Government finances

After the disease, the debt

To cope with the expensive legacy of the pandemic, governments will have to find the right path between stimulus and restraint




NATIONAL LEADERS like to talk about the struggle against covid-19 as a war. Mostly this is a figure of speech, but in one respect they are right. Public borrowing in the rich world is set to soar to levels last seen amid the rubble and smoke of 1945.

As the economy falls into ruins, governments are writing millions of cheques to households and firms in order to help them survive lockdowns. At the same time, with factories, shops and offices shut, tax revenues are collapsing. Long after the covid-19 wards have emptied, countries will be living with the consequences.

An astonishing deterioration in the public finances is unfolding (see article). America’s government is set to run a deficit of 15% of GDP this year—a figure that will go up if more stimulus is needed.

Across the rich world, the IMF says gross government debt will rise by $6trn, to $66trn at the end of this year, or from 105% of GDP to 122%—a greater increase than was seen in any year during the global financial crisis. If the lockdowns last longer, the load will be greater. Managing such colossal debts will burden Western societies for decades to come.

Few subjects in economics attract more scaremongering than government borrowing. The national-debt clock ticking near Times Square in New York has warned of imminent fiscal Armageddon since 1989. In fact a country’s public debt is not like a household’s credit-card balance.

When the national debt is owned by its citizens, a country in effect owes money to itself. Debt may be high, but what matters is the cost of servicing it and, as long as interest rates are low, this is still cheap. In 2019 America spent 1.8% of GDP on debt interest, less than it did 20 years ago. In 2019 Japan’s gross public debt was already almost 240% of GDP, but there were few signs that it could not be sustained.

In countries that print their own money, central banks can hold down interest rates by buying bonds, as they have in recent weeks on an unprecedented scale (the Federal Reserve has bought more Treasuries in five weeks than were issued, on net, in the year to March).

Just now there is no risk of inflation, particularly since oil prices have collapsed. Most economists worry less that governments will borrow recklessly, than that they will be too timid because of an irrational fear of rising public debt. Inadequate fiscal support today risks pushing the economy into a spiral of decline.

Yet while spending freely now to avoid a deeper slump is the only sensible path, wild borrowing for years would eventually threaten trouble. America has strong defences against an outright debt crisis, because the dollar is the world’s reserve currency and foreigners want to own its bonds.

But other rich countries do not have that luxury. Italy’s towering debt and membership of the euro zone condemn it to live with the perennial threat of a financial panic should the ECB stop buying its bonds.

The good news is that financial markets suggest rates will stay comfortingly low for decades.

But so much is still unknown about the virus and its effects that, now of all times, investors cannot see clearly very far into the future. Some economists worry, that once the virus abates, a price-and-interest-rate spiral could get under way as a burst of demand runs up against supply chains that have been wrecked by the pandemic.

Governments will thus have to walk a treacherous path between stimulus today and prudence tomorrow. Success is not guaranteed.

After the second world war countries shrank their debts over the course of decades, but only by using a bossy combination of high taxes on capital, financial repression (forcing domestic investors to hold debt at artificially low interest rates) and inflation, which erodes the real value of debts over time.

A baby boom and rapidly rising levels of education made it easier for economies to grow their way out of debt. Japan has not faced a bond-market crisis since the 1990s, but its debt-to-GDP ratio has continued to rise.

After the financial crisis in 2007-09 some European countries opted for budget cuts in order to cut debts, with mixed results and a big political backlash.

The politics of deficit reduction will be toxic. The pandemic will increase calls for lavish spending, not belt-tightening, especially on medical services. Ageing populations mean that there will be surging demand for pension and health spending in the 2030s and 2040s.

It will get more expensive to maintain public services, let alone improve them. Politicians who trim benefits for pensioners will be punished by legions of elderly voters. There will be less spare cash to fight future crises, such as climate change or even another pandemic.

Faced with this daunting reality, rich-world governments will make a big mistake if they succumb to premature and excessive worries about budgets. While they are in the throes of the pandemic, the withdrawal of emergency support would be self-defeating.

Modestly higher inflation would help, by boosting the economy’s nominal growth rate. When this exceeds the interest rate, existing debts shrink relative to GDP over time. Unfortunately, central banks have recently undershot their inflation targets.

Over the past ten years the cumulative shortfall in America and the euro zone has been about 5-6%. Central banks should pledge to make up the shortfall with catch-up inflation in the future. This would ease debt burdens without breaking past promises to hew to inflation targets.

And governments should prepare for the grim business of balancing budgets later in the decade. Done right, this would be fairer and more efficient than keeping rates low and letting inflation rip, which would transfer wealth in regressive and arbitrary ways, for example by reducing the debts of recklessly leveraged companies and homeowners.

Better to raise taxes on land, inheritance, carbon emissions and, in America, consumption—and at least try to trim spending on the elderly.

National-debt service

Perhaps interest rates really will stay low while growth rebounds and inflation rises just slightly, easing the burden of debt.

More likely is that living with high debts will be a nerve-racking and gruelling slog.

Making budgets add up looks as if it will be a defining challenge of the post-covid world—one that today’s politicians have not yet even started to confront.

When Will the Jobs Return?




Diane Lim from the Penn Wharton Budget Model talks with Wharton Business Daily on Sirius XM about the latest unemployment numbers.


After a double whammy during the past week, the unemployment pains triggered by the coronavirus pandemic seem likely to worsen in the U.S. in the coming months. The number of people filing for unemployment insurance doubled to 6.65 million in the latest weekly report on April 2, taking the two-week total to nearly 10 million.

On April 3, the unemployment report for March logged a loss of 701,000 jobs, making it the worst month for unemployment since the last recession. It also took the unemployment rate to 4.4% in March from 3.5% in February, the largest one-month increase since January 1975.

Workers are more pessimistic about losing work in the coming year as they expect overall unemployment to be higher, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations, which was released on April 6. The survey found that workers also expect the growth in their earnings to fall and are less optimistic about finding a new job in the coming year.

The latest unemployment report came as a surprise to many labor economists, because they did not expect much of the pandemic’s impact to show up in the last monthly jobs report as it did, according to Diane Lim, director of outreach and senior advisor at the Penn Wharton Budget Model. “It’s very telling,” she said, pointing out that the survey covers only one week of March 8 through March 14. “That seems like an eternity ago, in terms of how much has happened in the economy with the shutdown since then.”  
The next unemployment report covering April is due on May 8. It will reveal a more complete picture the pandemic’s impact. The Bureau of Labor Statistics (BLS) has noted that the surveys for its March report predated many coronavirus-related business and school closures in the second half of the month.


The labor department’s reports on jobs and jobless claims have become a proxy for tracking the economic downturn that the pandemic has sparked. “[Unemployment claims data] used to be boring reports for economists, because they were never changing. There were always around 200,000 new or initial unemployment claims each week,” Lim said. “But now it’s a leading indicator, because it comes in on a timely basis, closer to real time.”

Impact on Small Business

According to the March unemployment report, two-thirds of the jobs lost were in the leisure and hospitality sectors, with restaurants and bars accounting for 417,000 job losses, or nearly 60% of the total. Notable employment declines also occurred in health care and social assistance, professional and business services, retail trade, and construction, the report added.

Small businesses with fewer than 50 employees shed 90,000 jobs between February and March, according to the latest ADP National Unemployment Report. A breakdown shows that of that number, 66,000 jobs were lost at “very small businesses” that have fewer than 20 employees.

Most of the small-business job losses (77,000) were in the service-providing sector, while goods-producing firms made up the remainder. After accounting for job gains in other sectors such as large companies (businesses with more than 500 employees) and the education and health sectors, private sector firms had a net loss of 27,000 jobs between February and March, according to the ADP report.

As small businesses see their fortunes sinking, they are also finding it harder to raise money. Banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses, according to a Wall Street Journal report. Large banks like Bank of America and JP Morgan Chase, and fintech lenders like Square Capital and On Deck Capital are among the institutions that have tightened loan approval criteria.

“Lenders are concerned that rising unemployment and a potential recession will send loan defaults soaring,” the report noted. The CARES Act passed last month provides $350 billion in loans for small businesses. “[But] the program, which works on a first-come, first-served basis, likely won’t be large enough to satisfy the needs of all of America’s small businesses,” an Axios report noted.

The small business loan package is not enough to help employers keep paying workers until the economy recovers, says Wharton management professor Iwan Barankay. The economy isn’t likely to begin recovering before fall, but the CARES Act provides for small business loans to cover only the next quarter until June, he explained. Moreover, small businesses are finding it challenging to secure those loans, he said.

They have to apply for the loans to banks who then get the funds from the Small Business Administration. That process requires banks to access a certain software platform on the SBA website, which crashed for a few hours on Monday, he noted. “They are so backlogged and understaffed that they can’t handle the volume, leading to many loan applications being declined or delayed for weeks. This is pushing more companies into bankruptcy,” he said.

“[The brunt of the impact is borne by] people at the economic frontline of the quarantining and the shutdowns of businesses with a lot of people-facing activity,” Lim said. Most of the workers who filed for unemployment benefits in the past two weeks may have been in the leisure or hospitality sector, because the virus has “basically shut down that entire line of work,” she added.

Lim saw that unemployment is now starting to hit other sectors of the economy, especially the retail industry. She noted that major retailers have announced furloughs and layoffs. “We’re going to see this spread into other areas of the economy that at first we weren’t thinking needed to be shut down,” she said. “We were thinking only really crowded places would need to be shut down. Now we’re starting to hear that any place where you interact with people – like even across the cash register – is too close. We are going to see this spill over into other sectors.”

How Much Longer?


“Whether this will be a temporary blip is, of course, the multi-trillion-dollar question,” said Wharton management professor Matthew Bidwell. “It probably also depends on what ‘temporary’ means. We don’t know when bars, shops, restaurants, gyms, cinemas, schools, etc., will be able to open again. Nor do we know how many people will want to flock back to them once they do. There is also a real concern that people will be reluctant to return to bars, restaurants, etc., even after we can go out.”

According to Bidwell, it will take the economy “a while” before it bounces back to pre-pandemic levels. “There can be a long-lasting disruption after losing skilled workers, as firms try to rebuild the knowledge when demand returns,” he said. “Bringing in new workers is always disruptive, so bearing in mind the need to ramp up again in the future is important.”

Barankay was pessimistic about the ability of employers to resume their businesses in a meaningful manner after the current contraction. “Many companies are out of cash and they fired their employees and closed down their businesses,” he said. “I see no way how they can reopen under the current system.”

Looking for cues from history may be unhelpful. Bidwell noted that while the unemployment insurance claims numbers are “extraordinary,” they cannot be compared to those in previous recessions. “In previous years, [they were caused by] companies laying off workers because of a lack of demand.

This time, the jobless claims are caused mainly by companies laying off workers because the pandemic is preventing them from operating,” he explained. The 2008 recession would not offer much by way of useful pointers. Back then, “the shock to the economy, though sharp, was short and much smaller,” he noted.

According to Bidwell, many people are likely to be rehired after the social distancing restrictions ease up. However, he did not expect all laid-off workers to regain their jobs. “[That is] both because business owners do not want to fully staff up until they know what demand will be like, and because some of their businesses may have gone bankrupt or closed down in the meanwhile.”

The other uncertainty is the cascading effect on other sectors, Bidwell pointed out. “As all the directly affected sectors stop spending money, that will reduce demand across the economy, leading to further layoffs,” he warned. “Again, it is unclear how quickly the demand will come back to help those affected by this second wave of layoffs to return to work.”

Hopeful Signs?

Lim was cautiously optimistic. At some point, “you start to run out of people who have lost their jobs because of the quarantine,” she said. “I’m hopeful that there is a natural limit to the job loss, because we hit the most obvious sectors first – the businesses that had to shut down immediately, because they served crowds of people. Most people who do work sitting at a computer can do that anywhere. It’s easier for many in office jobs to continue work as usual.”

Even so, it is likely that many jobs, especially in the leisure and hospitality sector, could come back once the social distancing restrictions are lifted. One reason is that bonds formed at the workplace don’t wear out easily, Lim said. Most of the laid-off workers in the leisure and hospitality sector are not trying to get other jobs because they believe they could go back to their previous employers, she said.

While those who have been laid off are filing for unemployment benefits, “they still think of [these companies] as their current employer,” she added. “The positive thing is that while this has been a very sudden and dramatic drop in jobs and employment, things could very quickly improve once we get past the necessity of staying at home.”

Barankay was less optimistic, though. “The major worry I have about the current situation in the U.S. is that the COVID-19 disruption will last so long that those who lose their jobs now will have lost their relationship with the firms and sectors where they worked so far, causing large welfare consequences for a considerable part of the labor force,” said Barankay. “As workers stay idle, their training deteriorates, making them less employable and slowing the recovery for firms.”
It is important to ensure that people who have lost jobs and income can survive in these tough times. Unemployment insurance benefits could ensure that at one end, especially with the recent changes to get more money to workers.

At the other end are the small business loans and emergency grants that the CARES Act is helping arrange. The law aims to enable employers to continue paying wages to employees on their payrolls, and meet expenses such as rents, utility bills, insurance and so forth.

“You want the combination of the business loans and the generous unemployment benefits to keep people sitting tight,” said Lim. “You don’t want people to destroy, take down or dismantle their businesses, to literally start moving out of the bakery space that they occupy. You don’t want them to completely close shop for good. You don’t want workers to give up their attachment to the workforce and hopefully their own employers.

You want them to be able to maintain a minimal level of consumption – the necessity level of consumption – to be able to continue to pay their rent, to pay for their food and their health care and not get desperate such that they have to go out and find a new job that might not be the best thing for them to do in terms of the longer-term, once we’re past the quarantine period.”

Lessons from Europe

Barankay advised U.S. policy makers to look towards Europe, and Germany in particular, which offers financial support to companies to compensate for lost revenues. The country has a system of grants to firms, which are forgiven under some conditions including maintaining employment.

“This way, companies remain in business and can ramp up again after COVID-19 subsides,” he said. “We do not have a comparable system in the U.S., hence recovery will come later and be slower.”

The U.S. could also learn key lessons from Europe about managing unemployment insurance claims, according to Barankay. He noted that European countries are facing job losses in the wake of the pandemic, but they are able to contain the volatility in workers’ earnings much better than in the U.S. system.

“The reason we see such a large increase in unemployment [insurance claims] compared to other OECD countries has to do with how we in the U.S. deal with recessions in the labor market,” said Barankay. “In the U.S., when companies don’t do well, or as it is in the current contraction, they are simply out of cash to pay for wages, they lay off their employees who in turn can file for unemployment.”

Unemployment benefits vary by state. For instance, in Pennsylvania, the unemployment dole consists of 50% of an employee’s wages (up to $300 a week, plus a few fringe disbursements) and it lasts for 26 weeks, he noted.

Barankay pointed to the German system of “Kurzarbeit,” which he said is in place with some variation across all major economies in Europe now. “Kurzarbeit” is an agreement between the state, employers and employees in which employers don’t fire employees who in turn agree to a cut in wages to around 80%.

The state reimburses a large portion of compensation directly to the worker, he explained. “[That] was a major factor why recovery in the previous recession in Germany was much faster than in all other E.U. countries.”

The advantage of the Kurzarbeit system is that workers can maintain their jobs and the employer-employee relationship is not interrupted along with fringe benefits, Barankay noted. One other advantage of the system is that firms that struggle now can remain in business and after a downturn, they can resume with the same employees.

That avoids causing frictions in the labor market, forcing companies to start all over and employees to search for new employment, he added. “My urgent recommendation to Congress is to look into the German Kurzarbeit system to avoid major and prolonged disruption to the U.S. economy.”

The U.K. has announced a program where the government will cover 80% of the salaries of unemployed workers for at least the next three months up to a maximum of £2,500 ($2,900) a month, which is more than the average income, CNN reported. In addition to the labor department’s reports, other measurements of the unemployment situation estimated varying impacts of the recession. The unemployment rate was higher at 8.9% in March, up from 7.4% in February, according to the so-called U-6 metric.

Unlike the BLS data, the U-6 rate includes workers who are discouraged and underemployed. Various forecasts predict that the employment situation will get worse before it gets better. The unemployment rate is expected to exceed 10% during the second quarter of this year, the Congressional Budget Office stated in an update to its economic forecast on April 2.

 Job losses will climb to some 28 million by May, erasing all the jobs gained since 2010, according to a forecast by Oxford Economics that the Wall Street Journal cited.

What’s Next?

How soon will companies start hiring again? That depends largely on the action that Congress takes in the coming weeks and months, Barankay said. “With the current system, the disruption will be so deep that I worry about a major contraction in the U.S. GDP.” By that, he meant a decline in total GDP and not just slower growth, both in 2020 and 2021, he explained.

The latest jobless claims numbers do not really suggest a secular shift where employers learn to make do with fewer employees, according to Bidwell. “Recessions encourage employers to do as much as they can with as few staff as possible – we saw that a lot after the financial crisis,” he said.

“But that is more of a cyclical shift than a secular one. I don’t believe that we will see a lot of the formal economy shift to the gig economy. The benefits just are not there [to make that shift] for employers in most sectors.”

Bidwell also did not foresee shifts such as increased productivity as employers make do with fewer hands and employees work out of their homes. “You don’t tend to see increased productivity during recessions because the demand just does not exist.” In fact, productivity tends to go down as firms cut workers slower than demand falls off, he added.

“It can pave the way for increased productivity once the recession ends. As for whether working from home improves productivity, a key variable is whether employees are having to home school their children at the same time!”

According to Barankay, the latest employment reports do not signal any shifts in favor of the gig economy, where employers hire temporary workers or independent contractors. He said the “best data” on that segment is contained in a BLS report, which showed that in May 2017, only 3.8% of the work force, or 5.9 million people, held “contingent” jobs.

The BLS defines “contingent” workers as those “who do not expect their jobs to last or who report that their jobs are temporary.” As a result, the latest surge in people registering for unemployment claims cannot be attributed to the growth in the gig economy or a reflection of companies shifting their workforce into contingent roles, he added.

Government and Businesses Turn Attention to Eventual Reopening of $22 Trillion U.S. Economy

Once social distancing slows coronavirus pandemic, tough questions follow over how to get the nation back to work: ‘It isn’t like a light switch on and off’

By Stephanie Armour and Jon Hilsenrath

 
A St. Louis movie theater is one of the many businesses closed during the coronavirus pandemic.
Photo: Jeff Roberson/Associated Press .



Government officials and business leaders are turning their attention to a looming challenge in the fight against the new coronavirus pandemic: Reopening a $22 trillion U.S. economy that has been shut down like never before.

With some preliminary signs that infections from the virus are slowing, the whole nation is hopeful to get back to business as soon as possible. But a host of questions arise: Under what conditions should people be allowed back to work and stay-at-home orders be lifted? How will people at work be monitored for reinfection or antibodies to prevent a resurgence of the deadly virus? Does it all happen at once or is it staggered? Who is in charge of the effort?

A sharp reduction in new infections is a critical first step, but health experts say other steps will be needed to prevent another devastating outbreak that shuts the economy down all over again. That includes building testing and surveillance systems—and a readiness to reintroduce some social distancing and other mitigations on smaller scale if necessary—to give businesses and individuals confidence that they can return to work without risking infection.

“It isn’t like a light switch on and off,” said Anthony Fauci, a member of President Trump’s task force on the pandemic, in an interview with “The Journal,” a Wall Street Journal podcast. “It’s a gradual pulling back on certain of the restrictions to try and get society a bit back to normal.”

Dr. Fauci said a first condition is a steep drop in the number of cases. “You’ve got to make sure you are absolutely going in the right direction.” Then, he said, “you gradually come back. You don’t jump into it with both feet.”


The federal government has yet to put in place the kind of nationwide testing, tracing and surveillance system that public health experts say is needed to prevent another surge in coronavirus cases when social distancing eases. That includes identifying people who are asymptomatic and can also spread the coronavirus, health experts said.

Mr. Trump said Saturday that he is considering a second coronavirus task force focused on reopening the country. The administration’s current social distancing guidelines run through April.
 
“It’s the health people that are going to drive the medical-related decisions,” National Economic Council Director Larry Kudlow said in an interview with Politico webcast on Tuesday. “But I still believe, hopefully and maybe prayerfully, that in the next four to eight weeks we will be able to reopen the economy, and that the power of the virus will be substantially reduced and we will be able to flatten the curve.”

The federal government has yet to release a detailed recovery strategy, so state and local leaders are scrambling to create their own approaches. As a result, the recovery process could unfold in the same patchwork fashion as the shutdown.

New York, the state hit hardest by the pandemic, is looking to join with New Jersey and Connecticut on a unified reopening approach. “We cannot restart life as we knew it without testing,” Democratic New York Gov. Andrew Cuomo tweeted Tuesday.

Democratic Gov. Phil Murphy of New Jersey, which has the second-most Covid-19 deaths, said the resumption of economic activity would be “slow and careful, because the last thing we’re going to need is going too quickly.… That’s the equivalent, I think, of throwing gasoline on the fire.”
 
San Miguel County in Colorado, using a test from United Biomedical, has plans to check all its residents for immunity. Republican Massachusetts Gov. Charlie Baker last week announced a coronavirus tracking initiative that will involve 1,000 people working at a virtual call center to trace people exposed or infected with the virus.

GOP Texas Lieut. Gov. Dan Patrick announced Tuesday he is forming a task force on how to reopen the economy, and GOP Maryland Gov. Larry Hogan has created a response team to discuss measures that must be in place for opening the state back up.

Some governors talked Tuesday with Scott Gottlieb, the former head of the Food and Drug Administration, about ways to work together or launch their own surveillance plans that would trace the disease should it resurface and spread. One idea is to galvanize congressional lawmakers to pass legislation setting a U.S. surveillance system for coronavirus in place.

Dr. Gottlieb, who ran the FDA from 2017 to 2019, released a report on the “roadmap to reopening” Tuesday with Mark McClellan, a physician and economist who ran the FDA under President George W. Bush.

“I’m worried we don’t have the systems in place to carefully reopen the economy,” Dr. Gottieb said in an interview. “You need to be able to identify people who are sick and have the tools to enforce their isolation and [tracing of people they contact]. You have to have it at a scale we’ve never done before. We need leadership.”




Tensions are simmering, in some states, about how and when to reopen. Republican lawmakers in Pennsylvania have proposed legislation to scale back Democratic Gov. Tom Wolf’s business closure order from mid-March and create a Covid-19 emergency plan to allow businesses to reopen.

“Our governor is being overly aggressive on this, I feel,” said Matt Stuckey, president of Stuckey Automotive, which owns three dealerships in Altoona, Pa.

Democrats say the Republican proposal in the state would threaten public health and risk increasing the spread of the virus.

Many states and counties lack resources to set up their own systems for identifying infected residents and people who may have been exposed, a necessary step to contain the virus once social distancing rules have been eased.

It is unknown what role the federal government will take in running or coordinating a monitoring system once the worst effects of the crisis have eased. It is only now starting to grapple with some of these issues.

The administration, which was slow to respond to the early stages of the pandemic, began collecting key testing and epidemiological data from hospitals in late March. In the coming weeks, the Centers for Disease Control and Prevention plans to deploy tests known as serology tests to find people who have immunity to the disease, including among those who didn’t have symptoms, to better assess its presence in the population.


People who lost their jobs waited in line to file for unemployment in Fort Smith, Ark., on Monday. PHOTO: NICK OXFORD/REUTERS

Dr. Fauci suggested the federal government itself won’t take the lead on testing. “It isn’t up to the task force or necessarily the federal government to flood the country with testing,” Dr. Fauci said. “It’s in the hands of the private sector.”

About 60% of Americans say the federal government should be primarily responsible for the coronavirus response, almost double the 32% who say the states should be responsible, according to a March poll by the Kaiser Family Foundation.

Roughly one out of every 300 people in the country is now being tested, based on federal data, compared to about one out of every 100 people in Germany.

Testing is hampered by delays and shortages that limit who can get tested. It is unlikely that the problems will be resolved by the end of April, according to one person familiar with the planning.

Some health experts said any reopening scenario is likely to work like an accordion: Any easing on social distance protocols would be followed by a tightening in areas where the virus resurfaces. A vaccine is still at least 12 to 18 months away, and even that timetable is considered optimistic.

Federal Reserve officials have cautioned that state and local efforts to lift restrictions could be ineffective for the economy if they haven’t been paired with muscular measures to beef up testing for infections and to provide treatments for those infected.

Most of the hardest-hit sectors—restaurants, hospitality, travel—require workers and customers “not feel like they’re

taking their health at risk,” said Boston Fed President Eric Rosengren in an interview last week. “How effective are we at getting people tested so that you feel comfortable holding the subway pole?”

Economic outcomes “are very, very dependent on the public-health outcomes,” he added.



Some business executives are starting to look beyond the crisis to reopening. Movie-theater executives are talking to officials at the CDC about when they might reopen auditoriums, said John Fithian, chief executive of the National Association of Theatre Owners. As of this week, the theater chains hope to open around Memorial Day and use the month of June to re-acclimate moviegoers to the habit of sitting in a room with dozens of strangers.

The International Air Transport Association, a trade group, plans regional meetings with governments this month to standardize health screening at airports.

Tractor Supply,a Nashville, Tenn.-based retailer with 1,800 stores that sell animal feed and farm supplies to mostly rural customers, plans to split corporate employees into groups to reduce crowding when corporate offices reopen, said CEO Hal Lawton. The groups would be in the office on alternating days “to work in more of a social distancing kind of way,” said Mr. Lawton.

It’s not top of mind yet. “We certainly think this continues on at least until mid-May, if not end of May, end of June, before we are starting to do anything close to relaxing our existing policies,” he said.


—Kris Maher, Sarah Nassauer, Doug Cameron, Betsy McKay, Nick Timiraos, Erich Schwartzel and Kate Linebaugh contributed to this article.

Get Ready to Ignore the Haywire Inflation Data That’s Coming

For the next several months, consumer-price index data won’t reflect the drastic change in consumption patterns, and won’t guide policy makers in the usual way

By Mike Bird


Almost 0.7% of the consumer-price index is made up of haircuts and similar personal care.
Photo: Steven Senne/Associated Press .


On Friday, investors will get their first look at U.S. inflation data since strict measures to restrict the spread of coronavirus began.

But over the coming months, headline consumer price inflation will be next to useless for understanding either the economy or how policy makers might act to support it. Investors should get used to tuning it out.

A consumer-price index is made up of thousands of minor categories, derived from survey-based estimates of how people spend their money.

For some of these items, demand has collapsed thanks to stay-at-home orders.

For others, supply is now effectively illegal since it would require gatherings that would violate various lockdown strictures.

The supposed prices of many items will be based on extremely depressed sales.



For example, almost 4% of the index is made up of heavily disrupted recreational services.

Almost 0.7% is made up of haircuts and similar personal care. Transportation services account for 5.4% of the total, and vehicle purchases—new and used—more than 6%.

Even for particularly large components of the index, like rent and imputed rent—what a property would be worth on the rental market—assessments will now be extremely difficult.

Some commercial rents are being forgiven entirely, and the residential market may follow.

Many foreclosures and evictions aren’t going ahead. Residential rents make up nearly a third of the index.

Economists and investors would like inflation to mean more than just the average change in thousands of different prices moving wildly up or down for idiosyncratic reasons.

Unfortunately for months to come, headline inflation figures will tell us less about the general condition of the macroeconomy than they usually do, except to say that it is in an extremely unusual state.

For that reason, the inflation data will do very little to guide the hand of the Federal Reserve: Jerome Powell is unlikely to raise interest rates because prices are being driven higher by the pandemic surge.

There is good reason to believe that after the spread of the coronavirus is slowed and the strictest lockdown measures are lifted, the overall effect will be deflationary. Disrupted supply can roar back quickly but lost income and the shock to consumer confidence could weigh on demand much longer.

For now, months of unpredictable and wild inflation data—based on our consumption in far more normal times—lie ahead. For the most part, investors should treat them as an oddity rather than a cause for worry or celebration.

The Indo-Pacific After COVID-19

By: Phillip Orchard


In late March, senior officials from the Quadrilateral Security Dialogue, a loose coalition of the Indo-Pacific’s four most powerful democracies, quietly launched a series of meetings aimed at forging a coordinated response to the coronavirus pandemic.

"The Quad" (comprising Japan, Australia, India and the United States) has come to symbolize both the grand plans of those seeking to cement the Indo-Pacific’s status quo and the more complicated reality of a region in flux.

On paper, the Quad makes sense as a potent alliance capable of pooling immense resources and leveraging distinct geographic advantages to limit Chinese influence and deter Chinese attempts to establish military dominance in the Indo-Pacific — especially if other regional states such as Singapore, Taiwan and South Korea could be enticed to join.

In reality, though, the Quad has been slow to coalesce into something equaling more than the sum of its parts, due in large part to economic fears of antagonizing China and inadequate budgets that cannot keep up with China’s breakneck military modernization. Though military cooperation has increased modestly among its members, the grouping itself has struggled to implement any substantive joint initiatives, much less forge an integrated security alliance capable of pulling off complex military coordination in a combat environment.

The COVID-19 pandemic could realistically push the Quad — and thus, the future power balance of the Indo-Pacific — in a number of directions. There’s a scenario in which members rise to the occasion, realize their capacity for collective action and reinforce the regional multilateral architecture ahead of the daunting challenges to come.

On the other end of the spectrum is an outcome where the virus guts members’ military budgets, saps political support from multilateral initiatives and presages an era of regional disorder that China can reshape to its tastes. The United States, more than any other country, will determine which direction the Quad goes.

Quad Goals

For those alarmed by China’s military buildup, the idea of the Quad is certainly seductive. The three non-U.S. members are ideally positioned to exploit China’s biggest geographic dilemma: its dependence on sea lanes that run through chokepoints in the first island chain and the Strait of Malacca.

To deter Chinese aggression, the thinking goes, Quad members could threaten to cut off Chinese maritime traffic at these chokepoints. India, which has grown increasingly concerned about encirclement by China's People's Liberation Army, would ostensibly be tasked with blocking the mouth of the Malacca Strait from its bases in the Andaman and Nicobar Islands.

Japan, whose near-total dependence on imported natural resources makes it particularly vulnerable to sea lane threats, would cover the East China Sea down to New Guinea. Australia, itself highly dependent on global sea lanes and wary of China’s push into the Coral Sea, would cover the southern outlets through Indonesia.

In coordination with U.S. firepower, these positions would form a tight containment line. But the approach would also provide a degree of reassurance to Japan, Australia and India that their ability to deter China doesn’t hinge solely on a distant, distracted United States’ appetite for conflict.

This, in turn, would allow the group to woo other strategically located regional states — ones like the Philippines and Indonesia, whose own concerns about U.S. commitments have made them exceedingly reluctant to anger China.

Unlike the United States, Japan, Australia and India can’t one day decide to simply leave the Indo-Pacific. Indeed, in Southeast Asian states where tight cooperation with either China or the U.S. is politically problematic, partnerships with the other Quad states have proved to be welcome alternatives.



Quad Problems: Money Matters

Of course, geopolitical competition isn’t as simple as a game of Risk — and the COVID-19 pandemic has the potential to alter nearly every component of the regional landscape. For one thing, the military balance is only part of the equation. To prevent strategically valuable countries from concluding that siding with China (or, at minimum, refusing to cooperate with Quad members) is in their best interest, the group also needs a comprehensive — and invariably expensive — soft power strategy involving hefty economic and security assistance.

Moreover, China has ample ability to hurt each of the Quad members outside the military realm. More than a third of Australian exports head to China, for example. (Australian wariness of angering China after the 2008 financial crisis was central to the demise of the first version of the Quad.) India, among other things, is worried about China’s ability to use Pakistan as a proxy to keep the Indian military bogged down in Kashmir.

Japan is the most willing to challenge China, but even it is dependent enough on Chinese consumers and supply chain links that it is typically keen to keep relations with Beijing reasonably stable.

If China weathers the pandemic fallout better than most, its economic leverage over regional states would almost certainly increase. (Many regional states are in a fix either way; if China's economy can’t pull out of its COVID-19 tailspin, Japan’s and Australia’s economies will go down with it.)

Quad Problems: Military Might

Still, the military balance factors into nearly all other aspects of regional relationships; countries are much more likely to cede to Chinese demands on oil drilling in the South China Sea, for example, if they believe that it is impossible to stop China from settling the dispute by force. To be sure, Japan, India and Australia don’t need to be able to match China, which is on track to build a 425-ship navy by 2030, ship for ship.

They just need to be confident that each would be willing and capable of controlling certain maritime chokepoints in tandem, thus providing enough of a threat to Chinese shipping to convince Beijing that it is better off living with the status quo.

But while the pandemic’s economic toll creates incentives for deeper cooperation among the non-U.S. Quad members — it’s certainly cheaper to share base networks and divide up responsibilities — the crisis will make it even harder for the Quad to reach the sustained military spending needed to project sufficient power in distant waters.

This would be especially crucial in a scenario in which China remains ascendant and the United States loses interest in putting its blood and treasure on the line in the Indo-Pacific. It’s just very hard and very expensive to build a force capable of matching China in multi-domain operations.

The non-U.S. Quad member most capable of doing this over the long term is Japan. But as it stands, the Japan Self-Defense Forces are a superb complementary force tailored to operate close to home in tight coordination with the United States. To replicate the roles that the United States presently fills, Japan would need to dramatically reorient its force structure and procurement priorities, shed steep legal constraints and surge spending indefinitely (and go nuclear, for that matter). It won’t happen fast.

In a conflict in the East China Sea in the next decade, Japan would be unable to rely on India and Australia; even if the countries were fully committed to Japan’s defense, their forces would be too far away to help. Their ability to disrupt Chinese maritime shipping in their respective areas could act as a deterrent against Chinese aggression elsewhere.

But if Beijing was willing to accept the cost and concentrate its forces to secure access to the Pacific, Japan may be overmatched. The odds would be stacked even higher against Indian (set to spend some $73 billion on defense this year, the bulk of it on personnel costs) or Australian ($27.5 billion) forces if China tried to make a break for it in their respective domains.

These scenarios expose another problem inherent in the sort of decentralized alliance that would result without robust U.S. leadership. It’s too easy for strategic interests among coalition partners to diverge and for an adversarial power to exploit the cracks — especially a country with China’s coercive capacity in the economic, cyber and diplomatic realms.

Symbolic shows of unity that aren’t backed up by real readiness to act collectively are not a deterrent. At the end of the day, if India, for example, thinks Japan, Australia and the United States would not help enough for it to win an Indian-Chinese conflict at an acceptable cost, then it has ample reasons to limit tensions with China — even if that means capping military cooperation with its Quad partners at a level that won’t incur major retaliation from Beijing.

The U.S.-China Dynamic at the Center

All these problems make clear that the Quad’s future will be primarily determined by the fates of its most powerful member, the United States, and the group’s raison d'etre, China. While Beijing appears to have handled the pandemic relatively well so far, it’s still facing truly immense economic and political pressures as the world sinks into a deep recession.

If the fiscal constraints exposed by the crisis lead to a dramatic reversal in spending on China’s military and its Belt and Road Initiative — or, of course, if they cause China to collapse into an inward-focused basket case of political mayhem — then Quad members could lick their own wounds in peace, and the regional status quo would survive.

But let’s say the Communist Party of China muddles through the immediate economic crisis intact, leans on military spending as a form of stimulus, invokes external aggression to curry nationalist support and tries to use the pandemic to reveal that its neighbors’ best bets for prosperity lie in a Sino-centric order. The question then centers on how the U.S. bounces back from the pandemic.

The United States, for example, won’t be immune to deep cuts in military spending — even if such cuts were more the result of political forces than fiscal constraints. It took the better part of a decade for Pentagon budgets to recover from sequestration following the 2008 crisis. This time around, as the death toll from coronavirus climbs toward levels seen only in U.S. wars and the U.S. economy sinks into a deep recession, the pressure to redirect spending will be immense.

The more overstretched the U.S. military becomes, the less it will invest in expensive assets that will be vital in 20 to 30 years — and the more regional friends and allies will worry if they can really depend on U.S. defense commitments. A U.S. aircraft carrier getting sidelined in Guam at a time when Chinese vessels are ramming Japanese warships, sinking Vietnamese fishing boats, locking weapons on Taiwanese jets and flooding the Spratlys doesn’t exactly inspire confidence, even if the U.S. Navy wasn’t going to stop Chinese “salami-slicing” anyway.

Perhaps a bigger issue for the United States is regional concerns about the U.S. ability to continue delivering public benefits — and these are growing amid the pandemic. Since World War II, the U.S. role as guarantor of open sea lanes, its advocacy for a rules-based trading system, and its unmatched ability to take on global leadership roles in the face of natural disasters and shared threats have all been immense sources of American power.

The brilliance of the U.S. approach was its focus on building systems — on setting out relatively clear rules, expectations and benefits, and inviting just about anyone to participate. These systems created a sense of certainty and stability around which countries could organize themselves, expanding U.S. influence and, at least over the long term, supporting U.S. interests without requiring U.S. omnipresence.

For various reasons — chief among them China’s challenge to the rules-based order and internal U.S. political pressures — Washington has moved toward ad hoc, transactional means of pursuing short-term interests. This, incidentally, is how China prefers to play the game of influence.

It prefers bilateral settings in which it can tailor its coercive tools around a counterpart's specific vulnerabilities and chip away at the regional order bit by bit. The problem for the United States, at least in the Indo-Pacific, is that China, with its focus comparatively confined to a single region, is better positioned to channel its resources and sustain this approach. If it's every country for itself in the Indo-Pacific, China thrives.

The problem for China, however, is that, even if it wanted to, it can never replicate the U.S. role as a benevolent hegemon at the center of a mutually prosperous order. It’s physically too close to the other countries in the region, and its strategic and material needs are too immense.

Moreover, China’s role in unleashing the coronavirus on the world will only deepen regional wariness of the Chinese Community Party, no matter how many masks and tests it distributes in an effort to portray itself as a regional benefactor.

The country is stuck taking an inherently coercive approach, and coercion isn’t a great way to win lasting trust and support if there's an alternative. These conditions create space for groups like the Quad to take root. It’s just a matter of whether the U.S. reemerges from the pandemic ready to lead.

Switzerland’s central bank suffers record loss in market rout

First-quarter volatility deals $39bn blow to SNB as it steps up fight for Swiss franc

Sam Jones in Zúrich

A Swiss flag is pictured in front of the Swiss National Bank in Bern
The SNB has purchased foreign currency assets equivalent to 5.6% of Swiss GDP in the past three months, according to calculations © REUTERS


The Swiss National Bank has suffered its worst quarterly loss since its foundation in 1907, after the impact of the coronavirus pandemic on global markets wiped SFr38.2bn ($39bn) from the value of its reserves in the first three months of the year.

The hit came as the central bank staged what analysts said appeared to have been its most significant intervention to stabilise the Swiss franc since the “Frankenshock” of 2015, when the abrupt removal of the franc’s limit against the euro sent convulsions through foreign exchange markets.

“The loss was not unexpected given the exposure of the SNB to global asset prices . . . but what was really interesting today was the ability to get a better estimate on the scale of recent FX interventions by the SNB,” said Maxime Botteron, an economist at Credit Suisse.

He estimated that the SNB bought SFr27bn in foreign currencies in March — the most since January 2015.

The franc has steadily appreciated against the euro this year despite the SNB’s interventions, illustrating the extent to which the central bank is grappling with market forces as investors across the globe turn to haven assets during the turmoil wrought by the coronavirus pandemic.

Mr Botteron’s calculations mean the SNB has purchased foreign currency assets equivalent to approximately 5.6 per cent of Switzerland’s gross domestic product in the past three months, even as the value of its existing holdings plummeted.

Of the SNB’s SFr800bn in reserves, its foreign currency-denominated investments fell by SFr41.2bn in the three months to the end of March, the bank’s latest figures released on Thursday showed.

Losses were mitigated by its huge gold pile of more than 1,000 tonnes, which rose in value by SFr2.8bn, as market panic drove up the price of the precious metal.

The SNB's foreign asset portfolio makes it one of the world's largest institutional investors.

Its holdings include major stakes in US blue-chip companies; at one point the bank owned more of Facebook than the company's founder, Mark Zuckerberg.

The SNB does not seek to make a profit on its reserves.

Instead, they are a key part of its unorthodox monetary policy to maintain competitiveness for the Swiss economy.

The bank has pledged to do whatever it takes to try to hold down the value of the franc.

The currency has been under pressure to appreciate for years thanks to ultra-low interest rates in other developed markets, and because of Switzerland’s prominence as a bolt-hole for investors in times of crisis. 

Alongside a policy of negative interest rates, the SNB regularly sells francs in international markets and acquires assets denominated in foreign currencies in an effort to drive down the franc’s value.

The SNB’s loss over the last quarter, while its largest ever, is still insufficient to erase the gains its investments made in the previous three months.

The final quarter of 2019 brought gains of SFr48.9bn.