Recession? For Sure! Depression? Think Of Who's At The Helm

My friend called the other day and asked if I thought the economy would slip into recession. I think my response frightened him. We're already in recession. What we have to worry about now is something no one-- or almost no one-- thought we would ever see again: a depression. Although, if national leadership is a contributing factor, how could anyone not have considered that particular calamity after the first Tuesday of November, 2016! Welcoming Thursday morning at Axos, Dion Rabouin noted that the $2.2 trillion bailout "is not a stimulus bill at all; it is designed to prevent mass homelessness, starvation and a wave of business closures not seen since the height of the Great Depression." I just heard some well-heeled talking head congratulating his class for making sure working families would survive to pay their rent and food and so on... with a $1,200 one-time payment. It wasn't a comedy show.

In a widely quoted piece right after the Senate passed their bailout bill Wednesday night, Heather Long wrote "The good news is the majority of the money is going to laid-off workers, small business owners, hospitals and state and local governments. The bad news is it won’t be enough to stop a recession. And it’s an open question whether the nation can avoid an economic depression, the likes of which haven’t been seen since the 1930s."

So, what's the difference between a recession and a depression? The simple answer is that a recession is shorter-- months-- than a depression-- years. Yes, years. Hard to imagine, right? Did you ever imagine America would elect, more or less, something like Donald Trump president?

4 months ago, before anyone in the U.S.-- outside of government anyway-- knew about the coming pandemic, Kimberly Amadeo asked what makes depression so much worse than a recession? "A recession, she wrote, "is widespread economic decline that lasts for at least six months. A depression is a more severe decline that lasts for several years. For example, a recession lasts for 18 months, while the most recent depression lasted for a decade. There have been 33 recessions since 1854. There's only been one depression since then, the Great Depression of 1929. It was actually a combination of the recession that lasted from August 1929 to March 1933, and the one from May 1937 to June 1938. If you are wondering if we are in a depression or recession, it's probably a recession."

In a recession, gross domestic product contracts for at least two quarters. But that's not all. There are many more economic indicators that signal a recession. That's because GDP growth will usually slow for several quarters before it turns negative. That's in response to sluggish consumer demand.

A depression is an extended recession that has years, not quarters, of economic contraction. It's more severe than a recession. Unemployment reaches 25%, housing prices plummet 30%, and prices fall 10%. The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended.

The best way to find out if we are in a recession or a depression is to understand where we are in the business cycle. The recession follows the peak of the business cycle. It's signaled by irrational exuberance and asset bubbles.

A depression on the scale of that in 1929 could not happen exactly the way it did before. Central banks around the world, including the U.S. Federal Reserve, are more aware of the importance of monetary policy in regulating the economy.

...The underlying cause of any recession is a loss of business or consumer confidence. There are 12 events that trigger this panic reaction. These include a stock market crash, deregulation, and high interest rates.

Without confidence in the future, consumers will stop buying and businesses will lay off workers. These situations create a downward economic spiral of unemployment, businesses failures, and bankruptcies.

Since stocks are a piece of ownership in a company, the stock market is basically a vote of confidence in the future of all these companies and, as such, in the U.S. economy itself. A drop of 11% in a quarter indicates a sustained loss of confidence.

If confidence is not restored, the stock market will continue to fall over a sustained period of time. A prolonged downward trend would eventually indicate the start of a bear market. This could hurt the economy more and push it further toward a recession... Bear markets coincide with a recession. These 20% declines in stock market prices can also signal an impending recession. If the shock is bad enough, they can trigger the next one.

She lightly warned-- probably not really grasping it could happen-- that "if the United States were to experience an economic downturn on the scale of the Great Depression, your life would change dramatically."

Yesterday, Neil Irwin, cheering the impending passage of the Trump Bailout, penned a piece for the NY Times, How To Prevent A Coronavirus Depression-- and it wasn't about being down in the dumps from too much social isolation. He began with the assertion that "There is little doubt that economic data in the weeks to come will obliterate all modern records in their awfulness. One Federal Reserve official has said the unemployment rate could hit 30 percent, three times its level at the worst point of the 2008-2009 Great Recession. And he has suggested that G.D.P. could fall at a 50 percent annual rate next quarter, which would be five times worse than the worst single quarter on record. Economic forecasters at major banks differ in degree, not direction, of the disaster facing the American economy. Just how bad those numbers get in the next few months may amaze future historians. But what matters now is whether this turns out to be a severe-but-brief disruption to economic life from which the United States and other major economies can quickly recover, or the beginning of a long, scarring depression. And the economic data we usually rely on are particularly ill-suited to offer useful information on that question. What’s critical now is not whether the May 2020 unemployment rate is 20 percent or 40 percent or 50 percent. It is whether the unemployment rate in May 2021 is back to something more normal-- if people have been able to move on with their lives without damage that will stunt their economic lives for years to come."




A little backdrop before we go back to Irwin. Do you recall, after Trump was elected, a term that came into relatively common currency-- kakistocracy? In case you've forgotten, the basic meaning is "government by the worst people." Months after Trump occupied the White House and the horror of what had happened had sunk in, on 29 June 2017, the Merriam-Webster dictionary website reported that searches for the word had spiked to an all-time high that day. That said, we've now entered the greatest challenge to the incredibly, grotesquely dumbed-down American people in almost a century. Dumbed down? Yeah-- compare, in your mind, Joe Biden, a virtual corpse, to Franklin Roosevelt.

To reach that more optimistic outcome, the U.S. government is trying to build, at great speed, a three-legged stool. All three components need to come together to make it plausible to return to prosperity reasonably quickly once the coronavirus outbreak is safely contained. One or two won’t be enough.

First, the nation needs to ensure that who lose their jobs do not experience personal catastrophe with long-lasting effects. Second, it must ensure that they have jobs to go back to-- that businesses with sound long-term prospects don’t collapse in the interim. Third, the system of borrowing and lending needs to remain functioning to avoid a freeze-up of credit that would make the other two goals impossible.

The remarkable $2 trillion legislation Congress that was on the verge of passing Wednesday, along with a series of extraordinary actions by the Federal Reserve this month, constitute the United States government’s efforts to bolster each of those legs.

Leg 1: Support people who lose their jobs

Not all unemployment is created equal.

Sometimes a person loses a job and after a few weeks finds something new. It can be a wrenching experience, but it is also how a dynamic capitalist economy reinvents itself, funneling labor where it is most productive.

Periods of prolonged mass unemployment, when there are simply no jobs out there, are a different story. They tend to create lasting damage.

When people lose their jobs and remain unemployed for a long period, they are more likely to lose their home to foreclosure, disrupting the rhythms of their lives. They may lose their health care coverage. Their skills and relationships may atrophy in ways that make it harder to go back to work when jobs become plentiful.

And the income the newly jobless lose in those circumstances contributes to the freeze-up in the broader economy. Being forced to drastically cut spending can fuel a vicious cycle of lost revenue for businesses and cause other people to lose their jobs.

In short, when people’s incomes collapse in a crisis like this, there’s a great risk that their lives will unravel, with long-term consequences.

“Unemployment is more than just a period when you have lower earnings,” said Katharine Abraham, a University of Maryland economist who has researched long-term unemployment.

Part of the case for generous help for people losing their jobs-- like the funding for a major expansion of unemployment insurance benefits, which is included in the bill moving through Congress-- is that it can halt that vicious cycle.

Ms. Abraham says that it will be particularly desirable to maintain workers’ connections with their employers. This could be accomplished, for instance, by work-sharing arrangements in which hours are cut but employees not laid off, with unemployment benefits filling the income gap. It’s an approach embraced in the new legislation.

“We really want to try to preserve the relationship between firms and their workers,” she said. “Then when things start to pick up, it’s a lot easier for the firm to restart because they don’t have to go out and hire people.”

Leg 2: Make sure businesses don't collapse

Helping people who lose their jobs won’t, by itself, prevent long-term economic damage.

With vast numbers of businesses experiencing a collapse in revenue-- and in many cases a complete suspension of operations-- there is an acute risk of widespread bankruptcies and business closures.

Think of a neighborhood restaurant that is reduced to a handful of takeout and delivery orders while customers are self-isolating. The restaurant can cut back employee hours, reducing payroll cost. But it still owes rent to its landlord; loan payments to its bank; utility costs; property taxes and more.

If the restaurant can get some mix of forbearance from its creditors and favorable loans or grants from the government, it may be poised to open as soon as people can safely eat out again, allowing a rapid return to its normal role in the economy.

If the landlord evicts or the creditors force the company into bankruptcy, it could be months or years before that economic activity returns.

Yes, eventually a new tenant could be found, and the former employees could find new jobs. That’s why bankruptcy works perfectly well in typical business failures. But when all kinds of businesses are failing all at once, it paralyzes the economy.

“Ideally you want all those small and medium-sized businesses that were solvent and doing a great job as of Feb. 1 to still be around and able to do business when folks can get back to work,” said Heather Boushey, president of the Washington Center for Equitable Growth.

It’s true even at bigger scale, with large companies like cruise lines and airlines. In a vacuum, it would do no harm to the economy for them to go through a normal bankruptcy process, with shareholders being wiped out and creditors taking over ownership.

The risk is that the entire complex fabric of the American economy will be ripped apart at once-- and that it will take years, rather than months, to weave it back together.

Several elements of the new rescue legislation are aimed at preventing that from happening. There is $75 billion in bailouts targeted at specific industries, and $425 billion devoted to business lending broadly, which the Federal Reserve can match with 10 times as much cash. Essentially, it sets the stage for a truly huge reservoir of funds to try to ensure businesses are ready to resume normal functioning as soon as public health allows.





Leg 3: Allow the financial system to support a recovery

In the last few weeks, the economic crisis has also been a financial crisis. For a rapid recovery to take place, that will need to change.

This isn’t really about the stock market. The plunge in stock prices is a reflection, rather than a cause, of this perilous moment. But what is happening in many credit markets is more worrying.

For several days, the market for Treasury bonds-- the most important asset in global finance-- was dysfunctional, with fewer transactions as buyers and sellers were far apart on price. This resulted in rising borrowing costs for the government, despite efforts by the Fed to push interest rates down.

Problems in the Treasury bond market have diminished since the Fed announced open-ended bond purchases under its quantitative easing program, which could reach into the trillions of dollars. That provides some confidence the government will have easy access to the credit it needs to rescue the economy.

But other sectors aren’t so lucky. Mortgage markets have also been dysfunctional as investors hoard cash, and as some firms that buy up mortgage securities face major financial strains. If that continues, it will be harder for home buyers to get mortgages and could cause problems throughout the housing sector.

Investors have dumped municipal bonds, causing their interest rates to spike. If sustained, that would make it expensive or impossible for state and local governments to borrow money they need to get through a period in which their public services are likely to be stretched to the limit.

Many years ago, the former Fed chair Ben Bernanke and colleagues wrote of a “financial accelerator” in which problems in the economy can, by disrupting the flow of credit, metastasize into much bigger problems. The Fed has recently announced a range of programs, many built on Mr. Bernanke’s crisis-response strategies from 2008, to try to prevent that financial accelerator from taking hold now.

There are two pieces of good news about the three-legged stool.

One is the U.S. government is acting on a remarkable scale, at rare speed, to try to ensure each leg is in place. There will be plenty of time to argue on the exact structure of the programs and what should have been done earlier, but the magnitude of the potential economic disaster has become clear in Washington.

The second is that strengthening each leg makes the entire stool more solid. Helping unemployed workers will help businesses get back to regular functioning sooner, and both will help reduce the freeze-up of credit more broadly, which in turn will help consumers and businesses.

But it is the combined strength of all three that will determine whether this episode is a footnote of economic history or a long, harrowing chapter.

Who Tanked The Economy?

There were two votes in the Senate last night regarding the $2 trillion bailout package. The bill itself, which was a compromise concoction with some flimsy, temporary relief for ordinary families that progressives wanted and a hideous grab bag of corporate giveaways and bailouts conservatives insisted on-- while holding working people hostage-- passed 96-0 in the wee hours. Cowardly Democrats looked the other way as the corporate conservatives ripped off the country again. But before the Senate voted on that nightmare bill put together by McConnell, Schumer and Mnuchin-- H.R. 748 (Middle Class Health Benefits Tax Repeal Act of 2019 )-- they voted on an Amendment proposed by Ben Sasse (R-NE), Rick Scott (R-FL), Tim Scott (R-SC) and Lindsey Graham (R-SC) meant to kick workers in the face. The amendment, meant to hold down unemployment benefits for low wage workers, required 60 votes but failed 48-48. Joe Manchin (D-WV) was the only Democrat voting with the Republicans against workers while extremely endangered Republicans up for reelection in November, Susan Collins (R-ME) and Cory Gardner (R-CO), broke with their own party to vote with the Democrats against it. This bill will prove to be catastrophic historically-- and politically harmful to everyone who voted for it. Pelosi and Hoyer are working on a method of voting in the House tomorrow so that there will be no record of who voted for it and who voted against it.

Last night, before the senators voted, we looked at a study showing the efficacy of shelter in place by comparing COVID-19 in San Francisco to COVID-19 in New York (and L.A.), where shelter in place came later and is relatively superficial. Shelter in place works... bigly. But Trump wants to end it-- even before it's started in most of the country. In a tweet yesterday, urbanologist Richard Florida asserted-- with good reason-- that "Trump is positioning blue states and governors to take the fall for the bad economy. He knows they will do whatever it takes to keep their people safe. He can then 'blame them' for the bad economy. He can tell his supporters, he wanted to reopen and fix the economy. 'They' tanked it." Well, that certainly does sound like our Trumpy-the-Clown alright. After all, who else could move without batting an eyelash from "It's a hoax" to a blatantly insane Easter Sunday resurrection of himself, even with the Pope urging people to stay away from the churches Trump is urging people to fill (and turn into pods of contagion and death traps for the devout)?

Tuesday evening, MSNBC's Lawrence O'Donnell was at his very best, exposing the psychological wreck that defines the worst asshole to ever occupy the White House. It's 8 and a half minutes long and it's worth listening to.





Thailand puts the lie to Trump's stupid statements about how the warm weather will kill off the virus. COVID-19 has been ravaging Thailand, where the weather is usually in the 90s, since January. The hard-pressed Thais have been trying to work through this by gradually shutting down. Yesterday (at midnight), this country-- which is so dependent on tourism-- banned all foreigners from entering the country. Most tourists come from China, India, Singapore, Japan, South Korea, the Gulf countries, Europe and North America. But the decree also impacts migrant workers, 60,000 of whom left the country. The authorities have announced that shops selling food and essential consumer goods can remain open but price gougers and hoarders will be prosecuted. If a poor, developing country like Thailand can chose life over lucre, why can't Trump? (Rhetorical question-- although that Lawrence O'Donnell video above answers it very throughly.)

A couple of days ago the New York Times editorial board did what Trump is way too cowardly to do-- the editors told all Americans that the pandemic is getting worse and that all of us need to shelter in place. On Tuesday they wrote that the madman in the White House "needs to call for a two-week shelter-in-place order, now, as part of a coherent national strategy for the coronavirus to protect Americans and their livelihoods. Once he does, and governors follow his request, there will be time to debate how soon some controls might be lifted, or how soon certain people, like those under a particular age, might be free to resume something like normal life. There will be more time then to develop palliative treatments, and more time for the federal government to order up the test kits and ventilators needed nationwide. There will be more time to gather data about which regions, and which people, are most at risk. But the United States has passed the point where aggressive, targeted efforts at tracking and containment, like those pursued by South Korea, have a realistic chance of success. And calls for voluntary social distancing have had mixed results, as the photos of spring breakers crammed together on the Florida beaches last week made clear."

These editors wrote that they're not suggesting that the orange orangutan "has the authority to order a national lockdown, much less advocating that he attempt to enforce one. Instead, we are urging him to use the bully pulpit to put pressure on, and provide political cover for, governors to take the hard steps that are needed. As the president’s own health advisers warn, the worst of the coronavirus pandemic is yet to come. The nation’s slow and spotty response has allowed the virus to spread to every state. Modeling by researchers at the Imperial College London indicates that upward of two million lives could be lost to the pandemic unless America somehow manages to 'flatten the curve.'"

Some cities and states, and even entire nations, already have lockdowns in place. On Tuesday, India’s prime minister, Narendra Modi, ordered a “total ban” on leaving home for the population of 1.3 billion, for the next three weeks. He warned, “If you can’t handle these 21 days, this country will go back 21 years.”

Other countries have opted for narrower restrictions, and enforcement has varied. But patchwork approaches, like the one the United States defaulted to in the absence of a national plan, have proven inadequate.

The coronavirus can spread so quickly that to prevent hospitals from being overwhelmed, the restrictions need to be sweeping, they need to be uniform across jurisdictions and they need to be put in place now. It may already be too late for New York, despite the urgent efforts of state and local governments.

Everyone shares Mr. Trump’s concern for the economy. But this is not a moment for mere salesmanship, for conjuring a cheerful vision rather than facing reality. It’s a moment for providing a plan. On Tuesday, Mr. Trump said he’d “love to have the country opened up and just raring to go by Easter,” which falls this year on April 12. Who wouldn’t? But wishing will not make it so. This crisis has not turned a corner-- it hasn’t even hit yet.

Rather than raising false expectations of a rapid and full return to business as usual, the president needs to be pursuing even more drastic measures. He should announce that, within 24 hours, all nonessential businesses should be shut and residents directed to remain in their homes except for vital trips out, such as to obtain food or medical care. Provisions can be made for people to walk in outdoor public spaces, so long as they maintain a distance of at least six feet.

Two weeks from now, with more testing, we will also have a far better sense of where infections are clustered if more people confine their movements to a limited number of places.

Mr. Trump has proclaimed himself a “war president.” Why, then, won’t he rally Americans around this cause? Winning this war will require shared sacrifice, and tremendous short-term hardship for Americans. But failure would mean devastating loss of life and prolonged, widespread economic pain.

Of course, even extreme social distancing and withdrawal is no panacea. The Trump administration will need to take other steps to stop the spread of this disease.

Lines of authority and policy aims need to be clarified within the White House. Vice President Mike Pence is the official crisis czar, but Jared Kushner, the president’s son-in-law, has his own response team working on, among other things, outreach to the private sector. Certain senior aides, with business leaders whispering in their ears, are at odds with some health advisers about what restrictions are needed and how heavy the government’s hand should be. There has been much grumbling among people both inside and outside the administration that it’s hard to tell who’s running the show. That is complicating decision-making at all levels.

Federalism is integral to American government, but the administration needs to get serious about running a coordinated national response. When Mr. Trump effectively told governors, You’re on your own. Go find your own supplies in the marketplace, he at least gave states greater purchasing flexibility. But he also set up a free-for-all in which states are now bidding against one another-- as well as against municipalities, the federal government and other nations-- for scarce resources such as protective equipment and ventilators. This causes not only price competition but also misallocation of resources, as each state scrambles to amass its own stockpile, regardless of relative need.

This editorial board is reluctant to grant any White House more executive power, much less this one, given its track record. But in this case, there is no one else to coordinate at the national level. It is the federal government’s job to look at the big picture, tracking where needed resources are available and deciding where they should go. Systems must be set up to provide for quickly shifting equipment and workers from areas with low levels of infection toward those in dire need.

There are encouraging signs that the White House is moving in this direction, albeit belatedly. On Tuesday, the administrator of the Federal Emergency Management Agency, Peter Gaynor, announced that his agency would make its first use of the Defense Production Act to speed procurement of test kits, protective masks and other equipment needed to fight the virus. Later in the day, Vice President Mike Pence said that 2,000 ventilators were en route to New York State from the national emergency stockpile, with another 2,000 being dispatched on Wednesday. The state estimates it will need 30,000 of the machines.

There remains a drastic shortage of not only protective gear and other equipment but also hospital capacity in hard-hit areas. The administration should use the Defense Production Act to ramp up assembly and distribution of much-needed medical supplies where it makes sense. The president also should fully mobilize the National Guard, with an assist from active-duty military and Reserves, to tackle projects such as erecting field hospitals and setting up drive-through testing centers.

It’s time to put an end to the free-form daily task force briefings featuring the president, the vice president and a rotating cast of other officials. They are a poor use of time for most of the participants and, worse, have repeatedly served up confusing and even false information. The president should tap a respected figure, preferably someone apolitical and with experience in crisis management, to serve as the point person for these briefings. When developments merit, other officials can be brought in to address specific topics.

All this may seem like an overreaction to a health crisis that many Americans aren’t yet feeling. But though it has already wasted time and opportunities to contain the coronavirus, the United States still has a chance to apply hard lessons learned by China, Italy and other nations. A nationwide lockdown is the only tactic left to parry a viral adversary that is constantly on the move, and to buy the time for medical workers to prepare for what comes next.

Former Afghanistan War general Stanley McChrystal and former Navy Seal Chris Fussell, also in The Times, gave a quick tutorial about what a post-9/11 world entitles us to expect from our leaders. Short version: not what we've been seeing. They feel that effective leadership today is expected to communicate, share information, make decisions and, most critically, maintain a cohesive culture... and today our nation's leadership-- both political and corporate-- is managing their teams through a crisis with no clear end in sight. Their column points clearly to the horrifying inadequacy of Trump and his pathetic team of fifth raters.

Leaders must be visible with their plans, honest with their words and adaptable with their actions-- all while maintaining compassion for the situation and the impact it is having on their team.

Understandably, these leaders are already weary from a succession of crisis response meetings and market assessments designed to get their team through this change. While tiring, these are all necessary efforts. But the leaders we’ve spoken with also recognize that these are simply the very first steps of a marathon. They know that the real challenge lies ahead.

In any crisis, there is a natural temptation to simply wait it out. Today’s leaders cannot give in to this instinct. We’re facing a perfect storm of economic downturn, social isolation and a fast-spreading pandemic. The answer to this problem will not suddenly reveal itself; leaders must create solutions. Any leaders who are not already on a war footing and preparing to fundamentally change their organizations for the foreseeable future must start moving today.

Here’s what that means.

First, don’t hunker down. At the height of the Royal Navy’s dominance, British naval officers, impressive in ornate uniforms, were expected to stand erect on the ship’s decks during battles, clearly exposed to enemy fire. It was not that little value was placed on their lives. Rather, ever greater value was placed on their leadership. Their job was to be visible to their sailors, and show calm amid the chaos. Today’s leaders must also stand and be visible to their organizations, their communities, and their families.

Second, demonstrate candor-- and demand it from the leaders below you. In combat, when things look bad, the front-line troops always know it before the leadership. Denying reality makes your people assume you’re either lying or out of touch. Organizations can handle bad news and tough times if they feel their leaders are focused on solving the issues at hand. Today’s leaders must be honest with their people to a level that will and should feel uncomfortable.

Third, give up more authority than feels natural. Fighting through complexity requires quick and informed action at the edge. This is dependent upon fast, transparent and inclusive communication. Organizations will need teammates making independent decisions close to the point of action, not waiting for direction. It’s tempting in times of crisis to grab the reins and yank back, but this will be more disruptive than it is helpful. Be connected, listen and adapt based on what your front line is telling you.

Finally, be more compassionate than you think you need to be. As your organization disperses to remote-work status, the loss of personal interactions will quickly sink in. It will be easy for leaders to overlook or undervalue the fear and stress their people are feeling because of this isolation. All of us learn by watching our teammates, and we gain confidence through informal feedback from our colleagues or bosses. Your organization has lost that person-to-person contact. You must immediately take your culture online, and learn to reinforce camaraderie, esteem, and compassion, via digital platforms.

...We are now weathering a once-in-a-hundred-year event, and Americans are hurt-- physically, emotionally, financially, and spiritually. Leaders at all levels in society need to embrace the changes this crisis brings rather than struggle against it. Your people need you. This is your moment, and you can rise to it.