President Harry Truman once said that, “a recession is when your neighbor loses his job and a depression is when you lose your job.” He was a wise man and he nailed that one. It’s too early to call this a depression, but make no mistake, we are in an economic hole and unlike most economic downturns it has just one cause and that’s the pandemic.
What’s more, there is no precedent for the sequence of events that got us here. Economic downturns usually follow their own little rule book. However, this one didn’t.
Usually, even a deep economic recession takes a little while to get started. Just consider the great recession of the last decade. It began in 2007, leading indicators were falling, but our unemployment rate didn’t reach its peak at 10% until late 2009. However, during this recession, because the government all but closed the economy to fight the pandemic, we shed the jobs first.
Usually, the loss of jobs is one of the latter effects of a recession. That’s why economists refer to it as a lagging indicator. But, clearly, in this recession, it’s all turned around.
In a way it was a little like the unemployment surge after World War II. The war was over and all the orders for tanks, aircraft and munitions were cancelled. Unemployment surged immediately. There was a lot of anxiety, but pent-up demand from workers who had been saving their war wages speeded up the shift to a civilian economy and the unemployment spike didn’t last long at all.
This unemployment surge, and what will likely be a large contraction in Gross Domestic Product is different. For one thing, hope as various government officials might, the pandemic is not over. COVID-19 spikes are still happening. Northern Virginia is a good example. COVID cases are still rising and Virginia’s Governor Ralph Northam has delayed his reopening plans for our region.
However, when we reopen and how isn’t really the question. The concern is that if COVID-19 does recede what then? Will the economy just bounce back? That’s what President Trump thinks. As far as he is concerned, the sooner we lift the restrictions, the sooner we’ll find our way back to that 3.5% unemployment rate we had in January.
That would be great. I remember how excited my graduating seniors were as they looked forward to starting their careers. Unemployment wasn’t something they were worried about. They had choices. Now most of them are caught in an economic limbo.
The problem with that overly optimistic scenario is that the U.S. economy is incredibly complex. Once its functioning has been interrupted for a prolonged period, it becomes incredibly difficult to make a quick restart.
First, even with stimulus checks and unemployment insurance supplements, many Americans are tapped out. There has been an increase in credit card debt and missed mortgages. Even if they do go back to work soon, it’s going to take a while to pay off that debt. So, consumer demand, absolutely vital to a quick recovery, is down and will be down or some time to come. The longer it takes to recover the longer we’ll see this recession, or perhaps even depression, if it lasts long enough.
Second, employers, most facing lower and uneven demand, aren’t going to hire everyone back at one time. Their situation isn’t that different from their workers. Most employers have accumulated debt — corporate debt is especially high — and they are going to be careful about how quickly they ramp up towards more normal operations. Even if demand rises, they’re still going to take it slow.
Also, businesses of all sizes don’t have the reserves to weather the storm. Two large national retailers have already filed for Chapter 11 bankruptcy protection, several more on the brink, thousands of small businesses are on thin ice, and it might not be long before we see bankruptcies and defaults on a large scale.
Then there is the psychology of the COVID-19 world. The disease may abate, hopefully soon, but the anxiety could remain for quite some time. Consumers have already changed their habits and the notion of returning to more free and easy times could prove challenging. Going out to eat may still prompt some fears. The same is true for going to movie theaters and shopping malls. Also, in the back of our minds, there is the worry that COVID may mutate and come back for another round.
It’s a crisis that doesn’t come with much of a road map. There aren’t many answers, there are lots of uncertainties, and unfortunately, in the complex play of public health questions, government policy and economic forces, a lot of people are caught in the middle.
David Kerr is an adjunct professor of political science at VCU and has worked on Capitol Hill and for various federal agencies for many years.