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Economy in Brief

"Déjà Vu"--"Destroying the Economy By Trying to Save It"
by Joseph G. Carson ([email protected])  March 26, 2020

Government restrictions to contain coronavirus have caused tremendous economic damage compelling some to question is it worth "destroying the economy by trying to save it"?

This is not the first time government restrictions triggered a severe slump in the economy. In 1980 government imposed credit restrictions to kill the "inflation" virus. That policy literally tanked the economy within weeks, ultimately forcing Washington to relent.

The 1980 experience clearly shows easing government restrictions on people's mobility and businesses will trigger a substantial rebound in the economy. But will it be sustainable without addressing the core (coronavirus) issue? In 1980 it was not.

Economic Fallout & Political Ramifications

Since the publication of my article, "Investors Should Brace For A Record Decline in GDP" on March 13, analysts' forecasts the scale of the economic slump have gotten direr day by day. Forecasts of the possible slump in Q2 GDP quickly jumped to -10%, then -20%, and -30%.

It's quite possible that we have now seen the peak of the most pessimistic forecasts. Federal Reserve Bank of St. Louis President James Bullard stated that Q2 GDP could decline as much as 50%, sending the unemployment rate to 30% in the process. Based on the civilian labor force an unemployment rate of 30% would mean a loss of 45 million jobs, pushing the number of unemployed to 50 million.

Now that the severity of the economic slump caused by government restrictions has scared everyone a potential fissure has opened between government health officials and the nation's economic advisors and politicians.

On one side, health officials argue sustained social distancing is necessary to successfully beat coronavirus. On the other side, economic advisors and politicians argue that the economic and financial costs have become too great and a different approach is needed

America had a similar debate four decades ago when the economy faced a different enemy, uncontrollable inflation. At that time, Federal Reserve Chairman Paul Volcker argued, "Inflation was Public Enemy Number One".

The Federal Reserve, following the recommendation of the White House, placed restrictions of the use of credit in order to kill inflation. Initially brushed off as largely symbolic the government restrictions triggered the sharpest decline in consumer spending in the post war period. It was reported that some people felt it "almost unpatriotic to buy items on credit".

In a relatively short period of time the government restrictions were viewed as "overkill" and Washington was forced to undo its credit policy.

Washington is confronting a health and economic crisis today. Undoing or relaxing restrictions on people's mobility and businesses could very well lessen the severity of the economic contraction. But the ability to implement it in a piecemeal way will be most difficult, while never fully eliminating coronavirus.

In 1980, government restrictions on consumer credit were an all-inclusive policy, impacting everyone up and down the income ladder and in every city and state in the US. The decision to impose and remove credit restrictions impacted everyone simultaneously.

Decision on where to relax standards and where not will bring health care and economics together in away never seen before. Allowing some cities and states, or even parts of a state, to recover before others based on a bell-shaped health curve will prove to be unworkable, forcing federal and state governments to adopt a blanket policy approach.

Drawing on the 1980, investors should welcome the government to relax these restrictions on travel, work life and non-essential businesses since it trigger an economic rebound---maybe a V-shaped. Yet, would easing these restrictions give a false sense of security to the American people? Can the medical industry contain this virus and ultimately find a permanent cure? In 1980 recurrence of inflation one year later proved even more difficult to defeat triggering a deeper and more protracted recession.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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