Get ready for a second wave of economic pain

Just as epidemiologists are concerned that a post-reopening “second wave” of Covid-19 cases could further batter America’s health care system, many economists warn that the current wave of nutritional insecurity and overwhelmed food banks could be just the beginning of the economic crisis and will get worse starting in August if Congress doesn’t act now.

For all of Congress’s flaws, the existing economic recovery programs they’ve passed recently — especially the bonus unemployment insurance provisions of the CARES Act — have done a pretty good job of sheltering many of the most vulnerable people from the most severe forms of economic pain. But those provisions expire at the end of July, and unless the labor market is completely fixed by then, which seems unlikely, a huge hit to America’s spending power seems probable in later summer. At the same time, a separate program, the Paycheck Protection Program seems unlikely to prevent a serious number of small-business failures.

The good news is that none of this is inevitable. Some of it depends on public health questions that are outside of economic policymakers’ control, but most of it is a simple question of program design. The federal government has ample fiscal resources to keep spending levels from collapsing; it’s just a question of whether they’ll use them.

Low-wage workers have lost jobs en masse, but many are protected

It’s common for recessions to fall harder on less educated workers, but the class skew of the current surge in joblessness is extremely large. As Bloomberg reporter Luke Kawa points out, the year-over-year change in unemployment rate for workers with no college is around 14 to 16 percent, while for those with a college degree or better it’s just over 6.

One way to characterize this, as BuzzFeed’s Venessa Wong did in her story on the uneven impact of the recession, is as a case of the worst-off workers being hardest hit by the downturn.

Democrats in Congress actually passed a decent unemployment insurance plan for these workers under the CARES Act. The law expanded the set of workers who are eligible for unemployment insurance benefits and increased benefit levels by $600 per week. State UI systems work by replacing a fixed percentage of any given worker’s usual income. Consequently, for someone who does not earn much money, $600 a week makes a big difference. For someone who earns more, the $600 does less to close the gap in lost income.

The median hourly wage in the United States is $19.14, which works out to $765 over a 40-hour workweek. Since the $600 is on top of what you would normally get as an unemployment insurance benefit, this creates a situation where workers in the bottom half of the income distribution are generally better-off collecting UI benefits than they are working.

Many conservatives and business owners are angry about this, but President Trump signed it into law, and it means that through the end of July, working-class Americans are in practice in okay shape if they get laid off. The biggest problem for unemployed working-class people has been that state UI systems were unprepared to cope with such a large surge in claims and many people were unable to sign up for benefits in a timely manner. But those problems are abating over time.

That’s important in humanitarian terms, but it also matters for the larger economy. When people’s incomes are stabilized, they pay their bills on time (note that despite a lot of hype about rent strikes, landlords did not report a major spike in non-payment in May) and keep buying things. Since most workers who’ve been laid off are at the low end of the income spectrum and thus eligible for generous unemployment insurance benefits, the country has mostly avoided secondary shocks that would further exacerbate economic problems.

So far.

More cuts are coming

The problem is twofold. Even if the great reopening goes very well, at least some sectors of the economy — business travel, conferences, conventions, and leisure actives like movie theaters and concerts — are going to remain significantly depressed for a while. Workers who don’t get rehired by August 1 are set to see their bonus UI vanish and will need to start significantly curtailing their spending.

Meanwhile, lost revenue to state and local governments is already baked into the cake by the economic downturn the US has experienced.

Michael Leachman, the vice president for state fiscal policy at the Center on Budget and Policy Priorities, says “state budget shortfalls from COVID-19’s economic fallout could total $650 billion over three years.”

We don’t know exactly how states plan to deal with those shortfalls, but the answer involves some mix of cuts to spending and increases in taxes, which will act as a further drag on the economy.

The result is that by Labor Day, regardless of how much of the country has resumed operations, a much larger swath of the public will need to pull back on their spending and hurting business conditions. The economy will eventually come back from that. But the lesson of the history is that the return could be slow — and could be especially hampered this time around by a potential wave of small-business failures.

Recessions can just go on and on

The big lesson of the Great Depression is that economic downturns can persist for a very long time even if their original source has vanished. Once enough people have lost enough income that they’ve had to significantly reduce spending, thus reducing other people’s incomes, it doesn’t matter why incomes dropped in the first place.

And even when you’re not actually in a recession, problems can linger. The economy grew pretty steadily throughout the final six years of Barack Obama’s presidency — there was, in some sense, nothing “wrong” with the economy — it just wasn’t adding jobs nearly fast enough to soak up all the joblessness that accumulated during the peak recession years. It was only after one or two more years of similarly paced growth under Donald Trump that the labor market finally began to feel healthy.

A particular problem this time around is that, according to a survey by the Society of Human Resource Managers, about half of small-business owners expect their business to fail this year.

That businesses sometimes fail is a good, to a point. The economy couldn’t grow over the long term without new businesses, and those new businesses need some old businesses to fail, thus freeing up real estate and other assets for new ideas. But while one vacancy at the local strip mall is an opportunity for a new entrepreneur, a half-vacant strip mall is a creepy eyesore. If one restaurant in town fails, there’s a chance for a new one to be better. But if half the restaurants fail, the supply networks that make it possible to start new ones can dry up.

And the economic news only gets worse if, as seems likely, the drive to lift restrictions on business activity hits at least a few snags along the way, with new outbreaks that either scare off customers or lead to the reimposition of new restrictions.

This can be avoided

The good news is that the federal government’s borrowing costs are currently very low and there’s little reason we have to accept the inevitability of a late-summer spending crash.

State and local governments could easily be given an influx of cash — structured as unrestricted financial assistance, as Medicaid matching funds, as an “infrastructure package” that puts money into grant programs, or whatever else — to prevent a big wave of austerity. The bonus unemployment insurance could be extended beyond July or, at a minimum, structured to taper off rather than forming a huge cliff.

And small businesses could be given much more generous treatment in the form of big ultra-low-interest loans capped by some function of 2019 revenue rather than the complicated structure of the existing Paycheck Protection Program. Measures along these lines wouldn’t guarantee a robust recovery — to get that, the US needs to get the virus under control — but they would at least ensure that the economy is limited by the virus rather than by mere lack of money.

Correction, May 13: An earlier version of this article misstated the findings about unemployment rates in Bloomberg’s graph.

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