Last week, the Federal Reserve and others lowered interest rates in an attempt to counteract the effects of COVID-19 on the economy. Also last week, The Economist optimistically wrote that a recession is unlikely but not impossible:
Yet there is an uneasy feeling that a flurry of rate cuts may not be the solution to this downturn. In part that reflects the fact that they are already so low.
Lowering the prime rate has no effect because it’s not the banks who don’t have enough money: it’s the people. Maybe rate changes would have an effect if the banks changed the interest rate on consumer credit from 25% to -25%, but they won’t. It’s thoroughly irritating how some commentators say there’s too much money in the system when the problem is not how much there is but who has it. We’ve needed a helicopter drop of cash or a debt jubilee for a decade, and a basic income for a century.
In the United States, “full” employment is not having an effect on wages because it’s not full. The labor market is global, or was until yesterday, and global unemployment is roughly 50%, so real wages are still going down. Because employment only counts paid labor–and bears only a passing relation to what work needs to be done–employment is constrained by employers. And there aren’t enough employers, again because of the distribution of money, but also because of a tendency to monopoly: how many paperclip maximizers do we really need? Meanwhile, none of that matters because the system isn’t designed for the public good–or, if you prefer, it’s not designed to maximize marginal benefit for all market participants. Finance capitalism thrives on greed: the world can go to Hell; I’ve got mine.
Besides, it’s not just households who are over-leveraged. Everyone is.
One way the virus hurts the economy is by disrupting the supply of labour, goods and services. People fall ill. Schools close, forcing parents to stay at home. Quarantines might force workplaces to shut entirely. This is accompanied by sizeable demand effects. Some are unavoidable: sick people go out less and buy fewer goods. Public-health measures, too, restrict economic activity. Putting more money into consumers’ hands will do little to offset this drag, unlike your garden-variety downturn. Activity will resume only once the outbreak runs its course.
Then there are nasty spillovers. Both companies and households will face a cash crunch. Consider a sample of 2,000-odd listed American firms. Imagine that their revenues dried up for three months but that they had to continue to pay their fixed costs, because they expected a sharp recovery. A quarter would not have enough spare cash to tide them over, and would have to try to borrow or retrench. Some might go bust. Researchers at the Bank for International Settlements, a club of central banks, find that over 12% of firms in the rich world generate too little income to cover their interest payments.
Many workers do not have big safety buffers either. They risk losing their incomes and their jobs while still having to make mortgage repayments and buy essential goods. More than one in ten American adults would be unable to meet a $400 unexpected expense, equivalent to about two days’ work at average earnings, according to a survey by the Federal Reserve. Fearing a hit to their pockets, people could start to hoard cash rather than spend, further worsening firms’ positions.https://www.economist.com/finance-and-economics/2020/03/05/a-recession-is-unlikely-but-not-impossible
The Economist longs for Bretton Woods while they chart some of the attempted remedies. It’s quite possible, however, as some commentators have noted since at least the turn of the century, that the global economy is now too complexly intertwined to be centrally managed, if it ever could have been, or ever could be.
May you live in interesting times.