Can we really crawl out of the economic gutter?

Where is the demand to come from? That is the crucial economic question these days. If we can’t answer it (and for now, we can’t), then the outlook is bleak. It implies a weak recovery or — worse — a
Depression-like stagnation with massive joblessness. Economists project the recovery to begin sometime in the summer. But who will do the spending needed to pull the economy from the gutter?
Consumers aren’t a good bet. High unemployment has spread fear and anxiety among the newly jobless (16.8 million at last count) and among those whose neighbours, parents, children and coworkers have been fired. They’re likely to be stressed emotionally and restrained in their spending.
What about business? The country could use an investment boom. But this too seems a long shot.
For starters, all those scarred workers are also cautious customers. They don’t represent the strong demand that would cause firms to undertake major expansions.
There’s another problem. Cuts in spending by firms in what now seem risky sectors — think shale oil or airlines — have contributed to the economy’s overall weakness. We don’t need more capital goods; maybe we need fewer. Unsurprisingly, Boeing has just announced the cancellation of orders for 150 of its troubled 737 Max aircraft.
Twice a year, the International Monetary Fund (IMF) publishes major studies of the global economy. The latest makes for somber reading. The table below shows how the IMF’s forecasts have dramatically changed since 2019. The first column provides the actual rates of economic growth (gross domestic product, or GDP) in some major countries in 2019. The second and third columns give the IMF’s current projections for 2020 and 2021.
The table has two striking features. The first is that the present downturn is clearly global. The economies of most major countries are contracting. Even the projected GDP increases in China and India in 2020 are puny compared with their past growth rates.
“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago,” writes Gita Gopinath, the IMF’s chief economist.
The second message from the table is that, despite the severity of the downturn, the projected recovery for 2021 is fairly optimistic. Could this be? You can construct an optimistic case. “Mitigation” works and the number of new cases of coronavirus drops. People feel safer.
Extra health spending related to the pandemic offsets some loss in consumer buying. The stock market (at this writing) has
recovered some of its previous losses, bolstering
confidence.
Finally, there’s all that money, starting with the $2.2 trillion Cares Act. It pledges $1,200 for most poor and middle-income Americans; loans to small businesses that can be converted into grants; and more loans and grants for larger firms. In addition, the Federal Reserve says it will inject $2.3 trillion into financial markets to prevent a collapse of credit. Surely all this money must answer the initial question: Whose spending will revive the economy? The answer: the government’s.
Maybe not. What’s overlooked is that much of the money pledged by the Fed and Congress does not stimulate the economy so much as it prevents further weakening. Simplified, here’s what happens.
When investors get frightened, they may sell high-risk securities (say, poorly rated corporate bonds) and buy low-risk securities (say, Treasury bills, notes and bonds). If too much of this occurs, the credit available to the private sector may shrink, hurting economic growth and hiring. By buying the low-rated securities, the Fed aims to dampen this cycle. It substitutes the government’s credit for the private credit that has been withdrawn.
To summarise: A good deal of the so-called stimulus doesn’t really stimulate. Instead, it stabilises — or aims to stabilise — financial markets. What we don’t seem to know is how much “stimulus” is of this type, as opposed to genuine stimulus that expands the
economy. But it’s probably considerable, raising the same question: Whose spending will lift the
recovery?
What is unsettling about this crisis is that it doesn’t fit our preconceived notions of how the world works. What we don’t understand and can’t control makes us feel vulnerable. The expectation that after the present recession we should have a standard recovery is based on our past experience. It’s not inevitable. The most obvious alternative would be a prolonged period of high unemployment that bears a striking resemblance to the Great Depression.

—The Washington Post

Robert J Samuelson is a journalist for The Washington Post, where he has written about business and economic issues since 1977. He was a columnist for Newsweek magazine from 1984 to 2011