Nov 25th 2020

A Tale of Two Economies 

 

NEW HAVEN – Suddenly, there is a credible case for a vaccine-led economic recovery. Modern science has delivered what must certainly be one of the greatest miracles of my long lifetime. Just as COVID-19 dragged the world economy into the sharpest and deepest recession on record, an equally powerful symmetry on the upside now seems possible.

If only it were that easy. With COVID-19 still raging – and rates of infection, hospitalization, and death now spiraling out of control (again) – the near-term risks to economic activity have tipped decidedly to the downside in the United States and Europe. The combination of pandemic fatigue and the politicization of public health practices has come into play at precisely the moment when the long anticipated second wave of COVID-19 is at hand.

Unfortunately, this fits the script of the dreaded double-dip recession that I warned of recently. The bottom-line bears repeating: Apparent economic recoveries in the US have given way to relapses in eight of the 11 business cycles since World War II. The relapses reflect two conditions: lingering vulnerability from the recession, itself, and the likelihood of aftershocks. Unfortunately, both conditions have now been satisfied.

Vulnerability is hardly debatable. Notwithstanding the record 33% annualized snapback in real GDP growth in the third quarter of this year, the US economy was still 3.5% below its previous peak in the fourth quarter of 2019. With the exception of the 4% peak-to-trough decline during the 2008-09 global financial crisis, the current 3.5% gap is as large as that recorded in the depths of every other post-WWII US recession.

Consequently, it is ludicrous to speak of a US economy that is already in recovery. The second quarter snapback was nothing more than the proverbial dead cat bounce – a mechanistic post-lockdown rebound after the steepest decline on record. That is very different than the organic, cumulative recovery of an economy truly on the mend. The US remains in a deep hole.  

Just ask American consumers, who, at 68% of GDP, have long accounted for the dominant share of US aggregate demand. After plunging by an unprecedented 18% from January to April, total consumer spending has since recouped about 85% of that loss (in real terms). But the devil is in the details.

The rebound has been concentrated in goods consumption – big-ticket durables like cars, furniture, and appliances, plus soft-good nondurables like food, clothing, fuel, and pharmaceuticals that have more than made up for what was lost during the lockdown-induced plunge. In September, goods consumption in real terms was 7.6% above its pre-pandemic January 2020 high. The bounceback benefited significantly from a surge in online buying by stay-at-home consumers, with e-commerce going from 11.3% of total retail sales in the fourth quarter of 2019 to 16.1% in the second quarter of 2020.

But services consumption, which makes up over 61% of total US consumer spending, is a different matter altogether. Services accounted for fully 72% of the collapse in total consumer spending from January to April. While services have since partly bounced back, as of September, they had recouped just 64% of the lockdown-induced losses earlier this year.

With COVID-19 still raging, vulnerable American consumers remain understandably reluctant to re-engage in the personal interaction required of face-to-face services activities such as restaurant dining, in-person retail shopping, travel, hotel stays, and leisure and recreation activities. These services collectively account for almost 20% of total household services outlays.

The understandable fear of personal interactions in the midst of a pandemic brings us to the second ingredient of the double-dip: aftershocks. With the current exponential rise in COVID-19 cases, lockdowns are back – not as severe as in March and April but still aimed at a partial curtailment of person-to-person activity heading into the all-important holiday season. Precisely at the moment when the economic calendar typically expects an enormous surge of activity, the odds of a major seasonally adjusted disappointment are rising.

This poses serious risks to the still-battered US labor market. Yes, the overall jobless rate has come down sharply from 14.7% in April to 6.9% in October, but it remains essentially double the pre-COVID low (3.5%). With weekly claims for unemployment insurance only just starting to creep up in early November as new curfews and other lockdown-like measures are put into place, and a dysfunctional US Congress failing to agree on another relief package, the risk of renewed weakness in overall employment is growing.

The news on vaccines is truly extraordinary. While the logistics of production and distribution are daunting, to say the least, there is good reason to be hopeful that the end of the COVID-19 pandemic may now be in sight. But the impact on the economy will not be instantaneous, with vaccination unlikely to bring about so-called herd immunity until mid-2021 at the earliest.

So, what happens between now and then? For a still vulnerable US economy now in the grips of predictable aftershocks, the case for a relapse, or a double-dip, before mid-2021 is all the more compelling.

To paraphrase Charles Dickens, this is the best of times and the worst of times. As financial markets celebrate the coming vaccine-led boom, the confluence of epidemiological and political aftershocks has pushed us back into a quagmire of heightened economic vulnerability. In Dickensian terms, to reach a “spring of hope,” we first must endure a “winter of despair.”


Stephen S. Roach is a faculty member at Yale University and the author of Unbalanced: The Codependency of America and China. 

Copyright: Project Syndicate, 2020.
www.project-syndicate.org 

 

This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.
 

 

Browse articles by author

More Current Affairs

Putin's Brezhnev Moment 
by Aryeh Neier
Feb 6th 2023
EXTRACTS: "Brezhnev, in power from 1964 to 1982, signed the 1975 Helsinki Accords, together with the United States, Canada, and most of Europe. Eager for formal recognition of its borders at the time, the USSR under Brezhnev, together with its satellite states in Central and Eastern Europe, underestimated the potential impact of the Accords. That is probably why it agreed to include commitments to respect human rights, including freedom of information and movement, in the agreement’s Final Act." --- "Putin’s regime is turning its back on the legacy of Soviet dissent. Worse, it is replicating the despotic practices of Brezhnev and Soviet totalitarianism. If it continues on this path, it risks ending up in the same place."
The Necessity of Morality in Foreign Policy
by Chris Patten
Feb 5th 2023
EXTRACT: "....when countries like Saudi Arabia, Egypt, and, above all, China flagrantly violate their citizens’ human rights, liberal democracies must unite to constrain their behavior. Ultimately, it is up to those of us who believe in the universality of human rights to expose crimes against humanity and to uphold liberal-democratic values in the face of authoritarian threats" --- "....liberal democracies have a shared responsibility to support the Ukrainians fighting to defend their homeland and to protect their rights to self-determination and statehood in the face of Russian aggression."
Ukraine war: the bloody battle for Soledar and what it tells us about the future of the conflict
by Stefan Wolff
Jan 14th 2023
EXTRACT: "On balance, then, the events in and around Soledar over the past week illustrate that no matter the outcome of the current fighting, this is not a turning point. It’s another strong indication that the war is likely going to be long and costly."
Through the Russian Looking Glass 
by Michael Marder
Jan 14th 2023
EXTRACTS: "Russian President Vladimir Putin has long regarded the collapse of the Soviet Union as a “geopolitical catastrophe.” The invasion of Ukraine, now approaching its one-year anniversary, could be seen as the culmination of his years-long quest to restore the Soviet empire. ..... "With Russia’s economy straining under Western sanctions, some of the country’s leading economists and mathematicians are advocating a return to the days of five-year plans and quantitative production targets." .... "The logical endpoint of a planned economy today is the same as it was then: mass expropriation. Stalin’s collectivization of Soviet agriculture in the late 1920s and early 1930s led to millions of deaths, and the post-communist 'shock therapy' of privatization resulted in the proliferation of 'raiders' and the creation of a new class of oligarchs. Now, enthralled by imperial nostalgia, Russia may be about to embark on a new violent wave of expropriation and redistribution."
China's Autocracy in Crisis 
by Ian Buruma
Jan 11th 2023
EXTRACT: "These developments suggest that Indian economist Amartya Sen was correct when he famously argued in 1983 that famines are caused not only by a shortage of food but also by a lack of information and political accountability. For example, the Bengal famine of 1943, India’s worst, happened under imperial British rule. After India gained independence, the country’s free press and democratic government, while flawed, prevented similar catastrophes. Sen’s thesis has since been hailed as a ringing endorsement of democracy. While some critics have noted that elected governments can also cause considerable harm, including widespread hunger, Sen points out that no famine has 'ever taken place in a functioning democracy.' --- China’s system of one-party, and increasingly one-man, rule is couched in Communist or nationalist jargon, but is rooted in fascist theory. The German jurist Carl Schmitt, who justified Adolf Hitler’s right to wield total power, coined the term “decisionism” to describe a system in which the validity of policies and laws is not determined by their content but by an omnipotent leader’s will. In other words, Hitler’s will was the law."
No More "Chicken Kiev" for Ukraine
by Yuriy Gorodnichenko, Anastassia Fedyk, and Ilona Sologoub 
Dec 29th 2022
EXTRACTS: "On August 1, 1991, a little more than three weeks before Ukraine declared independence from the Soviet Union, US President George H.W. Bush arrived in Kyiv to discourage Ukrainians from doing it. In his notorious 'Chicken Kiev' speech in the Ukrainian parliament, Bush lectured the stunned MPs that independence was a recipe for 'suicidal nationalism', 'ethnic hatred', and 'Local despotism.' ----- ....the West’s reluctance to respect Ukraine’s desire for sovereignty was a bad omen, revealing a mindset among US and European leaders that paved the way to Russia’s full-scale invasion in February. ----- .... Western observers, ranging from Noam Chomsky to Henry Kissinger, blame the West for Russian President Vladimir Putin’s decision to invade, or have urged Western leaders to provide Putin a diplomatic off-ramp by compelling Ukraine to give up territory. Policymakers, too, seem to view Ukraine’s self-defense as a bigger problem than Russia’s genocidal aggression. ----- ..... despite the massive material and military support the West has provided to Ukraine, the fateful logic of appeasement lingers, because many Western leaders fear the consequences of Russia’s defeat more than the prospect of a defeated Ukraine. ----- This war is about the survival of Ukraine and the Ukrainian people. In the words of the Israeli leader Golda Meir, born in Kyiv, 'They say we must be dead. And we say we want to be alive. Between life and death, I don’t know of a compromise.' "
A China Optimist's Lament 
by Stephen S. Roach
Dec 29th 2022
EXTRACT: "China’s flexible, blended, increasingly dynamic private sector could do all that and more. ----- Then came Xi Jinping. "
COVID and the Chinese Social Contract 
by Joschka Fischer
Dec 29th 2022
EXTRACTS: "For a few years in the late 2010s, it seemed to be only a matter of time before China would replace the US as the world’s largest economy and overwhelmingly dominant technological superpower. Then came the COVID-19 outbreak in Wuhan in late 2019. " ---- "How could China’s seemingly all-powerful autocrat understand so little about the social contract on which his power rests? For all its difficulties, liberal democracy – with its transparency and self-imposed limits – has once again proved more efficient and resilient than autocracy. Accountability to the people and the rule of law is not a weakness; it is a decisive source of strength. Where Xi sees a cacophony of clashing opinions and subversive free expression, the West sees a flexible and self-correcting form of collective intelligence. The results speak for themselves."
Andy Warhol Comes to Kyiv
by Alexander J. Motyl
Dec 12th 2022
EXTRACTS: "Next time you’re in Ukraine’s capital, Kyiv, don’t bother looking for Dostoevsky Street. It’s been renamed: it’s now Andy Warhol Street. ..... because many Ukrainians regard Andy as Ukrainian. Was he? The evidence is mixed." ---- "Warhol remained a committed Greek Catholic all his life. He regularly prayed, both at home and in church, and frequently attended Sunday Mass. His bedside table contained a crucifix, a Christ statuette, and a prayer book. After he died on February 22, 1987, he was buried in St. John the Divine Byzantine Catholic Cemetery, some twenty miles south of Pittsburgh, in a simple grave next to his parents." ---- "When it comes to objective cultural affiliation or subjective ethnic identification, the United States—with its diverse Slavic heritages—has the greatest claim on Warhol and his art."
New food technologies could release 80% of the world’s farmland back to nature
by Chris D Thomas, Jack Hatfield and Katie Noble
Dec 12th 2022
EXTRACT: "Cellular agriculture provides an alternative, and could be one of this century’s most promising technological advancements. Sometimes called “lab-grown food”, the process involves growing animal products from real animal cells, rather than growing actual animals. If growing meat or milk from animal cells sounds strange or icky to you, let’s put this into perspective. Imagine a brewery or cheese factory: a sterile facility filled with metal vats, producing large volumes of beer or cheese, and using a variety of technologies to mix, ferment, clean and monitor the process. Swap the barley or milk for animal cells and this same facility becomes a sustainable and efficient producer of dairy or meat products."
Disrupting the Disruptors 
by Roger McNamee
Dec 5th 2022
EXTRACT: "After a decade of unconstrained growth – when it seemed that a new billionaire was minted every day – the tech industry has finally hit a rough patch. Elon Musk’s erratic behavior following his takeover of Twitter has left the financially leveraged platform in a precarious state. The crypto exchange FTX’s sudden implosion has vaporized a business that was recently valued at $32 billion, taking many other crypto firms with it. Meta (Facebook) is laying off 11,000 people, 13% of its workforce, and Amazon is shedding 10,000. What are we supposed to make of these setbacks? Are they isolated incidents, or signs of structural change?"
The Unavoidable Crash
by Nouriel Roubini
Dec 3rd 2022
EXTRACT: "Just looking at explicit debts, the figures are staggering. Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II."
Rishi Sunak's Daunting Challenge
by Chris Patten
Dec 3rd 2022
EXTRACT: "The Conservative leadership must stand up to the party’s extremists, and it must do so sooner rather than later. If moderates cannot defeat the hardliners by the next election, and the outcome turns out to be as bad for the Tories as recent polls suggest, they will find they have the same fight on their hands in opposition. --- Conservatives must never underestimate the importance of their moderate supporters. If the Party continues to disregard centrists whenever the Brexiteer right stamps its feet, it may find itself out of power for a long time to come."
US midterms: why gen Z and millennials came out to vote and why it marks a generational shift
by Dafydd Townley
Nov 24th 2022
EXTRACT: "....young voters did reach the polls they voted overwhelmingly for Democrat candidates across the country. According to reports, 63% of 18- to 29- year olds voted Democrat and 35% voted Republican in the House of Representatives elections. Voters between 30 and 44 split their vote between the two parties, while older voters tended to vote Republican."
Nouriel Roubini on stagflation, debt distress, financial innovation, and more
by Nouriel Roubini
Nov 24th 2022
Nouriel Roubini: "Central banks are in both a stagflation trap and a debt trap. Amid negative aggregate supply shocks that reduce growth and increase inflation, they are damned if they do and damned if they don’t. If they increase interest rates enough to bring inflation down to 2%, they will cause a severe economic hard landing. And if they don’t – attempting instead to protect growth and jobs – they will be left increasingly far behind the curve, leading to a de-anchoring of inflation expectations and a wage-price spiral. Very high debt ratios (both private and public) complicate the dilemma further. Raising interest rates enough to crush inflation causes not only an economic crash, but also a financial crash, with highly leveraged private and public debtors facing severe distress. The resulting financial turmoil that intensifies the recession, creating a vicious cycle of deepening recession and escalating financial pain and debt distress. In these circumstances, central banks will blink. They will wimp out in the fight against inflation, in an effort to avoid an economic and financial crash. But that will lead to a higher permanent inflation rate, while only postponing the arrival of stagflation and debt crises. In other words, central banks in the United States, Europe, and other advanced economies have only bad options."
Disquiet on the Western Front
by Sergei Guriev
Nov 13th 2022
EXTRACTS: "Today’s autocrats wear staid business suits and pretend to be democrats, and that has been sufficient to grant them access to high-level meetings in Davos or at the G20, where they actively recruit former Western politicians, lawyers, public-relations consultants, and think tanks to make their case in the West." ---- "....whatever the weaknesses of Western democracies, they still command a degree of soft power that their autocratic competitors could only dream of. Democracy remains popular around the world – among citizens of both democratic and nondemocratic countries. That is why modern dictators pretend to be democrats." ---- "....there is no shortage of criticism about how the US and Europe function. But that itself is a product of the press freedom and political opposition that one can find only in democracies. But actions speak louder than words: Immigrants from around the world are eager to come to Europe or America, whereas few are trying to get into Russia or China."
Stephen S. Roach on US monetary tightening, China's growth sacrifice, the Sino-American rivalry, and more 
by Stephen S. Roach
Nov 9th 2022
EXTRACT: "In conventional macroeconomics, an economy’s longer-term growth potential is determined by the sum of labor-force and productivity growth. If one of those factors slows, the other must accelerate. Otherwise, long-term growth suffers.  China is in serious trouble on both fronts. An unsustainable one-child family-planning policy –subsequently changed to a two- and now three-child policy – means that the working-age population is declining, and Xi’s speech at the 20th Party Congress suggested that already-strong productivity headwinds are likely to intensify. "
Could Russia collapse?
by Matthew Sussex
Nov 1st 2022
EXTRACTS: "First and most obvious – it has happened before. And in an historical sense, it has happened relatively recently, with the collapse of the USSR in 1991 rightly considered a seismic event in world politics. The rub is that nobody predicted the end of the USSR either. In fact, it was confidently assumed in the West that Mikhail Gorbachev would go on ruling the Soviet Union, until the hard-line coup that failed to topple him (but left him mortally wounded in a political sense) made that view obviously redundant." ---- "So is it speculative to talk about a future Russian collapse? Yes. Is there evidence it is imminent? No. But in many ways that’s the problem: when authoritarian regimes implode, they tend to do so very quickly, and with little warning."
Xi's Conflict-Prone China 
by Stephen S. Roach
Oct 25th 2022
EXTRACT: " But in celebrating the CPC centennial, he [XI left little doubt of what those challenges might portend: “Having the courage to fight and the fortitude to win is what has made our party invincible.” A modernized and expanded military puts teeth into that threat and underscores the risks posed by Xi’s conflict-prone China."
The ECB Has Been Driving EU Inflation
by Hans-Werner Sinn
Oct 8th 2022
EXTRACTS: "Recent inflation news from the eurozone’s largest member, Germany, is particularly alarming. In August, producer prices – which measure what is happening at the preliminary stages of industrial production – were a whopping 46% higher than in the same month last year. Given the long-term correlation between the growth rate of producer and consumer prices, this suggests that the latter could soar to 14% in November. Price stability – which is supposed to be the ECB’s uncompromising goal, per the Maastricht Treaty – is no longer perceptible" ----- "Since the 2008 global economic crisis, the ECB has allowed the central-bank money supply to increase twice as fast, relative to economic output, as the US Federal Reserve has. Of that growth, 83% was the result of the ECB’s purchases of government bonds from eurozone countries. With those purchases – which totaled an estimated €4.4 trillion – the ECB pushed interest rates on government bonds to around zero. This spurred countries to disregard European debt rules and accumulate debt at a breakneck pace."