MESSAGE
| DATE | 2020-04-05 |
| FROM | Ruben Safir
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| SUBJECT | Subject: [Hangout - NYLXS] Calculating the economic cost of COVID-19: The
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Calculating the economic cost of COVID-19: The coronavirus pandemic is
going to cost us $5 trillion
11-14 minutes
The $1 trillion coronavirus relief package Congress passed won't come
close to making up for the damage caused by COVID-19 and the Trump
administration's lethal dawdling.
We need the government to act or we could fall into a depression
rivaling the 1930s.
An 18-month crisis is widely expected. The Trump administration plan is
for 18 months. That implies $5 trillion based on my calculations.
The ultimate cost of this novel virus is likely to be north of $7
trillion, assuming this pandemic endures for two years, as German public
health officials warn.
Even if we put the pandemic behind us in just 12 months by finding and
distributing an effective vaccine, the economic damage will run about
$3.3 trillion. My calculations from the official economic reports also
show in one year about a 15% decline in the Gross Domestic Product.
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My estimates are more conservative than those of Goldman Sachs
economists, who project a terrifying 24% drop in the national economy in
April through June. If that severe contraction persists it quickly would
produce a nightmare right out of the 1930s because for the last four
decades Congress has been gnawing at what remains of the New Deal era
social safety net.
Goldman optimistically projects a sharp, brief, drop followed by a sharp
economic upturn starting in July. I don't see that as realistic because
until we have a cure allowing people to gather at work or for fun will
spread the virus.
My one-year cost estimate would mean increasing federal spending this
year from an expected $4.8 trillion to $8 trillion. More than half that
money would be borrowed, quadrupling the shortfall between tax revenues
and spending, known as the annual budget deficit.
Why we're reporting these numbers
Estimating the costs in broad strokes is not all that hard for anyone
who understands the principles of accounting identities, economics, and
public finance.
So why haven't journalists at major publications provided anything as
understandable as the numbers above? Journalists usually wait for
someone in authority to make a declaration which they can quote. This
administration hasn't done that. Many finance journalists also don't
know about the accounting identities used to calculate national income
or how to make calculations.
Last week, DCReport was the first to publish the numbers of infections
and deaths expected by a wide range of public health experts. Two days
later reports appeared confirming our reporting.
Much more pain
It's important to understand that if we don't spend as much as it takes
to make up for the loss of wages and profits, the result could be far
worse economic harm. America could be in economic pain long after
COVID-19 becomes history if Congress and Donald Trump act as cheapskates.
The Great Recession officially ended in June 2009, but for more than a
decade the American labor market suffered along with growth in domestic
capital investment, which is crucial to creating new jobs.
That was because stingy lawmakers, mostly Republicans but some
Democrats, refused to enact the full stimulus package former President
Barack Obama's economic advisers sought using the same economic
principles as I.
Then, at the behest of Republicans, 40% of the Obama stimulus was
foolishly wasted on business tax cuts. These are inherently savings,
instead of direct spending.
Trump seeks cuts in food, healthcare
The Trump administration and Congressional Republicans continue to seek
cuts in food stamps and health care for children, as DCReport keeps
advising readers.
The need for government spending to keep the economy from collapsing is
much bigger now because this is not a self-inflicted wound in one area
of the economy, unsound mortgages. It is a general collapse of economic
activity as people are directed to stay home to prevent a 21st Century
Black Death. In the worst case, it could kill eight million of us, in
good part because Trump delayed for weeks increased production of
medical safety equipment and ventilators.
$10,000 per each American
Trillions and billions are huge, virtually unimaginable numbers, so
let's give some perspective. Consider a $3.3 trillion coronavirus tab
for a one-year pandemic. That's more than $10,000 per American; $40,000
for a family of four.
That cost also would be more than twice the money our federal government
plans to spend this budget year on the military, veterans, education,
federal law enforcement, the Centers for Disease Control, NASA, all
cabinet agencies and other federal operations considered discretionary
because Congress can alter spending as it chooses.
Trump's team projected $1.8 trillion in individual income taxes or about
$5,400 per American. In addition, corporate profits taxes were expected
to generate $265 billion.
Back when Trump was claiming the first 15 coronavirus cases would
quickly fall to zero his administration projected revenues of all kinds
would fall $1 trillion short of total federal spending. That shortfall
is about $3,000 per American.
Record job losses
Income tax revenues are about to collapse as work disappears for perhaps
30 million Americans. Corporate profits overall are going to plunge,
too. That means the actual shortfall in tax revenues will be much worse
than Team Trump anticipated.
Already it's clear that job losses will be several times worse than
during the worst of the Great Recession. The weekly record for initial
jobless benefits claims was set in March 2009 at just under 700,000.
Last week about three million people made initial claims for jobless
benefits, according to Merrill Lynch economists. Goldman Sachs estimated
2.25 million claims. The data will be out Thursday, March 26, though the
Trump administration has asked states to temporarily suppress this
information.
As jobs vanish and business sales plummet it creates a vicious downward
spiral in which the economy shrinks and shrinks again.
What would it mean if unemployment hits 20%, a widely discussed and
perhaps conservative number?
One-in-five workers fired
American workers earn more than $150 billion a week. If every fifth
worker loses their paycheck it would mean about $30 billion a week in
wages vanish. Were that split equally among all workers it would mean
getting paid only for Monday through Thursday.
That's more than $1.5 trillion of lost wages for a year, more than the
entire discretionary federal budget for the military, FBI, etc.
Then there is the multiplier effect, so beloved by companies extracting
corporate welfare from state and local governments. When workers spend,
jobs are created for everyone from airline pilots and cooks to oil well
roughnecks and hardware store clerks. But when spending falls those
workers get laid off.
A loss of $1.5 trillion in wages implies at least $300 billion more in
damage, a very conservative number. If the lost wages were in
manufacturing the broader impact could mean the loss of other jobs
paying perhaps seven times as much.
CEOs panic
If you think these numbers are scaremongering, consider the behavior of
top executives at America's major corporations, who are well paid for
their exquisite expertise in how to husband and deploy capital. Their
behavior shows panic.
Every cent on credit lines of airlines, carmakers, lodging companies,
and others has been drawn down, making the borrowing companies flush
with cash. Fearing that they would be unable to fund this borrowing, all
eight Too Big to Fail Banks last week stopped buybacks of their own shares.
Ford Motor borrowed $15.4 billion, the total available on its credit
lines. It also canceled its dividend to shareholders to conserve cash
and it shut down vehicle production.
Last week the Big Three U.S. automakers sent 150,000 workers home last
week, partly at the urging of the United Auto Workers, which feared
members would develop coronavirus.
Meager unemployment benefits
Jobless benefits, using up vacation and sick pay will blunt the overall
economic damage from lost wages, but only for a short while. Unless
Congress acts, jobless benefits will last no more than six months. And
those benefits are meager, as little as $45 a week in Alabama.
People living paycheck-to-paycheck will face eviction unless our
government steps in, as New York state has for 90 days. But what of
landlords, many with properties burdened with mortgages that must be
paid each month?
More troubling, a majority of workers don't qualify for jobless benefits
under existing law; in Florida only one in eight applicants collect
unemployment checks, as we reported earlier. The reason: Employers
lobbied for laws that limit their costs.
Economy built on leverage
Because we have built an economy that discourages savings and favors
borrowing, also known as leverage, many firms are not prepared for a
significant drop in revenue.
The airline industry is demanding an immediate $58 billion in welfare,
half in cash, half in zero-interest loans. Otherwise, the airlines
threaten "draconian measures." United Airlines has suggested it will
furlough more than 50,000 of its 88,000 employees unless Congress
submits to its cash demands by next week.
So how does anyone have any idea how much stimulus is needed to keep our
economy from collapse? The answer is accounting identities, the simple
algebra of national income accounting.
Doing the GDP math
Just as 2+2 must equal 4, the rules of accounting identities give us the
Gross Domestic Product or GDP.
Our situation is as if we had an economy with two apples and two
oranges, but then one orange soured. That means 2+1=3. And that means,
assuming the population remains the same, that on average incomes must
fall by 25%.
When wages and investment fall, then the economy, the Gross Domestic
Product, must fall, leaving us overall worse off.
However, the government could offset this with increased spending to
make up for the fall. Since our constitution gives our government a
monopoly on the currency, it can create and spend all the money it wants
and never go broke, though over time such spending could have very
adverse consequences for us as individuals.
Trump businesses hit hard
Income from wages and profits and interest on investments are all about
to fall by 20% or more, I estimate. Some industries will see virtually
all of their revenue dry up.
The golf, hotel and restaurant businesses of Donald Trump will be hard
hit. As DCReport revealed last week, investors in Trump's second-largest
lender, Ladder Capital, have driven the value of that tiny firm's shares
down, now off 76%, more than double the overall decline in the market.
In such a troubled economy, total new business investment will fall by
as much as a 33%, a $2 trillion decline. The Great Recession fall was
about 25%.
And among people who keep their jobs, or can live off investments and
benefits such as pensions and Social Security, spending will decline
because people can't engage in many activities that cost money. Also,
many will hoard cash.
As I said, my calculations are conservative, assuming a 15% drop in
economic activity over the next 12 months driven by the loss of 30
million jobs.
If the crisis continues for a second year, the situation would worsen
somewhat. As more jobs are lost and many highly leveraged businesses,
from smalltime landlords to airlines, are forced to seek refuge in
federal bankruptcy court, lenders and vendors would take further losses.
But we can avoid that by sending cash to people through Congressional
spending. Putting cash directly in individual pockets will, as our
Constitution says, "promote the general welfare."
--
So many immigrant groups have swept through our town
that Brooklyn, like Atlantis, reaches mythological
proportions in the mind of the world - RI Safir 1998
http://www.mrbrklyn.com
DRM is THEFT - We are the STAKEHOLDERS - RI Safir 2002
http://www.nylxs.com - Leadership Development in Free Software
http://www.brooklyn-living.com
Being so tracked is for FARM ANIMALS and extermination camps,
but incompatible with living as a free human being. -RI Safir 2013
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