INSIGHTS: HOW THE ALPHABET WILL DESCRIBE THE RECOVERY
Guest Columnist: Elaine Schwartz, an economics teacher, and found of Econlife. Reprinted with permission.
The most recent GDP report from May 28th shows a 5 percent decline in our production of goods and services for the first three months of 2020.
Soon though, the GDP decline will exceed the Great Recession’s 8.4 percent drop. According to the Atlanta Fed’s June 17 GDPNow forecast, annualized real GDP will drop by 45.4 percent for the second quarter (seasonally adjusted). The Atlanta Fed calls its GDPNow number a “running estimate” because their calculations use current stats, not what they expect.
From so precipitous a plunge, we can ask what about the recovery?
A Recovery Alphabet
A “V” recovery from a recession is typical. With a “V,” the robust production of goods and services is our beginning. Then, the economy produces less and less, businesses lay off workers, and consumer spending declines. Happily, once we reach the bottom of the left side of the “V,” it all reverses. Production accelerates, unemployment declines, and the economy roars ahead.
Very few of us expect a V-shaped recovery. Among the alphabet recoveries, the “U” and the Swoosh are most likely. Below, the dotted lines indicate the pre-coronavirus baseline:
However, this recovery could be unusual because of the services that are depressing it. Past recessions have been characterized by slowdowns in manufacturing and construction. You can see that services don’t have the same recessionary dips as goods production.
Now though, services have led the decline. So yes, industry and construction could have a V-shaped recovery. But it is tougher to imagine a rapid return for concerts, sports, retailers, and restaurants. The GDP could also be constrained by more work from home and fewer business trips that would pull the airlines, restaurants, convention centers, and hotels down as well.
Our Bottom Line: Alphabet Explanations
The rosiest scenario is the “Z.” After the dip, the economy has a huge bounce, beyond where it would have been. As pent-up demand explodes, we make up for many of our delayed purchases.
The realists among us suggest that a “U” or a Nike Swoosh are more likely. With a “U,” social distancing limits business activity until we can function normally. The Swoosh sees a “V” like dip and rise but then takes awhile to return to the baseline.
More pessimistic, the “W” and “L” people see a prolonged drop. The two scenarios are different though because the “W” illustrates a rise that soon reverses after a second coronavirus wave. The “L” remains down if global supply chains are permanently upset and many smaller businesses permanently disappear.
There is one symbol that we can all agree illustrates where we are going:
My sources and more: As I mentioned in Friday’s e-links, Dr. Ed’s Blog always provides insight. His analysis of each letter’s recovery pattern then took me to Brookings, the Atlanta Fed, and the BEA press release. Please note that the first quarter GDP decline was for real GDP (it accounted for inflation) and was an annualized number (that assumed the first quarter five percent decline continued throughout the year.)
ON THE ECONOMY: DISMAL TIMES
John Dunham, Managing Partner, John Dunham & Associates
I looked into my morning mirror, and it reveals some things to me that I had not been able to see. I saw someone that I’m not sure I want to be. An empty, lonely face was staring back at me. All in all, I would have to say have to say, it’s been a rather dismal day. These lyrics light up the first track of the self-titled debut album from the band Bread. Written by front man David Gates, the 1968 song was Bread’s first single, although it didn’t chart.
The country, nay the world, are surely in dismal times, reeling from both the effects of a spreading virus, as well as from the government-imposed shutdowns in response to it. What better time to be an economist, a practitioner of what has long been called, the dismal science.
The term was coined in 1849 by Thomas Carlyle, a British historian, essayist, and mathematician, in a tract arguing in favor of reintroducing slavery in order to restore productivity to the West Indies. Carlyle wrote that it was “dismal” that the secret of this Universe was found in ‘supply and demand’, and reducing the duty of human governors to that of letting men alone. Carlyle labeled the science “dismal” mainly due to the fact that it did not support the idea of slavery. Instead, the rules of supply and demand argued for “letting men alone” rather than thrashing them with whips for not being servile. He was actually countered by the most eminent economist of his day, John Stuart Mill, as suggesting that toil itself was a virtue.
But the phrase struck, and in all honestly, since economics is really an analysis of scarcity in all things, there is something dismal about it. Unlike those who suggest that there is some sort of free lunch, economists examine the overall costs and utility of production and consumption in a world where there will never be enough stuff to satisfy all demand. This is true in all real economic thinking and theory, even those of Karl Marx.
It is also true that some of the earlier economists had an extremely dismal view of the future. Thomas Malthus always comes to mind, as he predicted that population growth will always outpace agricultural production. But in reality, the field of economics, and the markets that it promoted, suggested that there was a world beyond misery, and cruelty, based on individual effort and cooperation. This is what markets are about, and is why the capitalist system that came about beginning in the latter part of the 18th Century has led to a much better and more prosperous world than the one that existed before. This is in spite of the current craziness surrounding COVID-19.
It is interesting to look back and see just who was arguing against markets at the time when the capitalist system was in its early ascendency. Not only was Carlyle arguing against the theories of the market and capitalism, but so to were the founders of the eugenics movement, W. R. Greg, and Francis Galton, who attacked Mill for arguing that land-reform would help solve the problem of poverty in Ireland, stating, Mr. Mill never deigns to consider that an Irishman is an Irishman, and not an average human being—an idiomatic and idiosyncractic, not an abstract, man.
Over time, the idea of the market became accepted almost universally, that is until about the 1920s when a brand of socialism not based on the ideas of Marx, but rather a despotic socialist came to force in Russia, and later in large parts of Europe. Just like Carlysle, Greg and Galton, dictators like Stalin, Mao, Hitler, Franco, and Tsar Boris III of Bulgaria, saw people not as individual actors but as possessions, in this case possessions of the state (which of course they controlled).
So, while the economists of the day, people like JM Keynes, Friedrich August von Hayek, and Joseph Schumpeter, were arguing about the rights of man, and about property rights, much of the world was following racist policies based on eugenics and slavery.
The battle against state control continues to this day, as dictators in places like Venezuela, Cuba, North Korea and China, still consider that all of the means of production, including human beings, are their possessions. The battle is also being fought in the halls of Congress and on American streets. Take New York’s Mayor Bill DeBlasio. He, like many anti-market politicians, all use arguments that mirror those used by despotic governments throughout history. Mayor DeBlasio was quoted as saying, I think people all over this city, of every background, would like to have the city government be able to determine which building goes where, how high it will be, who gets to live in it, what the rent will be. He also said, If I had my druthers, the city government would determine every single plot of land, how development would proceed. And there would be very stringent requirements around income levels and rents. That’s a world I’d love to see…
In other words, the Mayor wants to be the one who determines how and where we should live, what buildings would look like and how much each of us pays, etc… These are statements that no rational economist can support, and that harken back to the anti-market ideas that first led to economics being called the dismal science. But what is more dismal would be the world without markets, that is the world of Cuba, Venezuela, North Korea, and Stalinist Russia. Maybe those who are supporting the current anti-capitalist protest movements might want to look into their morning mirror, because history shows us that it reveals some things to that they had not been able to see, someone that I’m not sure they want to be.