The world economy is now collapsing

A microbe has overthrown our arrogance and sent global output into a tailspin

Martin Wolf

Earth in Chains
© James Ferguson



In its latest World Economic Outlook, the IMF calls what is now happening, the “Great Lockdown”. I prefer the “Great Shutdown”: this phrase captures the reality that the global economy would be collapsing even if policymakers were not imposing lockdowns and might stay in collapse after lockdowns end.

Yet, whatever we call it, this is clear: it is much the biggest crisis the world has confronted since the second world war and the biggest economic disaster since the Depression of the 1930s. The world has come into this moment with divisions among its great powers and incompetence at the highest levels of government of terrifying proportions. We will pass through this, but into what?

As recently as January, the IMF had no idea of what was about to hit, partly because Chinese officials had failed to inform one another, let alone the rest of the world. Now we are in the middle of a pandemic with vast consequences. But much remains unclear. One important uncertainty is how myopic leaders will respond to this global threat.

Chart of credit spreads on US corporate debt showing that rising spreads show flight from risky assets in developed countries


For what any forecast is worth, the IMF now suggests that global output per head will contract by 4.2 per cent this year, vastly more than the 1.6 per cent recorded in 2009, during the global financial crisis. Ninety per cent of all countries will experience negative growth in real gross domestic product per head this year, against 62 per cent in 2009, when China’s robust expansion helped cushion the blow.

In January, the IMF forecast smooth growth this year. It now forecasts a plunge of 12 per cent between the last quarter of 2019 and the second quarter of 2020 in advanced economies and a fall of 5 per cent in emerging and developing countries. But, optimistically, the second quarter is forecast to be the nadir. Thereafter, it expects a recovery, though output in advanced economies is forecast to remain below fourth quarter 2019 levels until 2022.

A graphic with no description


This “baseline” assumes economic reopening in the second half of 2020. If so, the IMF forecasts a 3 per cent global contraction in 2020, followed by a 5.8 per cent expansion in 2021. In advanced economies, the forecast is of a 6.1 per cent contraction this year, followed by a 4.5 per cent expansion in 2021. All this may prove too optimistic.

The IMF offers three sobering alternative scenarios. In the first, lockdowns last 50 per cent longer than in the baseline. In the second, there is a second wave of the virus in 2021. In the third, these elements are combined.

Under longer lockdowns this year, global output is 3 per cent lower in 2020 than in the baseline.

With a second wave of infections, global output would be 5 per cent below the baseline in 2021.

With both misfortunes, global output would be almost 8 per cent below the baseline in 2021.

Under the latter possibility, government spending in advanced economies would be 10 percentage points higher relative to GDP in 2021 and government debt 20 percentage points higher in the medium term than in the already unfavourable baseline. We have no real idea which will prove most correct.

It might be even worse: the virus might mutate; immunity for people who have had it might not last; and a vaccine might not be forthcoming. A microbe has overthrown all our arrogance.

Chart of growth in global GDP that shows the depth and breadth of the coronavirus recession will be far worse than in 2009


What must we do to manage this disaster? One answer is not to abandon the lockdowns before the death rate is brought under control.

It will be impossible to reopen economies with a raging epidemic, increasing numbers of dead and pushing health systems into collapse. Even if we were allowed to buy or go back to work, many would not do so.

But it is essential to prepare for that day, by creating vastly-enhanced capacities to test, trace, quarantine and treat people. No expense must now be spared on this, or on investment in creating, producing and using a new vaccine.

Chart of Global GDP forecasts that shows the baseline forecast is now for deep recessions this year


Above all, as the introductory essay to a report from the Peterson Institute for International Economics in Washington on the essential role of the Group of 20 leading countries states: “Put simply, in the Covid-19 pandemic, lack of international co-operation will mean that more people will die.”

This is true in health policy and in ensuring an effective global economic response. Both the pandemic and the Great Shutdown are global events. Help with the health response is essential, as Maurice Obstfeld, former IMF chief economist, stresses in the report.

Yet so too is economic help for poorer countries, via debt relief, grants and cheap loans. A huge new issue of the IMF’s special drawing rights, with transfer of unneeded allocations to poorer countries, is needed.

Chart of impact of differing Covid-19 scenarios which shows that outcomes could be far worse than baseline in advanced countries


The negative-sum economic nationalism that has driven Donald Trump throughout his term as US president, and has even emerged within the EU, is a serious danger. We need trade to flow freely, especially (but not solely) in medical equipment and supplies. If the world economy is broken apart, as happened in response to the Depression, the recovery will be blighted, if not slain.

We do not know what the pandemic has in store or how the economy will respond. We do know what we must do to get through this terrifying upheaval with the least possible damage.

Chart of scenarios in the fight against Covid-19 which shows that outcomes could also be far worse in emerging and developing countries


We must bring the disease under control. We must invest massively in systems for managing it after current lockdowns end.

We must spend whatever is needed to protect both our people and our economic potential from the consequences.

We must help the billions of people who live in countries that cannot help themselves unaided.

We must remember above all that in a pandemic, no country is an island.

We do not know the future. But we do know how we should try to shape it. Will we?

That is the question. I greatly fear our answer.

Are We Heading for a Historic Economic Collapse? Why the U.S. GDP Could Fall by 40%.

By Randall W. Forsyth




When straightforward descriptions can’t adequately portray an event or phenomenon, metaphors abound. So it has been with the coronavirus’ devastating impact on society and the economy.

The pandemic has been called a war against an invisible enemy that therefore requires government mobilization. It has also been termed a natural disaster, but unlike earthquakes or hurricanes, it’s global and without a certain end date.

Economically, it’s arguably a man-made misfortune because the lockdown of people and the virtual cessation of many businesses resulted from government dictates.

All are fitting labels, to an extent. But more important than how to describe Covid-19 and its terrible impact—obvious in some 100,000 global deaths and massive U.S. unemployment and loss of income—is the question of when the virus will retreat and an economic recovery will begin. The financial markets appear positively sanguine that a revival is near, with stocks and risky corporate debt securities rallying strongly in the past week, mainly as a result of Federal Reserve actions.

If the economic contraction is chiefly man-made, it should be relatively simple to reverse. If, however, it depends more on when the virus’ health impact recedes, the timing is more uncertain. An economic comeback will also depend on how willing business and labor are to re-engage once the all-clear is sounded.

The stockmarket evidently saw reason to cheer this past holiday-shortened week, with the S&P 500 indexpopping up 12.1%. That was its best showing since the week ended on Oct. 11, 1974, when it was emerging from a bloody bear market that had sliced 45% from its peak value. The large-capitalization benchmark has now rebounded nearly 25% from its March 23 low, suggesting that a recovery may be at hand.

What could Mr. Market be thinking?

After examining stock prices’ past relationship with U.S. economic growth, Deutsche Bank macro strategist Alan Ruskin concludes that equities’ recent behavior would suggest a short, shallow recession ahead and a quick

recovery, rather than an economic collapse of historic proportions. But the latter most definitely is what the U.S. economy is undergoing. With nearly 17 million Americans filing for jobless benefits in the past three weeks, economists are starting to make stabs at how fast it is shrinking.

The most horrific number I’ve seen is J.P. Morganeconomists’ estimate that U.S. gross domestic product is collapsing at a 40% annual rate, a revision from their previous calculation of 25%. It has been said that economists use decimal points in their forecasts to show they have a sense of humor. These numbers are nothing to joke about.

That economic activity has ground to a halt in many sectors, as mandated by the need to quarantine, is obvious in the lack of traffic on highways, and in the air. (Flights are down some 95% from the total a year ago, according to Transportation Security Administration screenings, to levels not seen since after 9/11.)

“The most important factor driving the near-term path of the economy and the labor market is the progression of the virus and the length of restrictions on activity put in place to contain it,” the bank’s economists state. But how this unfolds remains unknown. “You don’t make the timeline; the virus makes the timeline,” as Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, has famously said.

Still, you have to make some assumptions. J.P. Morgan sees restrictions on activities and stay-at-home orders continuing through May, with a rebound starting in June. After that, the bank looks for GDP to surge at a 23% annual clip in the third quarter and 13% in the fourth quarter. That sounds stupendous, but after climbing out of the deep hole in which it now sits, GDP in the fourth quarter would still be 6.9% lower than it was a year earlier.

Cornerstone Macro’s Nancy Lazar is more skeptical. After falling at a 20% rate in the second quarter, she sees U.S. GDP continuing to decline in the third, albeit at a far more moderate 2%.

David Levy, who heads the Jerome Levy Forecasting Center, sees the worst hit in the current quarter, but thinks the third still will be bad, as businesses continue to shed inventories and cut capital investment. He is skeptical about a third-quarter bounceback.

The shape of a potential recovery is being described in terms of letters that represent graphically the economy’s eventual comeback, from a vigorous V to a lugubrious L, with variations such as U and W.

Given the high degree of uncertainty of uncertainty, RBC Capital Markets economists Tom
Porcelli and Jacob Oubina offer no less than five scenarios, depending on the changing data, including when Covid-19’s infamous “death curve” flattens. That could be in early June, according to the IHME Murray Model, named for its author, University of Washington professor Christopher Murray. Alternatively, the peak could come sooner…or later.

RBC ascribes a 35% probability to a V-shape recovery, with the virus contained, a lower death rate than expected, and the economy returning to trend by the end of the third quarter.

Equally likely, however, is a “double dip” with a relapse of the virus in autumn. In that case, the economistsposit, the drop in GDP in the fourth quarter would be less severe than the one in the second because we’d be better prepared to reimpose social distancing, and the health-care system would be better equipped.

A “check mark” recovery—picture a shorter downstroke and a longer upstroke with a flatter slope—is given a 20% probability by RBC. In that scenario, infection and death rates would remain elevated, although increased antibody tests beginning next month might nonetheless allow the economy to open up gradually.

An “EKG-shape” (like the blips of an electrocardiogram chart) comeback would be the best-case scenario, with low fatality rates and the effects of stimulus allowing the economy to come roaring back; the economists give that a 5% chance.

Finally, there’s the “long-U” recovery, with no letup in virus risk. That would ensure an elongated period of weak growth, such as what followed the financial crisis.

While the current economic contraction is unique, given that it was government-mandated to fight a public health crisis, Goldman Sachseconomists think there is a precedent in the 1981-82 recession. That also was “man-made,” with growth subordinated to another societal goal—in that case, to break the stubborn inflation of the early 1980s, they write in a research note.

After the recession engineered by the Paul Volcker–led Fed, which had raised interest rates as high as 20%, the labor market’s revival was particularly robust, Goldman relates. That was because many of the 2.5 milliontemporarily jobless workers were rehired once the central bank relented.

“When economic downturns are deliberately induced and negative growth policies are perceived as temporary, firms may be incentivized to minimize permanent layoffs (and the associated costs and revenue disruptions they produced),” the bank’s economists write.

There are significant risks today to this favorable outcome, including a more gradual lifting of activity restrictions, business “exits,” and “financial spillovers,” along with the specter of resurgence of the virus, they add.

What is imponderable is how we Will respond when we are freed from house arrest and businesses are permitted to reopen.

The Jerome Levy Forecasting Center’s David Levy wonders how much retired baby boomers will want to travel, considering the health risks. Even people with money might be scared to do anything this summer, he adds, given the “jolt” to household wealth. The value of U.S. stock holdings is down some $6.9 trillion from the Feb. 19 peak, even after a jump of $3.3 trillion in the latest week, according to Wilshire Associates. However, he adds, “I’m optimistic about the U.S. getting through this. The government basically did the right thing
to throw money at the economy.”

While Washington’s huge spending packages will help America get back on its feet, the rest of the world may not fare as well. Especially hard-hit will be emerging economies, which have basically gotten by on foreign borrowing after their export boom got off track in the last recession.

The only certainty about the outlook is that the U.S. economy is undergoing a severe contraction without precedent in history, even during the depths of the Great Depression of the 1930s. Yet just because this recession was mandated by government policies doesn’t mean it can be reversed as easily.

While the policy response has been unprecedented, with more than $2 trillion in fiscal measures and trillions more in liquidity provisions from the Fed via a dizzying alphabet soup of facilities, these actions are attempts to fill the gaps left by the enforced shutdown of a large swath of the U.S. economy.

Even well-intentioned schemes, such as the Payroll Protection Program of forgivable loans to small businesses, have been fraught with problems. And another round of stimulus will be needed to tide over those hurt in this crisis, especially states and localities that, unlike the federal government, can’t borrow without limit and in many cases must balance their budgets.

So far, the actions by Congress and the Trump administration, along with the Fed, have encouraged the equity and credit markets to stage strong recoveries. The outlook for the economy is far less certain, not least of all because it will be determined by the course taken by the coronavirus. And that course, as we see daily, is far from predictable.

Buttonwood

An imaginative template for dealing with the cash Crunch

The world of distressed lending offers a guide




Take yourself back, if you can manage it, to a more tranquil time—January, say. Imagine a smallish restaurant chain that had a bad Christmas. Its owner borrowed heavily to expand only to find its new outlets were slow to attract customers.

The chain cannot meet its interest and other costs. A consultancy says $10m is needed to tide the firm over until its problems are fixed. The bank says it will forgo interest payments worth $5m, if the owner kicks in $5m of equity capital. A deal is struck.

Fast-forward a few weeks and imagine a similar chain that is temporarily shut down because of the covid-19 virus. The firm has no revenue, but it still has fixed costs. The hypothetical January deal is a template for dealing with the problem.

But in a broader crisis, things are always trickier. The bank’s balance-sheet is stretched to the limit. The stockmarket crash has taken a bite from the owner’s wealth. And she is reluctant to sell a stake in the business.

An alternative is to turn to specialist private-credit funds. These are vehicles backed by long-term investors, such as insurance firms, sovereign-wealth funds and university endowments, which lend directly to companies, much as a bank would.

Some will have discrete distressed-lending or “special-situation” arms. Many more are prepared to put up capital when others won’t. And everything is a special situation now. So the mindset and methods of these specialists will need to be broadly applied.

What might they offer our hypothetical restaurant chain? One option is a payment-in-kind (or pik) loan. This affords the borrower flexibility. If the shutdown is protracted, it can roll up missed interest payments into the outstanding debt (ie, pay them in kind). Once the business gets back to normal, it can make interest payments in cash again.

A pik loan has two advantages, according to Mark Attanasio and Jean-Marc Chapus of Crescent Capital, a private-credit firm. It gives immediate relief, and it leaves the capital structure largely intact, so the owner retains control. The lender, in essence, says to the borrower “you take a spring break on interest payments; we believe in your recovery.”

Of course, the interest on any loan granted in a distressed situation will be steep. The opportunity cost to a lender is the double-digit yields now on offer in the high-yield bond market. A way to reduce the risk to the lender, and thus the cost to the borrower, is to secure a loan on fixed assets.

Last week United Airlines agreed a one-year loan with banks backed by aircraft and other collateral, according to Bloomberg News. Part of the loan was then sold on to Apollo, a leading private-capital firm. More deals like this seem likely.

Not every business in need is a big airline. A lot of medium-sized firms, like our hypothetical restaurant chain, do not have many tangible assets. Property and equipment are leased. The firm’s worth is in intangibles, such as its brand.

There is no value for a lender to recover if the company is liquidated. And in complex situations, such as this one, it is difficult to estimate the severity of the short-term damage and how quickly a business will recover. The ideal solution is an injection of equity capital.

But shareholders are reluctant to issue equity in recessions, when stock values are depressed, as it dilutes the value of their stake. Convertible loans offer a way around this. These carry a lower rate of interest than a conventional loan, but give the lender the possibility of converting it into equity when things—revenues, profits, asset values—return to normal.

In our ideal world, there is one lender and one owner. The real world is messier. Lenders to firms in distress expect to be paid back before other creditors. But the company may have covenants on its existing debt that rule out a new lender pushing to the front of the queue.

A unique situation calls for flexibility. “The right paradigm is a natural disaster,” says Jonathan Lavine of Bain Capital. “More than ever, banks, shareholders and other lenders will have to work together.”

The goal should be to keep healthy firms intact. There are some specialists that buy the debts of troubled companies in the expectation they will be forced into bankruptcy, wiping the shareholders out and leaving the debt-holders as owners. A change at the top is sometimes necessary.

But in general, it makes sense only if the management has screwed up. That does not apply to the vast majority of companies now in distress.

It will need a lot of ingenuity and capital to tide them over. It will also need a fair bit of goodwill.

Will the $2.2 Trillion Coronavirus Aid Package Be Enough?

Former Fed Chair Bernanke: Fed Is ‘Low on Bullets’ to Offset Serious U.S. Slowdown


The CARES Act that President Trump signed into law last Friday marks the fourth big effort to support the U.S. economy as it continues to reel from the impact of the coronavirus pandemic. It includes some $2.2 trillion in cash, loans, tax breaks and other incentives for individuals and families, small and big businesses, state and local governments, and health and education services, among others.

It builds on a series of actions by the Federal Reserve, and two other relief bills Trump signed in March – one for $8.3 billion in emergency funding for mostly health and human services, and another for paid sick and family leave for affected employees or those caring for a sick child.

The relief measures in the Coronavirus Aid, Relief, and Economic Security Act break down roughly as follows: About $560 billion for individuals; $500 billion for big corporations; $377 billion for small businesses; $339.8 billion for state and local governments; $153.5 billion for public health; $43.7 billion for education and other services; and $26 billion for safety nets.

Wharton finance professor Jeremy Siegel described the CARES legislation as “a broad-based, strong and effective relief bill,” adding that “it is remarkable that it could be cobbled together in such a short time.”

“This will dramatically cushion the economic blow from the shutdowns,” Siegel continued.

“Combined with the Federal Reserve’s program, the U.S. government has come out with all guns blasting to blunt the economic impact. We now need to speed medical relief and develop effective therapeutics.”

Wharton finance professor Richard Marston also commended the relief efforts: “I have to applaud Congress and the administration for the bipartisan support of this package. A unanimous vote in the Senate! But that just shows how scared everyone is.”

Cash in Hand

“Channeling liquidity to the most illiquid people leads to the most spending stimulus,” said Wharton finance professor Nicholas S. Souleles, drawing upon his research on stimulus rebates sent to households in prior recessions. Those beneficiaries are typically “unemployed, people with low income and cash on hand or [those] who have maxed out their credit cards, including people with good jobs who are temporarily illiquid,” he added.

The act provides for about $300 billion in rebate checks for all U.S. residents, including those who have no income or earn income from non-taxable benefit programs. Individuals with an adjusted gross income of up to $75,000 would receive $1,200 ($2,400 for married couples), with an extra $500 for each child below the age of 17. The incentive will reduce by 5% for every $100 above those income thresholds. It will phase out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

Those benefits will range between $1,385 and $1,990 across four main income groups of taxpayers, according to an analysis by the Penn Wharton Budget Model. An NPR report puts the $1,200 rebate check in perspective: It is a little more than the $936 weekly pay for the median full-time U.S. worker as of the end of 2019.

“The important thing is that people who need checks are going to get them,” Richard Prisinzano, director of policy analysis at the Penn Wharton Budget Model told the Wharton Business Daily radio show on SiriusXM. (Listen to the complete podcast above.) He was previously with the U.S. department of treasury, where among other roles, he helped develop its methodology for identifying small businesses from tax return data.

According to Prisinzano, implementing the direct cash transfers through tax return data “is the quickest way, because it’s what the Internal Revenue Service (IRS) has on file.” He also commended the act’s provision to delay collecting payroll taxes from employers because it “keeps some cash in businesses.” He stressed that helping people and businesses have cash in hand is the need of the hour. “Because as everyone knows, everyone’s being told to stay home. And that has a great effect on workers and businesses throughout the economy.”

The IRS will use the 2019 or 2018 tax returns of individuals – whichever is the latest filed – as the basis for the rebates, irrespective of the size of income, tax liability or refunds received. If returns were not filed for those years because of insufficient taxable income, the IRS will use the individual’s Form SSA-1099 or Social Security Benefit statement, according to a Forbes report.

Those who didn’t file a return in 2018 or 2019 but filed the form in 2020 will receive a credit equivalent to the direct check. The IRS will electronically remit the money to bank accounts if they have the relevant direct deposit information. Payments will be made between now and December 31, 2020.

Those checks will likely begin reaching beneficiaries within three weeks, Treasury secretary Steve Mnuchin told CNBC last Thursday. Prisinzano thought that would be the right time frame, but added that “the safe thing is to say it’s probably a little bit longer than that.” He pointed out that the IRS has its task cut out in that effort.

“There are programs that have to be written to read all of the electronic returns people filed, get the addresses [and] the direct deposit [information], and then send them,” he said. “There is just some time [needed] to do that. So, for the next couple of weeks, people should make sure they have those belts tightened. People aren’t getting out and spending, so that probably helps some.” On its part, the IRS is “doing it as quickly as they can,” he added. “I don’t think there’s any way to do it any quicker.”

The act allocates $260 billion to provide more unemployment insurance benefits and for longer periods than usual. It also expands those benefits to gig economy and freelance workers like Uber or Lyft drivers who would normally not qualify but are unemployed, partially unemployed or unable to work because of COVID-19. The federal government will give $600 weekly for four months to those who qualify for unemployment insurance from their state; they would also get an extra 13 weeks of unemployment insurance. The provision was controversial – four Republican senators said the extra $600 payment could encourage companies to lay off workers and Americans to stay unemployed.

Those benefits are timely: A record 3.3 million people filed claims for unemployment insurance for the week ended March 21, as captured in a Business Insider chart. The act also waives the existing 10% penalty on early withdrawals from retirement accounts of up to $100,000 if they are related to the pandemic.

Limited Gains

The CARES relief package “is very different from a fiscal stimulus,” said Wharton finance professor Nikolai Roussanov. “The standard, [new] Keynesian logic is that when there is a temporary shortfall in aggregate demand, it can be shored up by providing cash to households who are most likely to spend it.” That was the chief logic behind the tax rebate checks sent to people in 2009 in the wake of the Great Recession, he noted.

There are two problems in applying that logic to the current situation, Roussanov said. “First, the oncoming recession is in large part due to ‘supply side’ factors. Those are disruptions in the supply chain from people not showing up to work – first in China, now in the U.S., and elsewhere in the world. Giving consumers money to spend does nothing to address this.”

Secondly, Roussanov noted that for many consumers, the lack of spending is not because they have a financial constraint or because they are unwilling to spend it, but simply from their inability to do so. “If we cannot go out to restaurants because of quarantine, giving us more money to spend does nothing to solve the problem,” he explained.

“Yes, there are people whose incomes have been reduced, sometimes drastically, and their ability to spend can be improved through cash transfers. But that is not something that a blunt instrument like the $1,200 transfer based on a single income cut-off is best suited for. In sum, [in terms of] stimulating aggregate demand, the impact will be positive, but small.”

Helping Small Businesses

Nearly $350 billion has been allocated for loans to small businesses, or firms with fewer than 500 employees, including sole proprietors and nonprofits. They will be eligible for “paycheck protection loans” of up to $10 million each from the Small Business Administration (SBA), with provisions for loan forgiveness if they were used to maintain payroll, pay rent or for select pandemic related expenses.

The size of the loan will be determined by the payroll costs incurred by the employer in the preceding year, and will include tips, leave or vacation payments, severance payments and retirement benefits. The loan criteria exclude payroll taxes and payments to employees who earned more than $100,000 in the preceding year or whose primary residence was outside the U.S.

Small business owners could also avail themselves of the SBA’s “Economic Injury Disaster Loan Advance” of up to $10,000, which will be available within three days of applying and doesn’t have to be repaid. That is in addition to the SBA’s “Economic Injury Disaster Loan” program, which provides small businesses with working capital loans of up to $2 million. Also included in the CARES package is $17 billion to cover six months of payments for small businesses already using SBA loans.

Unlike in the previous recession of 2008-2009 when businesses closed and people lost jobs, the economic impact of the coronavirus pandemic is “self-induced” because people are being asked to stay at home, Prisinzano noted. “Encouraging people to stay home for the health of the nation causes all these ripple effects of businesses closing because they rely on people showing up every Tuesday night for their burger and beer, and those kinds of things.”

The government is supporting those businesses to tide over the crisis with loans, tax deferrals and other incentives, Prisinzano continued. “The government is stepping in and saying, ‘We’re going to support you through this, because everyone needs you to stay home. And then we’re going to try the best we can to keep those businesses aloft so that when the economy opens back up, when it’s healthy to go back out, these businesses are still there.’”

Big Breaks for Big Businesses — with Scrutiny

About $500 billion is allocated for loans and other monies for big corporations, which will have to make public disclosures. Included in this package are $58 billion for airlines to stay open and pay employee wages and benefits, and allocations for passenger air carriers, ($25 billion), air cargo carriers ($4 billion) and airline contractors ($3 billion). Much of the $500 billion will go toward backstopping Federal Reserve loans, a Wall Street Journal report noted.

Some benefits cover businesses of all sizes. Those whose operations are fully or partially suspended because of the pandemic will get refundable tax credits aimed at helping them keep their employees on their payrolls, so as to ensure that they can return to work later. Businesses with fewer than 100 employees could use the deduction even if they aren’t closed, an NPR summary noted.

Businesses could also defer paying payroll taxes, or the 6.2% of employee wages towards Social Security taxes, in equal measure over the next two years. Non-corporate taxpayers such as individuals, trusts and estates are allowed to deduct in the 2020 tax year all excess business losses (where deductions exceed income), replacing existing caps.

The act allows businesses to apply net operating losses incurred in tax years 2018, 2019 and 2020 to their tax liabilities in the previous five years. It also removed a provision in the 2017 Tax Cuts and Jobs Act that capped the carryforward of net operating losses at 80%. Further, it allows businesses a higher deduction for business interest expenses for tax years 2019 and 2020 – from 30% to 50% of adjusted taxable income. They could also choose to use their 2019 taxable income as the basis in their 2020 tax filings for business interest deduction.

All that expanded wiggle room for businesses that incurred losses is “one of the compromises” where both Democrats and Republicans agreed that “there are trade-offs to get this thing through,” said Prisinzano. “The two big pieces [relating to] the net operating loss and the interest deductions are rewarding businesses that did very well in 2019,” he said. “You’re basically going to let them go back to 2019 and reduce what they’ve already paid in tax. That’s a strange one to me.”

Some features of the act have been criticized for the special deals they may offer vested interests. The Trump family, which owns hotels, could benefit from two provisions aimed at helping hotels and restaurants, according to a New York Times report. The act also specifically sets aside $17 billion for “businesses critical to maintaining national security” – a category seen as intended at least partly for Boeing, the report added. Trump did allude to that when he told reporters that his administration would help Boeing, airlines and cruise lines.

“For Boeing getting a lot of money, you could make a reasonable argument [since] they do a lot of defense contracting,” said Prisinzano. But he wasn’t entirely comfortable with the CARES Act extending small business loans to enterprises with 500 employees or less. “Is that really small?” he wondered.
Significantly, the act incorporates checks and balances to prevent abuse of its provisions. A special inspector general will oversee pandemic recovery with oversight of all loans and other uses of taxpayer dollars. Businesses cannot use the relief money for stock buybacks or executive bonuses. “The idea is, if you need it we [the government] should give it to you,” Prisinzano said. “If you don’t need it, or you’re going to use it for something else, that’s inappropriate.”

The Democrats also succeeded in incorporating a provision that prevents President Trump and his family members from receiving any assistance from the $500 billion allocation for businesses. The also act explicitly debars the vice president, members of the cabinet and of Congress – and their families – from availing themselves of those allocations. The definition of family includes “spouse, child, son-in-law or daughter-in-law.”

Will the Relief Measures Work?

“This is a disaster situation so we do need relief, but it will certainly not stimulate the economy back to life,” said Marston. “About half of the package is in the form of loans. There are extended unemployment benefits, surely needed but again for temporary relief. There are small cash checks for individuals. Surely they are also needed, but small compared with the cash needed by many households.

There is money for hospitals, but that is a stopgap. Businesses and the people they employ will suffer lasting effects from the shutdown of the economy. To jump-start the economy back to life, Congress will have to pass additional spending bills. The recession is going to be that deep.”

Marston drew a parallel with the assistance the government provided to the Virgin Islands and Puerto Rico after Hurricanes Irma and Maria in September 2017. “The disaster relief provided by FEMA (the Federal Emergency Management Agency) and other government agencies was enormously important in helping the islands restore some semblance of life,” he said.

For example, FEMA paid for electricity restoration and helped to collect and cart away the hurricane debris, he noted. “But after these storms, many businesses never opened again in both places. The lasting damage to Puerto Rico was particularly severe. This will be the case after COVID-19 is conquered. There will be wreckage all around the U.S. economy.”

Marston predicted a slow economic recovery, and one that will need further relief measures. “Once the virus curve turns down, I expect restrictions on economic activity to be slowly lifted,” he said. “Companies that survive will reopen for business. But many firms will need financing before they open up again. And there will have to be additional massive aid to particular sectors including state and local governments. So expect this bill to be a down payment only.”

If the economic downturn persists, the relief measures could be extended, according to Prisinzano. “My expectation is that there [might] be another set of checks,” he said. “The Fed is not done with the tools that they can use,” he continued, pointing to a CNBC interview where Fed chairman Jerome Powell said as much.

Prisinzano expected the Fed to unveil a package similar to the Troubled Asset Relief Program, or TARP, that it had operated in the 2008 financial crisis, where it essentially invested in the equity of troubled banks and companies. “Obviously there’s nowhere to go with interest rates right now,” following the Fed’s March 15 action where it brought interest rates to a range of zero to 0.25%, he said. “So maybe it’s opening those lending windows to different places, and making rates available to a wider set of folks … [that] we should expect to see in the coming weeks.”
Macroeconomic Casualties

The Penn Wharton Budget Model has estimated “the lasting macroeconomic effects of the anticipated recession due to coronavirus, as the initial shock leads to lower federal revenue and higher debt.” It laid out two scenarios: If the economy recovers the year after a deep recession (a V-shaped recovery), it projected the federal debt at 3.2% higher and GDP 0.3% lower by 2030.

If the recovery occurs over two additional years (a U-shaped recovery), it estimated a 5.9% increase in federal debt and a 0.6% drop in GDP by 2030. “Barring future fiscal policy to reduce debt, the so-called ‘potential GDP’ will, therefore, be permanently lower due to the coronavirus,” it cautioned.

The PWBM analysis noted that “regardless of how deep the coronavirus-induced recession turns out to be, there will be lingering adverse impacts on the longer-term economy even without new fiscal policy measures.” However, the actual impact will depend on how fast the recovery takes hold, it stated.

Both the federal stimulus spending and the recession would create additional debt, it pointed out. Federal revenues will shrink as economic activity slows during a recession, and without changes in federal spending, the deficits and debt will increase, it warned. “This increased debt crowds out private investment and leads to lower future output and income.”

Roussanov, too, believes that the $2-trillion relief package will aggravate the fiscal deficit. “The big unknown is whether the resulting deficit will unleash a bout of inflation,” he said. “Such worries did not materialize the last time around, and they very well might not this time, either. But, given how little-understood inflation remains, we cannot rule it out.”

Roussanov said the medium- to long-run impact on the economy depends on the ability of businesses of all sizes to weather the crisis without going under. Much depends on whether the “supply shocks” are transitory or long-lasting, he added. “For businesses that can weather the pandemic, it will be but a blip in their long-run profitability. But for many of them operating on slim margins, it is life-or-death.”

While the $500 billion corporate relief program aims to help the businesses impacted by the coronavirus crisis, “the question is whether this will be well-spent,” said Roussanov. “The concern is that this fund will mostly go to the most politically powerful large public companies, which are the ones who need it the least.” He pointed to a letter to Congress from a group of economists at universities, where they have criticized the “bailouts” in the CARES Act for large corporations.

Roussanov said “moral hazard” is another concern. “Systemically important firms and industries such as banks, car makers, and, now, airlines have an incentive to minimize their equity cushion in good times, since they know that when the economy suffers a large shock the government will bail them out in order to protect against large job losses and massive disruptions in the system,” he said.

“Mom-and-pop businesses that are also affected [by the pandemic] are much less able to draw on public investors and not nearly as well-versed at negotiating the channels of government-provided aid.” It is unclear how effective the programs in the CARES Act for small businesses will turn out to be, he added.

Roussanov was also worried about “the distributional aspects” of the crisis, where “the burden is shared unequally across the population.” Here, he said highly skilled, primarily college-educated workers “have a very different experience in this environment” from that of unskilled, primarily non-college-educated workers.

Skilled workers are able to carry on with their lives in “financially rewarding ways” where most still have their jobs and keep getting paid, but “many lower-skilled workers find themselves without pay and having to take care of their children who are now out of school,” he explained.

To be sure, the increased unemployment insurance benefits as well as the $1,200 rebate checks should help, but these are unevenly distributed among those who continue to work and get paid, and others who do not, Roussanov said. He also doubted if the unemployment benefits will be sufficient, especially since many workers who might be affected are part-time with reduced hours or self-employed.

Roussanov also feared that the coming recession could leave behind “long-lasting adverse effects.” He said that in the three previous recessions, there was “permanent shedding” of routine jobs or those most vulnerable to automation. He explained why some jobs disappear forever after recessions in a Knowledge@Wharton interview in August 2018.

“This time around there might be an added force: We will learn to make do with fewer human interactions, potentially making many previously ‘non-routine’ jobs that rely on such interaction obsolete. That means many of the low-skill jobs that absorbed the bulk of non-college educated labor force will disappear forever.”

Why the Richest Country on Earth Can’t Get You a Face Mask

The U.S. spends more on health care than any other nation, but missteps and vulnerable global supply chains have left it without the equipment necessary to protect its citizens from the coronavirus

By Nathaniel Taplin


The U.S. is scrambling for surgical masks and other medical goods as it battles the coronavirus pandemic. Photo: jeenah moon/Reuters .


In yet another challenge to the wisdom of globalization, the U.S. scramble for surgical masks, N95 respirators and ventilators is highlighting the downsides of relying on today’s intricate supply chains for critical medical goods.

On Tuesday, Americans learned that, even with the country nearly shut down, deaths from Covid-19 caused by the new coronavirus could total 100,000 to 240,000. China, the most populous nation in the world and among the most densely populated, has reported a death toll of less than 4,000.

A public-health disaster of this magnitude always has more than one cause. Most obvious are the U.S. executive branch’s weekslong refusal to acknowledge the severity of the threat, and the slow ramp up in testing. For many Americans, though, one of the most puzzling aspects is why the wealthiest, most technologically advanced nation in the world can’t provide its citizens and health-care workers with lifesaving medical equipment.



Years of underinvestment in pandemic planning is a big part of the answer. But as in the pharmaceutical sector—highly dependent on Chinese and Indian producers—a reliance on global supply chains is also making life difficult for Western hospitals struggling to source gear.

Eighty-five percent of global medical mask-production capacity is in China, according to Morgan Stanley—up from 50% before the new coronavirus struck. It is also a major producer of the polypropylene fibers that filter out dust and pathogens in the N95 respirators medical professionals rely on to protect themselves.

In 2018, China was the single largest exporter of nonwoven fabrics, of which polypropylene filament is one, controlling 18% of the global export market, according to United Nations data. The U.S., while also a large manufacturer, is the world’s largest importer.

A surge in demand over the past two months—first in China—has set off a world-wide scramble to secure both masks and the materials to make them. Local restrictions on medical-gear exports from Germany, China and elsewhere have added to shortages. In one recent example, Montreal-based mask maker Medicom found its China-based factories unable to source local materials, which had been diverted by officials to produce masks for domestic use.

The U.S. Department of Health and Human Services said in early March that the U.S. has only about 1% of the medical masks it would need to combat a year-long epidemic.

Ventilators—needed to help critically ill coronavirus patients breathe—are also produced from parts often sourced all over the world. In an interview with Fortune Magazine published last week, the chief executive of Hamilton Medical Inc. said that Romanian export restrictions on medical supplies had briefly prevented the company from receiving humidifier parts needed for ventilators. Other parts like tubes and masks are often sourced from China or other Asian countries.

At the same time, Chinese companies that make ventilators are struggling to secure parts like turbines and sensors from Europe, according to the South China Morning Post. Factories are finally ramping up in China as the epidemic ebbs there, but airfreight capacity has dried up and Europe’s labor force is, as in the U.S., increasingly sheltering at home.

U.S. auto makers like General Motorsand Fordhave expressed interest in helping boost ventilator production, but if they can’t secure specialized parts, there may be only so much they can do.

The U.S. currently has around 160,000 ventilators, according to the Society of Critical Care Medicine, many of which are already in use. The American Hospital Association estimates that close to a million U.S. patients could need ventilators over the course of the epidemic.

New technologies like 3-D printing may help paper over some of the cracks—and the millions of Americans practicing social distancing right now will, with luck, forestall some of the worst-case scenarios.

But when the pandemic ends, one of the enduring changes it causes could be a major reassessment of complex global supply chains for critical medical goods. The Trump administration’s battles over global trade have already highlighted the political risks of low-cost offshoring and lean inventories for consumer products such as automobiles and cellphones. Now weaknesses have shown up in yet another sector, potentially at a much higher human cost.

Many Americans—and presumably Uncle Sam—might be willing to pay a bit more for a more reliable supply chain with some pricey redundancy built in.

The COVID-19 Solidarity Test

If the COVID-19 crisis has taught us one thing, it is that the relentless focus on hyper-efficiency and short-term gains of recent decades has given rise to a highly fragile global system. The time has come to build a more resilient world order, based on economic, generational, and international solidarity.

Kemal Derviş

dervis100_Jeremy Hogan  Echoes WireBarcroft Media via Getty Images_coronavirussuppliesaidfood


WASHINGTON, DC – The COVID-19 crisis represents an unprecedented test of human solidarity. Will the wealthy – or, indeed, all those with stable incomes or savings cushions – embrace measures to support the poor and economically insecure? Will the young, among whom the mortality rate is lower, make sacrifices to protect the old? And will people in rich countries accept resource transfers to poor countries?

Only if the answer to all three questions is yes will the world be able to minimize the fallout of the pandemic that has killed nearly 38,000 people and crippled the global economy. And yet that outcome is nowhere near guaranteed.

The first form of solidarity that is being tested – across income groups – may be the easiest to secure. COVID-19 has infected the likes of the United Kingdom’s prime minister and crown prince, professional athletes, and multiple Hollywood celebrities, showing that it has no regard for whether a person is rich or poor.

But the economic consequences of public-health measures – such as indefinite business closures and lockdowns – will be borne disproportionately by less economically secure groups, including low-income earners, hourly workers, and those who cannot work remotely. In designing strategies to offset the pandemic’s economic damage, governments must consider these differences.

So far, this is not happening to the required extent. In the United States, for example, many measures, such as expanded sickness benefits, do help lower-income groups, but should have been in place long ago, as they are in other advanced economies. Other actions, such as sending checks to all citizens and ordering federal agencies to halt evictions and foreclosures, hold more promise, but remain far from sufficient to protect the country’s economically vulnerable.

Building solidarity across income groups will require leaders to foster the kind of selfless patriotism that facilitates shared sacrifice in wartime (while rejecting the kind of narrow-minded nationalism that undermines international solidarity). It helps that the hoary argument that support for the poor undermines work incentives, hardly convincing in normal times, loses all credibility during a pandemic. If nothing else works, citizens and political leaders should bear in mind that lower-income individuals remain valuable consumers and (in democracies, at least) voters.

The second dimension of solidarity being tested today is intergenerational. Given the economic (and social) consequences of self-isolation measures, securing the long-term cooperation of younger generations – who are vulnerable to serious complications from COVID-19, but die at lower rates – may not be easy.

Family ties could go a long way toward convincing them to adhere to social distancing. But, as the fight against climate change has shown, that approach has its limits – at least in the opposite direction. Today’s older generations have so far proved reluctant to make the sacrifices that will be required to secure a more sustainable future for their children and grandchildren.

In this sense, however, the pandemic may offer an opportunity for progress. If young people remain dedicated to drastic short-term measures to contain the COVID-19 outbreak, older generations can surely make a medium-term commitment to ambitious climate action.

The third COVID-19 solidarity test will be the most difficult to pass. At a time when political leaders are already demanding so much solidarity within their countries, and national economies are suffering severe losses, generous resource transfers to struggling developing countries will be a difficult pill to swallow. Already, some economies, such as France and Germany, have limited or banned exports of critical medical equipment.

But if a country with a per capita income of $50,000 – about the level in Canada and Germany, and lower than in Australia, the Netherlands, and the US – suffered a 10% economic contraction, it would still be ten times better off than low- and lower-middle-income countries were before the pandemic. Perhaps more salient, if poor countries are unable to contain their COVID-19 outbreaks, the virus could re-emerge in rich countries that thought they had escaped it.

Solidarity with developing countries is thus a matter of both morality and long-term vision. Failure to pass this solidarity test would leave deep psychological wounds in left-behind countries, paving the way for all manner of extremism and new crises – from pandemics to conflicts – that would threaten everyone.

As the developed countries implement measures to counter the economic consequences of the COVID-19 pandemic, they should also work with international institutions to develop strategies for helping the developing world.

While providing immediate liquidity, as the International Monetary Fund proposes, is a good first step, simply piling on more debt is not a sustainable solution. Grants and another round of debt forgiveness will also be needed, and international institutions must ensure that all countries get the medical equipment and other support – including food – that they need.

The world is about to find out whether decades of economic and financial globalization can lead to a deeper understanding of the ties – social, moral, and personal – that bind all people together. Only by recognizing and strengthening those ties can we replace our fragile and conflict-ridden system, built in the service of hyper-efficiency and short-term gain, with more sustainable arrangements based on economic, generational, and international solidarity.


Kemal Derviş, former Minister of Economic Affairs of Turkey and former Administrator for the United Nations Development Program (UNDP), is Senior Fellow at the Brookings Institution.