During this continuing pandemic the economy remains in the worst shape since the Great Depression.
The second quarter saw real (price adjusted) GDP down a drastic 32%. From an earlier low of over 14%, the unemployment rate remains at 8.4% in August.
This sharp decline in economic activity is not due to the usual cause of recession, namely deficient aggregate demand. Instead it is self-imposed due to necessary steps to reduce the spread of COVID-19. Restricting travel, closing down restaurants and bars, canceling large spectator events and other social distancing measures inevitably reduces spending, hence income and employment.
With such a drastic economic downturn, this would be expected to hurt financial markets. Wall Street money managers and big investors hate uncertainty. Financial markets initially tanked, only to soon rebound. What accounts for this?
The businesses hurt most were small businesses, such as restaurants and bars. Small “Mom and Pop” operations operate on slim margins even in the best of times. A major shock such as the pandemic is enough to push them over the edge, especially as restaurants and bars are those most hurt by social-distancing measures. Sadly, many of them are permanently gone.
In contrast, many large businesses, corporations listed on the stock exchanges, have managed to survive relatively well under social-distancing measures. Corporations such as Apple, Microsoft, Zoom, and Alphabet have actually prospered during the pandemic. And since these are pricey, large-cap corporations, they heavily influence the price-weighted DOW, the cap-rated S&P and the tech-oriented NASDAQ indices. So-called “value stocks” have not fared quite so well, but savvy investors are taking advantage of those reduced prices.
The Fed’s response to the pandemic has kept interest rates low, and promises to keep rates low, which is generally seen as good for financial markets. Some corporations have engaged in “buy-backs,” that is, purchasing their own stocks, reducing supply of outstanding shares, thereby putting upward pressure on stock prices.
And, of course, the federal fiscal stimulus kept many of those who lost employment due to the pandemic financially solvent, enabling them to pay at least some of their bills. This propped up personal spending, consumption, and business profits.
The current role of the fiscal stimulus in propping up the economy illustrates how the conventional wisdom of politicians and the media can sometimes be so wrong. As President Clinton presided over national economic prosperity and balanced budget budgets, he famously declared, “The era of big government is over.”
As much as Republicans claim to wish it were over, and notwithstanding Clinton’s erroneous statement that “it is over,” the era of “big government “is not over. Nor can it, or should it, be over when massive and direct government assistance is needed to keep workers and families financially solvent and the economy afloat. The fiscal stimulus, at least thus far, gave some assistance to the unemployed. This assistance was significant in keeping the economy from tanking, and has also benefitted Wall Street and major stock holders. It is, once again and however flawed, “big government” to the rescue.
In contrast to the Great Recession of 2008-09, banks and financial institutions are sound, at least for now. For this, the Dodd-Frank legislation that Republicans fought tooth and nail is largely responsible. Strong banks enable lending that supports the current strong housing market. This is another example of “big government” having saved short-sighted financial barons from their own excesses.
But ominously, the pandemic persists. It is realistic to expect that, even under the best of conditions, the pandemic and its economic effects is far from over. Much can still happen, and much of it bad. The future of government fiscal assistance is uncertain at best. Recent stock market activity shows signs of nervousness. Wall Street hates that uncertainty.
While there are plenty of things to worry about, some worries are overblown. This includes Wall Street’s anxiety over a Biden victory. Republicans, aided by much of the media, continue to perpetuate the fiction that “Republicans are better for business than Democrats.” Overlooked and ignored is the fact that Democratic administrations have presided over long periods of economic prosperity, including strong financial markets — and even federal budget surpluses under Bill Clinton. No, it was not all due to John Kasich, as he continually boasts.
This brings us to current polling that shows potential voters giving Biden and Democrats higher marks for ability to deal with the pandemic. But they give Trump and Republicans higher marks for dealing with the economy. These answers are inconsistent. It does not require an economist to understand that the pandemic and the economy are intimately tied. Of course, the answers to such questions depend on how the questions are posed. The economy cannot return to anything resembling normalcy until the pandemic gets under control. If Biden can best handle the pandemic, it is under Biden that the economy can sooner recover.
Most voters going to work, struggling to make ends meet, raising their children, paying for health care and all the rest of it don’t pay detailed attention to a lot of this stuff. But they do sense whether things are going well for them, and have a sense of the direction the country is heading. Historically, presidents who preside over a nation in a “good mood” do well. If the country is in a “bad mood,” presidents get whipped.
With the 1980 Iranian hostage crisis and inflation, the country was in a “bad mood.” It matters not whether President Carter was at fault. He got whipped that November.
Today, with everybody angry at everybody else, the country is in a terrible mood. Polls indicate that many voters want change
But then again, it depends on who votes and who counts the votes — and whose votes are actually counted — yet another course of anxiety.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column usually appears Saturdays in the Monroe Times.
