US have bounced back, thanks to the digital economy. for the lower 25%, it is altogether a different story. people who do manual jobs, who are in health services, in the food and restaurant business and all other front line workers have lost their employment drastically; in fact, they tanked. So many small businesses are shut forever, and so many workers are let go for good.
The macroeconomic policy response in all advanced countries has been bold and encouraging. In the US, the passage of the $ 2.2 trillion package by overwhelming bipartisan Congressional support is promising. The same can be said about national European actions involving hundreds of billions of Euros and the euro 100 billion promised by the EU and further action by the EIB. As to developing countries, neither the virus has yet manifested its full impact nor are these countries going to have the financial resources and medical systems to cope with this double crisis.
What is important from a macroeconomic policy strategy is to keep workers employed in their respective enterprises. The service dominated economies in the advanced countries would be difficult to restart if massive layoffs occur. There are $350 billion appropriated for medium and small enterprises in the  US` bill. This relief will be administered by the US Small Business Administration and channeled through banks. This risks two things: that there will be long bureaucratic procedures in which small enterprises will not be the best place to get the money and another is the long delays in processing such a massive amount.  The capital danger is that small businesses will go bankrupt if the money does not get to them fast. 
Another $500 billion are allocated for large businesses. Getting all these businesses to keep their workers rather than dismissing them, will be the important challenge. There should be a stipulation that any such business that employs after the fiscal help less than what it did before the crisis should pay back the aid as a loan. A huge problem is that the bill does not appropriate specific amounts to state and local governments. Given the state of finance of these bodies, the US risks severe cuts in education, health care and other necessary expenditures. 

For the furloughed workers, it is imperative that the individual monthly appropriations reach these workers soon, i.e. in a matter of a few days and not a few weeks. In the US the bill provides unemployment compensation for 39 weeks instead of 26 weeks and tops the compensation by $600. In Europe, the unemployment compensations are more generous,80 to 85%  of previous wages and longer in duration. In both cases, reaching fast  the pockets of the workers is what matters. The Federal Government must distribute the $250 billion immediately. This reveals the weakness of the US social safety net.

Paying for sick leaves and for medical treatments is more assured in Europe than in the USA. There are evident gaps in the USA`s health care system as far as insurance coverages and benefits are concerned. What comes out of this episode, is the need to review the public health care system in the  USA as compared to Europe.

In the case of big businesses, like air transport, cruise industry, various tourism and hospitality industries, etc., there should be no repetition of what such industries did in 2008 and after the US tax cuts of 2017, where many of them spent the bulk of their aid and forgone taxes on buying their stocks and giving large bonuses to their executives. The conditionality introduced by the Democrats` amendments to the original bill should be carefully monitored by experts under the supervision of Congress. Since these big businesses have access to bank loans, the priority should be to use existing credit lines before dipping into the appropriated aid. The coverage should also involve tertiary industries like transport, food and tourism services.

An important problem is that implementing such massive guarantees to banks and disbursement of Funds involves new procedures and is at a scale never seen before. This will cause delays and force more dismissals, the very thing nobody wants.

On the monetary side, even though interest rates are no longer available, the US `Fed. has done an exemplary job in providing unlimited liquidity and even opening its facilities to lending financial institutions as well as even businesses if that becomes necessary. The Fed is also cooperating through its swap lines with other major Central Banks to provide dollars and stop the climb of its exchange rate.

The Possible Shape of the Recovery
The question arises as to what type of recovery, the economy will have after controlling the virus onslaught. Looking at the USA, the crisis has four interrelated facets. First, there is the question of what percentage of the labor force kept their jobs in the various enterprises and what percentage are furloughed. The smaller is the latter, the faster is the recovery. Historically, unemployment decline has always been a lager in the recovery. Besides, many firms will re-examine their manpower requirement in view of the new labor-saving technology and they might decide to reduce their work-force.
The second facet is the oil industry problem. Today the price of oil has come down to $ 25.00 per barrel from the usual plateau of $ 60.00.  This threatens the survival of the oil industry and for the USA, could wipe out fracking and shale extraction. The president triumphantly declared that as a return to 99 cents per gallon bonanza. One day later he took a different tack saying he is  interfering  in the oil dispute between Saudi Arabia and Russia to preserve the industry. The problem is nowhere near a solution. There have been no talks between the two quarreling producers and no Trump intermediation. Furthermore, OPEC and Russia will not negotiate production targets without the participation of other oil producers like the USA. 
The third problem is the ballooning private debt in the US economy. This problem has accumulated over the past 12 years and it involves both businesses and 45 million American individuals encumbered by student debts.  In addition, American house owners have mortgage loans of about $15 trillion. The mortgage market is now dead. And close to 70% of small and medium-sized enterprises are linked to the construction industry. This is a problem of immediate need of attention by the Central Bank. One should expect some winding down of these accumulated debts. But such a process will hit hard the financial system. 
One aspect of the current recession is its pattern of effect across the income distribution in the USA. In all the previous four recession the top 25 % of income earners and the lowest 25 % had experienced more or less synchronized declines. In this one, however, the digital economy seems to have spared the top 25 % of a great negative effect, while the lowest 25 % have tanked. People working in the travel industry, in tourism in general, in restaurants and those employed by small businesses have been hit very hard. Some research predicts that 15-20 percent of small businesses will disappear. 

Europe is not yet on the road to recovery; Spain, France Italy and Germany have yet to resume activities. China, South Korea, Singapore and Taiwan are on the mend. But the emerging market economies have yet to handle the virus onslaught and place their economies on the recovery path.
International trade is practically shut off; there are few imports and exports taking place. It is of paramount importance that the supply chain is reopened and exports start to flow. 

Considering all the above, an educated guess is that the recovery will not follow a V -curve but rather a protracted, slightly rising L- curve. It will take a long time to get back to normal. In the crisis of 2008, it took the Economy 5 years to recover. However, with the help of the digital economy, the economy has a higher buoyancy than before.
Certainly, President Trump will be disappointed in this season of elections.

One last lesson in the US is the pattern of effect on various groups. Black and Hispanic Americans have been hardest hit by the epidemic; their death toll is more than double the rest of the population. Part of that is due to the type of front-line services they render such as transport, health-care help, all of which expose them to the virus, and the other part is the long-standing structural problems of poverty, ill-health and discrimination. The crisis is an opportunity for the US to look at its self and start making up for these long-neglected ills.

(Geneva, 4/ 5/2020)


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