US: Recovery Scenarios 2020 & Economic Impact from Covid-19
- International Economics
- Nov 15, 2020
- 6 min read
Updated: Nov 20, 2020
The Covid-19 pandemic has already claimed thousands of lives in the United States and Canada; it poses a grave threat to millions more. But the virus is more than a public health emergency. It has also attacked the economies of both countries, resulting in massive unemployment and leading to pervasive uncertainty as individuals ponder their financial security.
Photo: Created by Kieu Minh, inspired from VENNGAGE
Governments on both sides of the 49th parallel have responded to the shocks reverberating through financial markets and the real economy. Not since the global financial crisis a little more than a decade ago have policymakers acted with such resolve. The Federal Reserve and the Bank of Canada have cut interest rates and resurrected crisis-era facilities designed to provide liquidity to markets caught in a fevered rush to safe assets and prevent destructive asset price fire sales. They have done so on a greatly accelerated schedule, however. In effect, the two central banks have packed 18 months of policymaking in the global financial crisis into a mere four weeks.
Meanwhile, Washington and Ottawa have opened the fiscal taps to support furloughed workers and firms at risk of bankruptcy because of efforts to break the virus’ chain of transmission. When the “all clear” is sounded, deficits and debt levels will be much higher. Perhaps the closest historical analogue is the mobilization and transformation of the North American economy into the Arsenal of Democracy in World War II.
Then, government spending put millions to work producing the armaments and material needed by those serving overseas. Today, government spending is supporting millions laid off as they serve by staying home.
The objective behind the suite of policies adopted by the US and Canadian governments, whether Washington’s Paycheck Protection Program of forgivable loans or Ottawa’s wage subsidies, is to preserve the value of firm-specific relationships between firms and their workers and firms and their suppliers. With luck, these extraordinary policy responses will assure a rapid recovery once social distancing measures are relaxed. A robust bounce back in economic activity is likely. But that felicitous scenario is not assured; significant risks to long-term prosperity remain.
Three factors could impair a rapid recovery
The first is a risk of widespread bankruptcies and disruption to international and domestic supply chains if the crisis extends beyond the limits of existing support programs. Such a scenario is highly problematic in that existing bankruptcy frameworks in both countries—Chapter 11 in the US or the Companies’ Creditors Arrangement Act in Canada—are designed to deal with creditor coordination failures with respect to individual firms; not systemic business failures in which the liabilities of an insolvent firm are the receivables of otherwise solvent firms. Individual creditors, and bankruptcy frameworks, do not factor in the potential externalities of increasing the likelihood of financial distress of other firms in enforcing past due claims. The result could be too many bankruptcies from a social perspective that disrupts production and impedes economic recovery. Mitigating this potential risk should be a priority.
The second factor threatening long-term American and Canadian prosperity is the depreciation of the human capital of recent graduates whose professional lives are put on hold by the crisis. The longer that these individuals are forced to wait before applying the skills and knowledge they have learned, the more their human capital is degraded. This outcome would have profound consequences for the individuals concerned, whose lifetime earnings are reduced. It would also have broader societal effects in the ideas, innovation and dynamism that are lost. Economic growth could suffer. Government departments in both countries should therefore be hiring graduates, putting them to work researching solutions to the challenges that lie ahead. If young researchers are hired by private industry once the economy recovers, so much the better.
Unintended consequences of border restrictions on non-essential traffic are the third, and likely greatest, threat to economic recovery. No one disputes the need for extraordinary measures to contain cross-border spread of the virus. Moreover, the joint border restrictions Washington agreed to with the Mexican and Canadian governments are a positive step back from the alternative—unilateral action that would undoubtedly have led to enormous dislocation.
But by leaving the definition of “essential” unclear, governments have generated unhelpful uncertainty regarding production supply chains. Relaxing social distancing restrictions to restart the economy will be less effective if production is disrupted by broken supply chains as trucks idle at the border or are blocked entry. This is a North American issue, and all three governments should be working to strengthen existing trusted shipper/trader programs to address potential problems before they threaten the rapid recovery millions are counting on.
The Covid-19 pandemic is first and foremost a global public health emergency. But it also threatens economic prosperity as output collapses and unemployment soars. Managing and mitigating the three risks to a rapid recovery identified above is critical to containing these costs and sustaining shared prosperity.
Recovery
Based on this experience and the need to create sustainable economic growth as well as short-term economic recovery, here are three principles that should shape how the United States structures its stimulus package in response to the coronavirus:
First, do no harm.
We must not respond to the COVID-19 crisis by putting Americans’ health at greater risk and worsening the climate crisis. That means focusing on helping workers in all affected industries, but avoiding subsidies that would increase heavily polluting activities or infrastructure investments that lock in greenhouse gas emissions for decades to come—things like leasing public lands at bargain prices for fossil fuel extraction or exempting oil and gas pipelines from environmental reviews.
Subsidizing fossil fuels would also increase air pollution from particulate matter and ozone, which kills more than 100,000 Americans every year.
The dramatic drop in oil prices from reduced travel during the pandemic and how Saudi Arabia and other international oil producers responded is likely to reduce U.S. drilling activity and cause some oilfield workers to lose their jobs. Let’s help those workers directly, such as by direct payments and extended unemployment and health benefits—not by increasing subsidies for oil production or bailing out oil companies.
Similarly, let’s help flight attendants, gate agents and other affected workers, but let’s condition any loans to the airline industry on meeting rigorous emissions-reduction benchmarks, as eight senators recently called for.
Second, make win-win investments now.
While the bulk of any short-term stimulus bill may support incomes in a sector-neutral way, it makes sense to include measures that will create or preserve jobs by investing in “shovel-ready” projects that also reduce carbon pollution and improve public health.
For example, the clean energy tax credit package introduced in the Senate as an amendment to the American Energy Innovation Act would help preserve and expand clean energy jobs. The wind and solar industries are a smart bet, considering they were among the fastest-growing industries in the United States before the COVID-19 pandemic struck, and currently employ 350,000 Americans.
Similarly, expanded funding for energy efficiency and weatherization assistance programs would help low-income Americans reduce their energy bills, increase employment in the buildings and construction industry — where almost 1.3 million Americans work on energy efficiency upgrades — and lower emissions from burning gas and oil.
Meanwhile, a major program to restore trees to the American landscape could put 150,000 people to work planting the seedlings that will pull millions of tons of carbon dioxide out of the atmosphere for years to come.
Third, plan major investments to jolt the economy in the right direction.
Even with a massive stimulus package to help the economy weather fallout during the next few months, chances are the economy will need another major jolt once people are able to move around freely again. That jolt needs to be planned carefully now so that it pushes the economy onto a sustainable, low-carbon path.
If we prepare now to take advantage of historically low interest rates to invest in climate-smart infrastructure, we can not only ensure that the economy does not stall out, we can accelerate progress towards a resilient and competitive clean energy economy that leaves no one behind.
For example, investing in upgrading the energy efficiency of hospitals, schools and other public buildings while powering them with renewable energy mini-grids will lower costs, clean up pollution, and ensure that this critical infrastructure is prepared for the next major hurricane or wildfire.
Similarly, replacing the nation’s 485,000 diesel school buses with clean electric buses will eliminate a source of pollution that goes directly into our children’s lungs. Buses’ batteries can be used as a large energy-storage asset that can help the grid integrate more wind and solar power.
Meanwhile we can build the charging infrastructure needed to power an all-electric fleet of passenger cars, trucks and SUVs. We can install the long-distance, high-voltage DC transmission lines needed to bring solar power from Arizona, wind power from Wyoming, and offshore wind power from North Carolina to consumers across the country.
By building this infrastructure with low-carbon concrete and steel and investing in advanced manufacturing, we can drive innovation that will position U.S. companies to compete for the $23 trillion market for climate-smart investments in emerging economies between now and 2030.
Creating a Stronger America After COVID-19
The COVID-19 pandemic is a challenge like nothing else we have faced in generations. We must move quickly to address the severe harms it has and will cause in the short-term. At the same time, we must craft our response in a way that fosters sustainable economic and social benefits that will create a brighter future for all Americans.
References
https://coronavirus.dc.gov/?gclid=CjwKCAiAtK79BRAIEiwA4OskBtSomaz65w6385cB2uIoenIA6n1xouW9jbfH6XvXymg9X835ysiwTRoCob0QAvD_BwE
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