With Unemployment Up, GDP Down, Household Income Increasing, Consumer Spending Plummeting, Stock Markets Recovering — What on Earth Are the Numbers Trying to Tell Us?
As protesters gather en masse to denounce systemic racism and the official count of confirmed U.S. coronavirus cases surpasses 2 million, many economists are terror-stricken by how the private sector is behaving.
The National Bureau of Economic Research recently declared that the United States has entered a recession. In making the announcement, the bureau’s Business Cycle Dating Committee justified their reasoning by pointing to the “unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy.”
This raises two very important questions:
1. How serious are the ramifications of shutting down our national economy?
2. What steps can we take to ensure the United States recovers from this economic disaster?
Let’s start by examining the first question.
On Wall Street, investors have been relatively bullish in the financial markets since the beginning of June. As reported by Business Insider, the Nasdaq Composite hit 10,000 points for the first time ever on June 9th.
All that optimism was erased, however, when the Dow Jones Industrial Average experienced its biggest one-day loss since March 2020 on June 11th, mostly in response to the significant rise of confirmed coronavirus cases. The Nasdaq and the S&P 500 have also declined in value during the same time frame.
While the stock market is perceived to be correlated with the performance of the economy, the economic damage brought on by COVID-19 extends to virtually all aspects of American society — beyond the share price of a company.
According to the Bureau of Economic Analysis, real gross domestic product (GDP) decreased 5.0 percent for the first quarter of 2020. The GDP is equal to the total income of the nation’s households or the total expenditures on the nation’s output. When GDP shrinks, America’s economic power erodes.
To understand the sheer magnitude of this report, the economy contracted 2.3 percent in the first quarter of 2008 in the midst of the Great Recession.
As consumer spending is plummeting, the coronavirus pandemic is proving to be a major catastrophe for the retail industry. U.S. retailers could announce between 20,000 and 25,000 store closures in 2020, as per a report published by Coresight Research. Department store chains Neiman Marcus, Stage Stores, and J.C. Penny have all filed for Chapter 11 bankruptcy.
These statistics don’t just affect private enterprises, shareholders, or corporate executives. The Associated Press recently reported that 1.5 million laid-off workers applied for unemployment benefits last week, driving the unemployment rate to as high as 13.3 percent. The 2008 financial crisis was only able to drive the unemployment rate to as high as 10 percent in 2009.
While recovery has slowly begun, many Americans are still paralyzed by the 2020 recession. The Kaiser Family Foundation found in a recent poll that one in four Americans have gone without meals or relied on charities or government programs to obtain groceries. Diane Swonk, a prominent labor economist who works with Grant Thornton, explained how food insecurity is affecting vulnerable American families in the midst of economic turmoil:
“People don’t go to a food bank for no reason. They go to a food bank when they’ve run out of food,” said Swonk in an interview with CNBC Make it. She adds that food insecurity is affecting children disproportionately hard. “Kids are skipping meals and not getting fed appropriate nutrition at a critical time in their lives.”
The economy isn’t only suffering on a domestic scale. The International Monetary Fund (IMF) projected that the global economy in 2020 will contract 3 percent.
To add insult to injury, the U.S. monthly international trade deficit increased since the start of the coronavirus pandemic, as exports decreased more than imports. When consumers purchase imported goods, they are essentially making foreign nations wealthier. When foreign consumers purchase Americans goods (exports), our circular flow of income augments.
So, to answer our first question of how serious the ramifications are of shutting down our national economy?
Obviously, we made a huge mistake.
As for economic recovery, we have a rocky road ahead of us.
The Congressional Budget Office (CBO) projected that the coronavirus will cost the United States economy nearly $8 trillion. No, that is not a typo. Eight trillion dollars! And according to another report published by the CBO, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is expected to add $1.8 trillion to the national deficits over the 2020-2030 decade.
Lawmakers on Capitol Hill are debating on whether to extend the $600 enhancement to weekly unemployment checks past the July 31 expiration date. Last month, the Democratic-controlled House passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROS) Act, which would extend the extra $600 federal unemployment benefit to January 2021.
Despite this, Republicans view the additional payments as a disincentive to return to work. Senate Majority Leader Mitch McConnell (R-KY) recently said any additional stimulus legislation would not extend the $600 benefit.
McConnell berated House Democrats last month when he declared that “[the HEROS Act] reads like the speaker of the House pasted together random ideas from her most liberal members and slapped the [word] ‘coronavirus’ on top of it.”
Heidi Shierholz, an economist at the Economic Policy Institute, argued that extending the $600 unemployment benefit would mean that Americans would have more money to spend in stores, thus leading to lower unemployment. If the extra $600 unemployment benefit expires, millions of Americans will have less money to spend in stores, and that could ultimately lead to more unemployment, Shierholz said.
Rock-solid economic data shows that unemployment insurance helps keep an economy afloat, especially during times of crisis. Mark Zandi, chief economist at Moody’s Analytics, found in a 2008 study that for every dollar spent on unemployment insurance there is a multiplier effect that leads to a 1.64 percent increase in GDP.
Conservative-leaning lawmakers such as Senator Rob Portman (R-OH) have insisted on using federal funds to distribute a $450 “return to work” bonus. According to the CBO, if the $600 benefit was extended through January 2021, five out of every six recipients would receive more in benefits then they would from working those six months. This could de-incentivize Americans from going back to work.
Senator Rob Portman (R-OH)
“Not only is the return-to-work bonus proposal the right policy in terms of incentivizing people to safely return to work and allowing businesses to re-open, but it could also benefit the American taxpayer through significant cost savings compared to the current money we’re spending on the CARES Act unemployment benefits,” Portman said in a statement to Marketwatch.com. “Given that more than 15 million unemployed Americans are categorized as ‘temporary layoffs,’ we need to be sure that there’s no financial disincentive for individuals to get back into the workforce when those jobs become available to them again.”
The problem with this proposal, however, is that our current economy has become an inhospitable environment for job growth. The Bureau of Labor Statistics found that the number of job openings have declined to 5 million in April (which is a decrease of 965,000 job openings from March). Heidi Shierholz claimed that “It’s not true that there’s a pool of jobs out there that people would fill if they weren’t receiving unemployment benefits.”
So, how do we provide struggling Americans with a sustainable income without de-incentivizing potential workers from getting a job?
The Worker Relief and Security Act would allow Americans to continue to receive the $600 unemployment benefit for as long as the state in which they reside continues to impose emergency-power regulations in response to the coronavirus outbreak. Once the national or state emergency is rescinded, unemployed Americans would receive benefits based on their state’s unemployment level.
Congressman Don Beyer (D-VA) is the sponsor of the bill.
“The goal of the Worker Relief and Security Act is to prevent political gridlock from interfering with relief efforts by tying financial support for workers to public health and economic conditions,” said Beyer.
While I do believe the government should extend the $600 enhancement to weekly unemployment checks past the July 31 expiration date, I do not support a “one size fits all” approach sponsors of the HEROS Act advocate for. We cannot prolong this economic recession by de-incentivizing Americans from getting back to work.
Now more than ever, we must abandon political partisanship and implement laws that will generate a cohesive and productive American society. Passing the Work Relief and Security Act and quickly, but responsibly, reopening our economy are the first steps to economic recovery.
Article written by Jett James Pruitt
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