No argument that this is a tragedy. But are these *permanent* closures really temporary closures that simply remove costs for owners while the pandemic happens? If I owned a coffee shop (I don't) and the next 12 months look awful, do I close up, figure out something else to do for a year, and then... just open up again next year? Matt is sort of saying this - there will be enough demand for more coffee and new shops will open. But is it probably a lot of the same people who owned coffee shops and restaurants before opening these new places anyway? Maybe it doesn't matter but to me it sort of changes the perception of permanent vs. temporary closures.
I think the big problem is we don't know - these businesses haven't closed by the slow steady bleeding of cash that a business would normally have, so the owners may not feel that it is as "final" or that the business "failed". But if the owners don't have any capital or any part of their operation (employees, equipment, etc.) are gone, that's not so easily reversed.
I think economically we don't know how "sticky" these closures are.
I can only speak to the 200 or so owners we've talked to. But they are done or in the case of multi-location owners that location is closed. The equipment has been removed. The store fronts are already on the market to be leased. Now they might re-open a new location or another owner might open in that location but there's a finality here.
Do you know where the equipment was moved to? Presumably it wasn't sent to another small business that had just opened up, so it's probably just sitting in a warehouse somewhere with an owner who is desperately looking to unload it to any buyer. And the storefront is probably still sitting vacant, desperately looking for any tenant.
This really seems to me like a very different situation than a small restaurant that closed down in 2017, and sold its equipment to a small restaurant in a growing sunbelt city, and leased its storefront to a new yoga studio.
Somewhat. There's a couple options for the equipment but I don't have a strong feeling on which is the dominant path right now. The kitchen line-up is owned by the operator not the landlord. It's a significant expense; $50k for a small location, maybe less if you buy used equipment. If they're behind on rent, they'll most often workout a deal with the landlord to leave the equipment. We do a lot of retro-fit work to move the systems around for the new concept that comes in. There's also a used equipment market in Chicago so the owner could sell the entire line-up to a wholesaler - but there's a lot of supply right now so some have stopped buying. If they own multiple locations and plan to open another, then they will remove and store until then.
A lot of words there ... but I think more to your point. This is definitely different. There's a lot of locations sitting vacant, more or less ready for a new restaurant concept to come in. The problem is without full capacity, a lot of these concepts can't operate profitably.
The buildings still exist. The landlords will eventually find someone to use them. In the case of coffee shops, there is likely to be a benefit to the new operator of the historical use. I feel bad for the old owners if they can't come back.
I think you and Matt are too confident in the speed of the bounceback. Back in March when we were first contemplating lockdowns the key sticking point for economists was to keep people tied to their jobs. Permanent job losses dramatically slow down the recovery - people start moving around, new openings are slammed with hundreds of applications as stewardesses and hotel managers suddenly find themselves competing for the first available barista job, people give up and fall out of the job market entirely. It takes time to rebuild, and time for the workforce to reshuffle back into something resembling full employment. Research shows that the longer people are unemployed the harder it becomes for them to get back into the market. Maybe the pandemic will be unique in that regard, but I'm not counting on everyone suddenly becoming employed again once demand rebounds.
It will be interesting to see if/how much/whether the pandemic recession is different - people are losing their jobs knowing that their economic activity was not in itself a market failure. I wonder if this changes decision making about changing fields, moving, searching for a new job that doesn't pay as well vs waiting for a better match, etc.
One would hope. Fundamentally, the cause of the Great Recession was human behavior, which doesn’t go away and is an impediment to recovery. You can vaccinate against a virus.
Maybe! I hope so and I can see the case for it. But people still need to eat, and avoid getting evicted, and keep their bills from spiraling out of control. I'm not confident we've done enough to bridge the gap through the pandemic for the chunk of the population that was hardest hit.
I'd say: I am sure we have _not_ done enough to ridge the gap through the pandemic for the chunk of the population that was hardest hit.
I think one of the big problems here politically is that aid to prevent human misery would have to be really progressive (meaning given to a smaller number of people who are in more need) because as Matt said there is some middle class savings - and that's a hard sell in the US politically.
***Maybe the pandemic will be unique in that regard, but I'm not counting on everyone suddenly becoming employed again once demand rebounds***
I have been a skeptic of the "quick rebound" narrative on this forum and others. But the more I contemplate it, the more I suspect this (Matt's) view probably has it right. The key is *rate* of change. The economy doesn't have to reach its pre-pandemic level for the growth to be substantial. As Matt notes, even under current conditions quite a few people have (to take one example) continued to feel comfortable going to bars and restaurants, travelling, and so on. Massive numbers of (formerly vulnerable and/or cautious) people aren't going to be added to this group overnight. But by February their numbers should be growing pretty substantial. And by, say, April, they should number in the tens of millions. So that should result in a big spike in the demand for restaurant meals, concert tickets, airline flights, hotel bookings, cab rides, haircuts, billiards parlors, tattoo shops -- and the vendors that supply such sectors. And this will all occur well before we reach our pre-pandemic level of output.
Sure, some of the jobs created may not pay as well as the old jobs. And not every lost job will have been replaced by then. But some will! And it'll nonetheless translate into more business activity, more jobs, more wages in the aggregate, and higher (maybe much higher) growth.
I think one cause for optimism, although it is a genuine tragedy otherwise, is that a lot of large employers remain relatively fine and some seem to be benefitting from the shifts in demand. Large employers, by virtue of the definition, have more employees. Even a local franchisee tends to have more employees than a comparable small business pizza or burrito joint. plus, retail is a large share of the low-skill service sector and it has fared well in the pandemic for obvious reasons.
Now, the concern is when localized small business failures would spread through to other parts of the economy, whether its geographically or downstream the value chain.
These are permanent. As in, we've talked to the owner. They've walked away. There is a for lease sign on the front window. We already wrote off the outstanding accounts receivable. In March our book of business was 1800 locations (we install and service restaurant fire systems). We're now down to 1400. Another 250 or so are temporarily closed until March.
I've posted this in other threads but in Chicago ~25% of restaurants are already permanently closed. We're planning for that go to 40% by the end of winter. Biggest headwind for the industry is that digital shifts are VERY sticky behavior changes. From personal experience, having friends over, making our own cocktails and ordering out is a pretty great experience. Especially with young kids. I doubt we go back to getting sitter and going out in the near future.
I can only speak anecdotally - my sample size of "1" obviously has a little bit of statistical weakness - but I don't expect restaurant behavior changes to be as sticky as other behavior changes.
I do know people who wanted to work at home and couldn't get permission or were inconstant conflict with their management over working at home until the pandemic hit. I buy that that change is sticky - if the business has functioned, the employees have a fantastic case that working at home is fine and they want ot. So to the extent that there was pent up work at home demand released by the pandemic, I think it stays released.
By comparison, we already had all the takeout we could eat before the pandemic and yet restaurants were a thing - the babysitting is a hurdle so my wife and I eat out less than before we had kids, but restaurants still represent an experience we can't reproduce at home, there's food that will be better in the restaurant than if it gets driven home in a car in plastic containers, and when it comes to larger groups eating together, the restaurant is easier.
So my prediction is that demand for dining bounces back faster than the restaurants themselves do. If Chicago has 40%+ closed restaurants by the time people are out and about, I'd expect a demand shortage.
I do think there's another aspect to this - chain vs one-off restaurants...I fear the closing and re-opening will favor corporate consolidation and will make the restaurant industry be more consolidated, more centralized, more corporate. If our favorite random family restaurant closes and an Applebees replaces it to fill in demand, I'm not happy about that.
We're kindof threading replies here, but just to that last point ... Yes. Sadly yes, that's exactly what's happening. The chains, especially the fast casuals have the financial capabilities to weather this + the ideal takeout menu. The owner-operators, so single location, family run do not. In many cases they couldn't even access the PPP funds because of the form complexity and the need for prior banking relationships. Then also the Michelin-stars types just can't support their cost structure with take-out. I'm closest with the Boka Group here. They're closing locations and flipped their furloughs to permanent layoffs heading into fall.
Spot on and totally sad. One of the frustrating things about the support mechanisms for businesses in the recession is how much they favored "bigness". If you're a big company that can access the bond market, we got a million ways to take care of you - if you're a family that's poured all of its energy into a one-off restaurant, there's pretty much nothing.
I'd add that there are plenty of people that I like enough to go see in a restaurant, but I'm not keen to have "get the house ready" to have them over to the house.
"Especially with young kids" is the tell here. I regret to inform you that you are entering a period of of your life when you were going to be a super lame homebody regardless of the pandemic and that your experience is, therefore, not really generalizable to the economy as a whole. The world has long been filled with 20 somethings who go out a lot and 30 somethings who do not and it will continue to be thus. I sympathize by the way, I have a 2.5 year old and have not been to a restaurant basically this entire year, but I also only ate out a handful of times in the year leading up until March while I used to be a person who would go out 2-3 times in any given week and had informed opinions about all the new cool restaurants in Brooklyn etc.
If I were in the restaurant industry (which I am not) I would absolutely be looking to sign a lease right now. If you figure six months to build out, staff up, etc. then opening a new restaurant this summer seems like an obviously winning preposition.
It's not a bigger deal because restaurants and the like fail and reopen all the time, just not all at once. As others have said, it's certainly unfortunate for the owners who have suffered losses, but it's not like the economy doesn't recycle restaurant equipment and space all the time under normal circumstances!
Brad DeLong pointed out some time ago that the most successful social program is often a "high pressure economy" --meaning an economy close to full employment. That makes the labor market more competitive, encouraging people to enter the labor force and raising wages. Not saying this is the only social program we need, but it is fundamental. A low unemployment rate makes other social programs cheaper and more effective.
> If you can reach the 29 percent of the population that’s over 55, you eliminate about 88 percent of the death risk. This is true for many countries, and Harry Lambert, a British journalist, demonstrated it for the UK in the New Statesman.
> That means restrictions on activities will start to be lifted well before herd immunity, and senior citizens will simultaneously start greatly increasing the pace at which they go do things.
I'm not sure this is true - vaccinating the elderly reduces the death rate dramatically, but doesn't reduce the hospitalization rate nearly as significantly, which is the key for a "flatten the curve" hospital capacity strategy.
And obviously if you open everything back up too quickly the death rate will spike even amongst young people in the scenario of completely overcrowded hospitals unable to provide basic things like oxygen treatment - so you need to reopen slowly enough to keep transmission at stable levels.
Too lazy this morning to do my own back-of-the-napkin math on this though.
Restrictions have given Governors and Mayors a lot of power. They won't give that up easily.
Restrictions have also allowed lots of people to feel quite smug and superior to 'those rubes' who don't want to wear a mask. That feeling of superiority will be hard to give up also.
I think calls for restrictions will continue in large parts of the country throughout 2021 and perhaps beyond.
I'll take the other side of that bet. Restrictions require governors and mayors to go directly against the clear wishes of their constituencies. If they're up for re-election and their opponent can run with "that guy kept us locked down when we could have been open because vaccine", that guy's toast.
I don't buy that governors and mayors are so power-hungry that they'll endure perpetual abuse from their constituencies when they can avoid it.
There may still be calls for restrictions from people who can't actually actuate them - it's cheap to call for more lockdowns when you're not the guy who can do them and get voted out.
I can respect this view, and wouldn't give odds on the bet. I temper it, though, with seeing the increase in approval ratings for those who have imposed the harshest measures. Their population may be upset, but the anger seems to be directed at either Trump specifically (gone, thankfully) or Conservatives in general. I sure hope you are right, though.
I do think anger at Trump is part of it - in MA, we're really, really convinced it's the orange guy's fault and we were pretty mad at him. And I think this has taken people's focus away from other parts of the system that have failed; I've appreciated Matt's writing on non-Trump public policy that's been bad because I think it's been under-covered.
I think the other part of approval for harsh measures is a sense that the US response has been disorganized and inadequate. When Charlie Baker redid the color codes for COVID levels (which had the effect of turning an almost red town map into an almost green one), put in no additional restrictions and then encouraged everyone to try in person school, there was a real sense of "he left us to hang the way Trump left him to hang." My friend on the local school board said that the town board of health and school board felt like the state had dumped dealing with COVID onto them.
Now...I'm not convinced Baker was wrong - contact tracing data in MA doesn't point to the schools being a big problem - they point to households being a big problem. So Baker's constantly telling us to be vigilant in our family interactions isn't coming out of nowhere. But there really hasn't been any public health communication of the local data, so "why aren't they doing anything" is quite strong.
But...I think that "why aren't they doing anything" is _really heavily_ driven by MA numbers getting worse as winter hits us. It looks like a tsunami about to hit us.
It wasn't like that over the summer! When MA numbers after the spring Northeast outbreak were going down and things were bad in e.g. the southwest, it really felt like the pandemic was far away, and "do something, shut it down" wasn't nearly as strong.
So my hope is that over the spring if/when things get better there won't be an overhang of restrictionism.
I think I'm more concerned about the opposite. When I went to the grocery the other day I was 100% mask use - and it's been like that for several weeks. I think keeping mask use up over the spring and summer wouldn't be bad - it's such a cheap intervention and I'd rather open more things and keep our faces covered longer. I don't know that we'll keep the easy habits up once the sense of urgency goes away.
I predict that restaurant servers will keep wearing masks for the long term, particularly in semi-fancy places where part of the reason to go is to feel special, because someone is waiting on you (and now has their face covered to indicate their inferior social status, and incidentally protect you from cold and flu).
I'm sure calls for lockdowns will continue from segments of the population, but my impression of the last nine months has been liberal governors and mayors pushing back against left wing calls for shutdowns. Even the most liberal cities in the world are still allowing indoor dining and taking very broad views of essential businesses. And that makes sense - no politician wants to go into reelection with a shuttered economy.
In pure economic terms, I agree with much of what you've shared. The purpose of your piece is to examine macroeconomic factors that could ultimately make our economy (look) stronger (on paper). It's an economic piece that works in a realm where we assume actors are rational and free from long-term harm.
"Well, the one surviving coffee shop (a great local business that I wholeheartedly endorse btw) ought to experience a windfall of increased demand and muted competition."
I agree with the upside here for this coffee shop and all employed there, but I am concerned about the former owners and employee of the other three shops. The impact of unemployment can be extremely detrimental to mental and physical health (APA Article below). Moreover, I believe a sudden shock like the one experienced by millions earlier this year will have an even greater impact. The bottom truly fell out without warning - a fear that I believe underlies the collective psyche in a society where most couldn't handle an unexpected expense of a couple hundred dollars.
My concern is what this collective fear, mostly of the working poor and others making under $20/hour, portends for our future. The impact of the pandemic ended for the rich long ago but most Americans are still in the throes of it and will be for some time. What kind of impact will this collective fear drive? In my opinion, the abysmal government response will only fester existing skepticism of government for those greatly impacted for the rest of their lives. It is not a hot take to say that the pandemic exacerbated existing faults in our social safety net. But it also highlighted that above that net most are walking a tightrope and while the wealthy stroll across a reinforced bridge.
I am concerned this collective fear will grip multiple generations of Americans. Fear breeds our worse tendencies: resentment, discontent, intolerance, xenophobia. We've already seen how some folks who have paid off their student debt are up in arms that others might have a measly portion of their own forgiven. It is not hard to imagine in the next national/global challenge that Americans impacted by this crisis will be against stimulus because they only got $1,800 the last time.
I agree that, on paper, the economy will likely bounce back faster in 2021. I am also fortunate enough to be in a position where I will benefit from that. But I am concerned about the impact five and ten years down the road. When we will tell a story that we've moved forward from this crisis, a giant portion of our population will still live in the 2020. What will the impact of being left behind be? Raising Trump is starting to feel like Reductio ad Hitlerum. But with multiple generations of permanently impacted: it is easy to see how this crisis could lead toward similar political choices in the future.
By the measure of this piece, I am concerned that the scarring left by this crisis could lead millions of individuals to make collective choices or to be permanently left behind in a way that drags on some of the assertions of macroeconomic growth to come.
More importantly, I am scared for the millions of Americans who had their worst fear - the bottom actually falling out - realized this past spring and how that will impact them for the rest of their lives.
My biggest concern is that the economic recovery depends on the health care system being able to actually get vaccines into arms. Right now if the pace of vaccine administration is far too slow. The U.S. has "allocated" over 11M doses and as far as I know shipped at least half of that total but only administered about 600K as of this morning. Now this may be a data reporting delay but everything that I have seen locally here in Northern California is that the health officials have no sense of urgency and are taking days and weeks to administer the doses they have received. As an example Santa Clara county has received and set-aside 6,000 doses for nursing home staff. They have also set-up a drive through vaccine administration site to give out those shots but the site is only serving about ~200 people a day! No one in authority seems to know or care to ask why they can't serve ~1000 or more of this ultra-high priority group a day. Even spacing out shots to account for shift work, workers out a day or two for side effects, etc., it seems like a reasonable pace here would be a week to 10 days to complete this group and instead they are planning to take over a month. My prediction is that the big story/scandal in early to mid-January will be that hospitals and health departments are sitting on millions of doses with no plan to administer them in a timely matter.
That sounds like a combination of government regulation, institutional inertia, and lack of creativity. It should be possible to massively scale up drive through vaccination centers very quickly, but those in charge will need to get over the idea that only a "qualified" medical professional can stick a needle in someone's arm.
We actually have enough qualified professionals. We gave out 190 million flu shots in 60-90 days this fall and I never saw a line. CVS and Walgreens etc have the staff and they are trained. Get them the product (that's the bottleneck) and the retail dispensing is the easy part.
I was replying to his comment in the sense that his hypothetical is true. I another comment below the same commenter seems to be basing his opinion on comparing apples to oranges, i.e., what has been shipped versus what has been put into people's arms.
I would be pretty surprised if the dispersed latter stages of the logistics chain were anything like as efficient as the centralized beginning stages this early in the game. It's the same "last mile" problem that consumer logistics has been struggling with for years.
Its genuinely perplexing because India, one of the most over-regulated countries in the world, was able to do a mass polio vaccination campaign, that involved giving over 100M kids two doses in a matter of a few days in 2011. Now, kids and polio has less of the persuasion problems on the demand side than adults and COVID. But its clear that if India can get through the supply constraints.
In Canada, Manitoba (and other provinces to a lesser extent) is calling on 'dentists, medical laboratory technologists, midwives, occupational therapists, pharmacists, physiotherapists, respiratory therapists, second-year students and former practitioners in these areas, paramedics, veterinarians and veterinary technologists.'
I wonder if it is physical distancing/room occupancy concerns that are driving the lag in Chris' account.
But isn't the polio vaccine oral? That _drastically_ reduces the complexity of getting it administered, literally anyone can hand it to the kid and make sure they take it.
That's a very good point, that definitely makes the easier at the ground level and personnel level easier but you get more slack in the COVID vaccination scenario with not having to reach the same % of pop. targets, let alone the absolute numbers. It still stands to reason that national missions in decentralized systems are definitely doable.
"In Canada, Manitoba (and other provinces to a lesser extent) is calling on 'dentists, medical laboratory technologists, midwives, occupational therapists, pharmacists, physiotherapists, respiratory therapists, second-year students and former practitioners in these areas, paramedics, veterinarians and veterinary technologists.'"
See, when I said "lack of creativity" I meant going beyond people with medical training. Like bring in a National Guard infantry battalion and teach them how to administer shots.
In any event I would imagine the limiting factor at the moment is the logistics. That seems to have been figured out at the macro level and it'll smooth out locally eventually.
I live in California, just give people the vaccines outside! Obviously, nursing home patients need an on-site visit but that at least seems to have been planned for (though not as quickly as it could have been). If you need large sites virtually every sports stadium and arena in the country is sitting empty right now. Plenty of space, parking, etc. It just boggles my mind that no one seems to be in a rush over this. I think that it is notable that there seems to be a large and growing difference between states over how much of their allotment they have been able to use. Colorado has administered 43% of their doses, while California has only used about 12%, and Ohio is at only 4%! (tracker here - https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/).
Allotted for distribution and administered are two quite different things. For example, a dose cannot be administered until it has been received, which necessarily lags distribution.
I would really like to see some objective criteria for how much capacity each state/city/county should be spinning up. My rough estimate of a reasonable pace is that we should be injecting .5% of the population per day for the next 30 days. 1% per day for the 30 days after that then 2% per day going forward after that. Noting that with the two shot regime we need to inject something like 150% of the population to reach herd immunity. I live in a city of about 100,000 people so this pace for my town would need to be at 500 people a day from now to Jan. 15, 1,000 a day from Jan. 15 to Feb. 15 then 2,000 a day from Feb. 15 going forward. That certainly seems logistically doable and fairly closely matches the projected national supply. We should also make sure that we have more injection capacity than anticipated so that we can take advantage of unexpected supply (like the 6th dose per vial that folks are finding with Pfizer). Unfortunately we are well behind that pace so far (see https://covid.cdc.gov/covid-data-tracker/#vaccinations)
IMHO the aspiration of "full employment" is an outdated myth. Not meaning to disrespect the human suffering linked to unemployment, but I think one of the core problems we face is technological and sociological, and has been lurking for more than 50 years: With the introduction of agriculture, it became obvious that people had to work to eat, despite their wishes to the contrary. Over the past 10,000 years, culture has developed and internalized intense pressures to maintain this need for labor. Unfortunately, the technical reality of the present no longer corresponds to this myth, and what we need to do now (over the next 100 years, anyway) is to readjust goals and expectations so that we can be happy and fulfilled without work.
I'm skeptical. I think of work as solving problems for people (like a plumber fixing a leak). For most of human history the big problem was food production, but we've got lots of other problems to deal with, and it seems unlikely we'll ever run out of problems.
It is indicative of the Fed's inadequate macroeconomic policy that banks do not have so much low yielding liquidity that they are pushing money onto mortgage holders of the landlords of Matt's coffee shops that they would be happy to give rent forbearance so the coffee shops would NOT be closed permanently.
Also note that Matt's scenario for recovery depends on inflation being temporarily higher, which is consistent with what the Fed says its target is, but which markets do not believe.
What you wrote here sounds crazy to me, but I want to make sure I understand it and I'm not arguing against a straw man.
Are you saying that it would be good for the Fed to push the yield on liquid investments down so much that the most lucrative use of a bank's money is to give mortgage holders such low interest rates that the mortgage holders are incentivized to let the closed coffee shop keep the property for free?
No, not free. And I do not know just how far down yields would go if the Fed were hitting it's inflation target. But in that direction, yes. Some mortgage holders would not push some landlords to evict rather than renegotiate some rents. that's what I was trying to say with "indicative;" there is a relation between monetary policy and microeconomic outcomes.
1. There just isn't a level of liquidity or low interest rates or whatever that would make a difference. In the end of the day, if you have a chain of businesses who cannot zero out their costs and have no cash coming in, they have a _solvency_ issue, not a _liquidity_ one; only negative interest rates (e.g. pay the landlord a monthly stipend for his mortgage that covers his property taxes) would be enough, and even then I don't know how it transfers through rents to the poor business itself.
2. Since the money can go anywhere, when you get to really low yields, lots of _dumb_ (but not negative) investments start to look pretty good.
In other words, the Fed can't save restaurants, Congress can. When all you have is low interest rates, everything starts to look like a carry trade. :-)
I've been frustrated since October 2008 because all we hear about is "interest rates are zero. Interest rates have been cut", when another part of the story is Interest on Reserves. For 95 years, the Fed paid Zero interest on reserves, so banks minimized reserves (ie, lent to people and businesses. And to each other.). Starting in October 2008, the Fed started paying IOR. Initially at 1.00% if I recall correctly. Reserves skyrocketed. Banks stopped lending to businesses and instead put the money back at the Fed. For most of 2009 through today, the Fed paid banks more for reserves (overnight money) than the Treasury paid you or me to hold 3 month Treasury bills. This is the main reason that the Fed's balance sheet has increased. It's also the main reason that this increase has had a modest stimulatory effect (modest in both the real and nominal sense).
While I, too, find IOR curious, it is not an insuperable obstacle to the Fed buying enough of something (and even without the "Special Facilities in the March relief bill) to carry out it's mandate.
You are right. However, it does increase the amount of those somethings to attain the same effect. IOR increases the Demand for money - ie, offsetting the effects of the increases in supply at the worst moments possible.
I'm getting a little more optimistic about monetary policy as I keep my eyes on the 5-year inflation breakevens. I will be worried about the Fed until it lets the 5-year breakeven exceed 2.5% (CPI, which equates to about 2.2% in PCE). Hopefully they don't tighten in any way until the 5-year breakeven hits 3%.
Right - I think this gets at the fundamental tension of the 2008 financial crisis (and also why it's probably not comparable to any other recent recession or now). In 2008 we had the simultaneous problems of the real economy (recession, unemployment, below capacity, etc.), a contracting monetary supply but also the banks balance sheets being a mess.
The goal of getting the banks to lend to help the economy and to get their own house in order don't go together well.
Without minimizing the difference between the Great Recession and earlier ones, the current recession is the real outlier in that it is partially a supply shock.
I think you'll find Matt and his readers to be pretty keen on negative interest rates, relabeling solvency issues as liquidity issues, and merging our fiscal/monetary authorities.
I subscribed here partially because I want to figure out for myself if it's possible to disagree with Matt on these points while otherwise finding his judgement sound.
While I have no very strong objection to negative ST interest rates, that not what I advocate and is not implied by what I DO advocate, the Fed achieving its inflation target.
I don't know what "merging fiscal and monetary authorities means for you. In a way I'm assuming the best course is separation: the Fed runs the nominal macro economy and Congress taxes and spends looking at the real economy and distribution.
I have no very strong priors on what Matt and others already think about these issues, though like you I do hope to clarify and even change my own opinions.
"merging fiscal and monetary authorities" in this context would mean proposals like Matt has made such as: in the future, the Fed will deposit money directly into individual and business accounts as needed, and this is A Good Thing.
Hmmm...I'm definitely in the camp of "monetary policy is a poor substitute for fiscal policy" when the goal is to actual stimulate the economy by spending money or give money to people who will spend it (or who would otherwise cut consumption in bad ways without money).
I've sort of assumed that that's not controversial for the center-left, but maybe not?
In my terminology, I'd say the opposite; "fiscal policy is a poor substitute for monetary policy." But I also have a very specific view of "fiscal policy." Generally and especially in times of recession, I'm a fan of giving people money and "stuff" like health insurance and food, unemployment payments. I also want the Federal government to run its expenditures according to an NPV concept. In a recession the government's borrowing rate will go down and the marginal costs of many inputs into government services and outputs will drop below their market prices. Following this rule will look very much like "Keynesian" stimulus and will certainly put moony into the hand of people who will spend it and who would not have had it to spend otherwise.
I don't think what you've just said is controversial when it comes to the organizing logic of the center-left.
But in terms of the actual Democratic party... I think they expect to need both their fiscal policies and ever-increasingly accommodative monetary policy just to tread water. (IMO this was proven to be true of the GOP during the Trump admin)
Consider that in stimulus negotiations, elected Democrats went to bat for all of the emergency Fed programs that Sen. Toomey insisted must require explicit reauthorization. This includes the primary and secondary Corporate Credit Facilities. They could have only defended the Main Street Lending Program and the Municipal Credit Facility.
I do not think you are disagreeing that more aggressive monetary policy, the Fed meeting it's targets, would not help firms like Matt's coffee shop at the margin. But if not, not. It is going to help on some margins. The target is the price level trajectory, not the number of coffee shops that do not close.
Matt, how dare you provide economic analysis without the piled higher and deeper Union card. This will infuriate my professional colleague's, particularly since you do better than much of the drivel PhD economists produce. I'm a very inflation dovish economist myself. I'd be well content of the Fed committed to maintain measured inflation in a corridor between 2 and 4 percent. I stress measured inflation because inflation measurement is very imperfect science. As you point out, recovery after the plague will cause rising prices in some sectors. The Fed's preferred personal consumption index measure of inflation will spike significantly. The correct response is, so what? As you point out, this is just the price system doing it's job.
Good piece, and to the extent that I understand macro issues, I agree with you.
You are calling for a plan that would not only flatten the curve for unemployment, but stomp it into the ground.
I'm afraid that the decision-makers will screw this up as badly as they did on the pandemic -- too little, too late, declaring premature victories and then surrendering when it gets tough, etc.
So, keep banging the drum. Neither of us works in Treasury, the Fed, or OMB, so making noise is all we can do.
High employment is the goal. Inflation is not a good thing for its own sake. If we added 30 million jobs and the unemployment rate fell to 2% (I'm exaggerating a bit) yet inflation stayed a 1%, we should cheer.
Day laborers working for less than minimum wage are a few taps away on popular phone apps, yet folks forget this the second they get a chance to pitch a minimum wage increase.
I remember reading about Coal Towns where the company owned the stores, paid the wages, owned the houses.
I really think that sooner or later we will have to take on Amazon. Ironically, I say this after having two or three amazon packages delivered a day for the last week.
I can see places like Amazon bringing back a stronger labor movement. They have been pretty successful and union busting so far, but sooner or later one will succeed.
Are the sectors where supply constraints are likely in the early part of the recovery really big enough to drive up headline inflation numbers in the way you suggest? Really we are talking about restaurants, travel, and live entertainment - which will have positive wage dynamics for people who work in those industries but not drive a lot of inflation through the supply chain.
I think that is what he is getting at. It won't be enough to create real inflation so we shouldn't worry, but it could create the appearance of inflation to a casual observer because of rising prices in high visibility products; ie gas, restaurants, etc.
The problem is stickier than this. We actually _need_ inflation to quickly return to full employment. So the real Q is how long the Fed will allow AIT to run before losing their nerve.
I’d push back against yours and Matt’s assumption that those are the only sectors facing inflation pressures. The cost of goods made from plastics have increased quite a bit over the last 4 months. We haven’t seen these price increases yet in the inflation data because there is a lag between the costs increasing on the suppliers and when Walmart finally agrees to raise prices. I’d wager that you’ll start seeing this over the next quarter
I believe the biggest threat to our economy comes from the "financilization" of our economy and some violent reversion to the mean in financial markets. And since the current state of the markets is based on psychology, I'm not sure there is anything we can do about it.
The current state of the markets is based on low interest rates, a ton of liquidity in the system (Thanks, Fed!), high margins and the growth outlook Matt mentions for 2021. Psychology only affects the last item, in terms of being feelings about the future I guess.
If Congress, the President and the Fed act smartly in 2021-2023 (the one area where Trump did OK), then a path to full employment and those rising wages and still-high stock valuations is very plausible.
As John mentioned, the market is only up when measured in a deprecating asset the USD.
“We are in a flood of money and credit that is lifting most asset prices,” says Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, the world’s biggest hedge fund. Indeed, with interest rates at rock bottom as they are today, “there’s no good reason that stocks couldn’t trade at 50 times earnings”.
Matt, of all people, is no stranger to the shortage of housing in the US. As a serious concern, this reared it's head post-crisis (although it's always been a problem in some areas NYC, SF, ...).
I am worried we could be looking at a similar over-correction here. Fewer people will want to open restaurants, be in the hospitality industry, or make investments in the category of 'crowded meat-space.'
If this happens, the inflationary pressure will be overestimated (or correct, but for unfortunate reasons). On top of that, these are industries that tend to employ the lowest wage workers. This could grow the chasm in pandemic outcomes, one that is already very likely to be bad.
There is only so much the fed can do if the national mood has turned in the wrong direction.
This has been one of my favorite posts so far. Partially because I agree with so much of it (and the macro framework underlying it) but more importantly because it highlights the importance of macro and especially monetary policy which I still think is vastly under appreciated (and often ignored) in most political discussions.
Different Fed policy during the great recession would have led to a very different economic situation in the last decade which wouldn't have just spared millions of people needless economic hardship but would've also changed the narrative around inequality, losers from trade, etc. and potentially the political fallout from that.
I have to admit not to know much about Jerome Powell outside of his work as Fed chairman (and have not thought of him as a partisan figure) but have been extremely impressed with everything he's done so far so I'm hoping that he'll continue to do so under a Biden administration.
What's the counter-factual fed policy for the great recession that would have had a better outcome? What should they have done?
If I understand correctly, wasn't the target rate 25 bp without moving from 2010 -> mid 2016?
I've heard Obama-era economists and others who are more to the left say "the stimulus was too small, that was the problem", but that's the fiscal side.
I'm having a bit of a hard time quickly finding one article that explains it well. My own explanation is going to be very rushed, basic, and likely inadequate but my TLDR would be that people generally look at the target rate to judge whether money is loose or tight when they actually need to look at it in context - if the economy is continuing to slow in the face of a certain target rate that actually means that money is tight, and if it's expanding with a high target rate money is likely too loose. Leading into the great recession people thought money was loose or being loosened because the rate was low but the economy was collapsing faster than most people realized -> money was too tight. In terms of the recovery there were lots of discussions about how money was likely too tight but also enormous pressure from people who are always worried about inflation no matter what - both in the US and in the EU (where the ECB did a terrible job).
I should note that I generally believe in market monetarism which influences a lot of what I just wrote and while that is still outside of the mainstream it seems to explain a lot of economic history best and recent moves by the Feds are shifting in the direction of a similar framework.
Ah...I think my trite summary from the Voxsplainer (which isn't bad) is that they could have done "QE, but with more feeling."
I'm a little wary of "Japan devalued their currency by printing money, their exports became competitive and increased and that worked well for them" as something that would be portable to the US.
But yeah, I get that if you think the problem in 2008 was a lack of money supply, that's on the Fed, not congress. And for the 2008 recession in particular, where there was just a massive credit contraction, that strikes me as not crazy, albeit possibly very specific to the financial crisis.
Certainly the "zOMG inflation" worries do seem a little silly in hindsight. :-)
You want growth and inflation? Me too, let's include a chart of money velocity and do more than handwave how it will rise enough to counteract long-term decline.
If you're not going to do that, can you at least share the prewrite blaming Republicans for low growth?
And you can show the TIPS chart all you want to suggest inflation is coming (was in a previous post) but it's no secret that the Fed is buying over 50% of all TIPS sold on any given day.
"The problem is three of these four coffee shops have closed entirely."
<throws computer across room>
*This* is just don't get. I don't get how this isn't a bigger deal. To me this is catastrophic.
No argument that this is a tragedy. But are these *permanent* closures really temporary closures that simply remove costs for owners while the pandemic happens? If I owned a coffee shop (I don't) and the next 12 months look awful, do I close up, figure out something else to do for a year, and then... just open up again next year? Matt is sort of saying this - there will be enough demand for more coffee and new shops will open. But is it probably a lot of the same people who owned coffee shops and restaurants before opening these new places anyway? Maybe it doesn't matter but to me it sort of changes the perception of permanent vs. temporary closures.
I think the big problem is we don't know - these businesses haven't closed by the slow steady bleeding of cash that a business would normally have, so the owners may not feel that it is as "final" or that the business "failed". But if the owners don't have any capital or any part of their operation (employees, equipment, etc.) are gone, that's not so easily reversed.
I think economically we don't know how "sticky" these closures are.
I can only speak to the 200 or so owners we've talked to. But they are done or in the case of multi-location owners that location is closed. The equipment has been removed. The store fronts are already on the market to be leased. Now they might re-open a new location or another owner might open in that location but there's a finality here.
Do you know where the equipment was moved to? Presumably it wasn't sent to another small business that had just opened up, so it's probably just sitting in a warehouse somewhere with an owner who is desperately looking to unload it to any buyer. And the storefront is probably still sitting vacant, desperately looking for any tenant.
This really seems to me like a very different situation than a small restaurant that closed down in 2017, and sold its equipment to a small restaurant in a growing sunbelt city, and leased its storefront to a new yoga studio.
Somewhat. There's a couple options for the equipment but I don't have a strong feeling on which is the dominant path right now. The kitchen line-up is owned by the operator not the landlord. It's a significant expense; $50k for a small location, maybe less if you buy used equipment. If they're behind on rent, they'll most often workout a deal with the landlord to leave the equipment. We do a lot of retro-fit work to move the systems around for the new concept that comes in. There's also a used equipment market in Chicago so the owner could sell the entire line-up to a wholesaler - but there's a lot of supply right now so some have stopped buying. If they own multiple locations and plan to open another, then they will remove and store until then.
A lot of words there ... but I think more to your point. This is definitely different. There's a lot of locations sitting vacant, more or less ready for a new restaurant concept to come in. The problem is without full capacity, a lot of these concepts can't operate profitably.
The buildings still exist. The landlords will eventually find someone to use them. In the case of coffee shops, there is likely to be a benefit to the new operator of the historical use. I feel bad for the old owners if they can't come back.
I think you and Matt are too confident in the speed of the bounceback. Back in March when we were first contemplating lockdowns the key sticking point for economists was to keep people tied to their jobs. Permanent job losses dramatically slow down the recovery - people start moving around, new openings are slammed with hundreds of applications as stewardesses and hotel managers suddenly find themselves competing for the first available barista job, people give up and fall out of the job market entirely. It takes time to rebuild, and time for the workforce to reshuffle back into something resembling full employment. Research shows that the longer people are unemployed the harder it becomes for them to get back into the market. Maybe the pandemic will be unique in that regard, but I'm not counting on everyone suddenly becoming employed again once demand rebounds.
It will be interesting to see if/how much/whether the pandemic recession is different - people are losing their jobs knowing that their economic activity was not in itself a market failure. I wonder if this changes decision making about changing fields, moving, searching for a new job that doesn't pay as well vs waiting for a better match, etc.
One would hope. Fundamentally, the cause of the Great Recession was human behavior, which doesn’t go away and is an impediment to recovery. You can vaccinate against a virus.
Maybe! I hope so and I can see the case for it. But people still need to eat, and avoid getting evicted, and keep their bills from spiraling out of control. I'm not confident we've done enough to bridge the gap through the pandemic for the chunk of the population that was hardest hit.
I'd say: I am sure we have _not_ done enough to ridge the gap through the pandemic for the chunk of the population that was hardest hit.
I think one of the big problems here politically is that aid to prevent human misery would have to be really progressive (meaning given to a smaller number of people who are in more need) because as Matt said there is some middle class savings - and that's a hard sell in the US politically.
***Maybe the pandemic will be unique in that regard, but I'm not counting on everyone suddenly becoming employed again once demand rebounds***
I have been a skeptic of the "quick rebound" narrative on this forum and others. But the more I contemplate it, the more I suspect this (Matt's) view probably has it right. The key is *rate* of change. The economy doesn't have to reach its pre-pandemic level for the growth to be substantial. As Matt notes, even under current conditions quite a few people have (to take one example) continued to feel comfortable going to bars and restaurants, travelling, and so on. Massive numbers of (formerly vulnerable and/or cautious) people aren't going to be added to this group overnight. But by February their numbers should be growing pretty substantial. And by, say, April, they should number in the tens of millions. So that should result in a big spike in the demand for restaurant meals, concert tickets, airline flights, hotel bookings, cab rides, haircuts, billiards parlors, tattoo shops -- and the vendors that supply such sectors. And this will all occur well before we reach our pre-pandemic level of output.
Sure, some of the jobs created may not pay as well as the old jobs. And not every lost job will have been replaced by then. But some will! And it'll nonetheless translate into more business activity, more jobs, more wages in the aggregate, and higher (maybe much higher) growth.
I think one cause for optimism, although it is a genuine tragedy otherwise, is that a lot of large employers remain relatively fine and some seem to be benefitting from the shifts in demand. Large employers, by virtue of the definition, have more employees. Even a local franchisee tends to have more employees than a comparable small business pizza or burrito joint. plus, retail is a large share of the low-skill service sector and it has fared well in the pandemic for obvious reasons.
Now, the concern is when localized small business failures would spread through to other parts of the economy, whether its geographically or downstream the value chain.
These are permanent. As in, we've talked to the owner. They've walked away. There is a for lease sign on the front window. We already wrote off the outstanding accounts receivable. In March our book of business was 1800 locations (we install and service restaurant fire systems). We're now down to 1400. Another 250 or so are temporarily closed until March.
I've posted this in other threads but in Chicago ~25% of restaurants are already permanently closed. We're planning for that go to 40% by the end of winter. Biggest headwind for the industry is that digital shifts are VERY sticky behavior changes. From personal experience, having friends over, making our own cocktails and ordering out is a pretty great experience. Especially with young kids. I doubt we go back to getting sitter and going out in the near future.
I can only speak anecdotally - my sample size of "1" obviously has a little bit of statistical weakness - but I don't expect restaurant behavior changes to be as sticky as other behavior changes.
I do know people who wanted to work at home and couldn't get permission or were inconstant conflict with their management over working at home until the pandemic hit. I buy that that change is sticky - if the business has functioned, the employees have a fantastic case that working at home is fine and they want ot. So to the extent that there was pent up work at home demand released by the pandemic, I think it stays released.
By comparison, we already had all the takeout we could eat before the pandemic and yet restaurants were a thing - the babysitting is a hurdle so my wife and I eat out less than before we had kids, but restaurants still represent an experience we can't reproduce at home, there's food that will be better in the restaurant than if it gets driven home in a car in plastic containers, and when it comes to larger groups eating together, the restaurant is easier.
So my prediction is that demand for dining bounces back faster than the restaurants themselves do. If Chicago has 40%+ closed restaurants by the time people are out and about, I'd expect a demand shortage.
I do think there's another aspect to this - chain vs one-off restaurants...I fear the closing and re-opening will favor corporate consolidation and will make the restaurant industry be more consolidated, more centralized, more corporate. If our favorite random family restaurant closes and an Applebees replaces it to fill in demand, I'm not happy about that.
We're kindof threading replies here, but just to that last point ... Yes. Sadly yes, that's exactly what's happening. The chains, especially the fast casuals have the financial capabilities to weather this + the ideal takeout menu. The owner-operators, so single location, family run do not. In many cases they couldn't even access the PPP funds because of the form complexity and the need for prior banking relationships. Then also the Michelin-stars types just can't support their cost structure with take-out. I'm closest with the Boka Group here. They're closing locations and flipped their furloughs to permanent layoffs heading into fall.
https://robbreport.com/food-drink/dining/boka-group-chicago-mass-covid-layoffs-2948853/
Spot on and totally sad. One of the frustrating things about the support mechanisms for businesses in the recession is how much they favored "bigness". If you're a big company that can access the bond market, we got a million ways to take care of you - if you're a family that's poured all of its energy into a one-off restaurant, there's pretty much nothing.
I'd add that there are plenty of people that I like enough to go see in a restaurant, but I'm not keen to have "get the house ready" to have them over to the house.
"Especially with young kids" is the tell here. I regret to inform you that you are entering a period of of your life when you were going to be a super lame homebody regardless of the pandemic and that your experience is, therefore, not really generalizable to the economy as a whole. The world has long been filled with 20 somethings who go out a lot and 30 somethings who do not and it will continue to be thus. I sympathize by the way, I have a 2.5 year old and have not been to a restaurant basically this entire year, but I also only ate out a handful of times in the year leading up until March while I used to be a person who would go out 2-3 times in any given week and had informed opinions about all the new cool restaurants in Brooklyn etc.
If I were in the restaurant industry (which I am not) I would absolutely be looking to sign a lease right now. If you figure six months to build out, staff up, etc. then opening a new restaurant this summer seems like an obviously winning preposition.
I just want to humblebrag here - my wife and I were staying home with the kids and being super lame before it was cool.
Honestly, I’m not seeing much of that. People I know are dying to get out of the house. But most people I know also aren’t having friends over. 🤷♂️
It's not a bigger deal because restaurants and the like fail and reopen all the time, just not all at once. As others have said, it's certainly unfortunate for the owners who have suffered losses, but it's not like the economy doesn't recycle restaurant equipment and space all the time under normal circumstances!
Here in LA all the restaurant failures, especially with the new shutdown, have just been brutal.
Brad DeLong pointed out some time ago that the most successful social program is often a "high pressure economy" --meaning an economy close to full employment. That makes the labor market more competitive, encouraging people to enter the labor force and raising wages. Not saying this is the only social program we need, but it is fundamental. A low unemployment rate makes other social programs cheaper and more effective.
Now let's add to that: given that this is true, should we be increasing the minimum wage right now?
We should be doing precisely the opposite.
> If you can reach the 29 percent of the population that’s over 55, you eliminate about 88 percent of the death risk. This is true for many countries, and Harry Lambert, a British journalist, demonstrated it for the UK in the New Statesman.
> That means restrictions on activities will start to be lifted well before herd immunity, and senior citizens will simultaneously start greatly increasing the pace at which they go do things.
I'm not sure this is true - vaccinating the elderly reduces the death rate dramatically, but doesn't reduce the hospitalization rate nearly as significantly, which is the key for a "flatten the curve" hospital capacity strategy.
And obviously if you open everything back up too quickly the death rate will spike even amongst young people in the scenario of completely overcrowded hospitals unable to provide basic things like oxygen treatment - so you need to reopen slowly enough to keep transmission at stable levels.
Too lazy this morning to do my own back-of-the-napkin math on this though.
Restrictions have given Governors and Mayors a lot of power. They won't give that up easily.
Restrictions have also allowed lots of people to feel quite smug and superior to 'those rubes' who don't want to wear a mask. That feeling of superiority will be hard to give up also.
I think calls for restrictions will continue in large parts of the country throughout 2021 and perhaps beyond.
I'll take the other side of that bet. Restrictions require governors and mayors to go directly against the clear wishes of their constituencies. If they're up for re-election and their opponent can run with "that guy kept us locked down when we could have been open because vaccine", that guy's toast.
I don't buy that governors and mayors are so power-hungry that they'll endure perpetual abuse from their constituencies when they can avoid it.
There may still be calls for restrictions from people who can't actually actuate them - it's cheap to call for more lockdowns when you're not the guy who can do them and get voted out.
I can respect this view, and wouldn't give odds on the bet. I temper it, though, with seeing the increase in approval ratings for those who have imposed the harshest measures. Their population may be upset, but the anger seems to be directed at either Trump specifically (gone, thankfully) or Conservatives in general. I sure hope you are right, though.
I do think anger at Trump is part of it - in MA, we're really, really convinced it's the orange guy's fault and we were pretty mad at him. And I think this has taken people's focus away from other parts of the system that have failed; I've appreciated Matt's writing on non-Trump public policy that's been bad because I think it's been under-covered.
I think the other part of approval for harsh measures is a sense that the US response has been disorganized and inadequate. When Charlie Baker redid the color codes for COVID levels (which had the effect of turning an almost red town map into an almost green one), put in no additional restrictions and then encouraged everyone to try in person school, there was a real sense of "he left us to hang the way Trump left him to hang." My friend on the local school board said that the town board of health and school board felt like the state had dumped dealing with COVID onto them.
Now...I'm not convinced Baker was wrong - contact tracing data in MA doesn't point to the schools being a big problem - they point to households being a big problem. So Baker's constantly telling us to be vigilant in our family interactions isn't coming out of nowhere. But there really hasn't been any public health communication of the local data, so "why aren't they doing anything" is quite strong.
But...I think that "why aren't they doing anything" is _really heavily_ driven by MA numbers getting worse as winter hits us. It looks like a tsunami about to hit us.
It wasn't like that over the summer! When MA numbers after the spring Northeast outbreak were going down and things were bad in e.g. the southwest, it really felt like the pandemic was far away, and "do something, shut it down" wasn't nearly as strong.
So my hope is that over the spring if/when things get better there won't be an overhang of restrictionism.
I think I'm more concerned about the opposite. When I went to the grocery the other day I was 100% mask use - and it's been like that for several weeks. I think keeping mask use up over the spring and summer wouldn't be bad - it's such a cheap intervention and I'd rather open more things and keep our faces covered longer. I don't know that we'll keep the easy habits up once the sense of urgency goes away.
I predict that restaurant servers will keep wearing masks for the long term, particularly in semi-fancy places where part of the reason to go is to feel special, because someone is waiting on you (and now has their face covered to indicate their inferior social status, and incidentally protect you from cold and flu).
I'm sure calls for lockdowns will continue from segments of the population, but my impression of the last nine months has been liberal governors and mayors pushing back against left wing calls for shutdowns. Even the most liberal cities in the world are still allowing indoor dining and taking very broad views of essential businesses. And that makes sense - no politician wants to go into reelection with a shuttered economy.
I'm also too lazy to check right now, but I presume hospitalization rates are highly correlated with death rates?
There is a chart above - highly correlated but an order-of-magnitude lower. 630x greater death rate for 75+, 13x greater hospitalization rate.
Ack - sorry, you're right! That is an interesting point.
Correction to myself here - those #s are for 85+ not 75+
In pure economic terms, I agree with much of what you've shared. The purpose of your piece is to examine macroeconomic factors that could ultimately make our economy (look) stronger (on paper). It's an economic piece that works in a realm where we assume actors are rational and free from long-term harm.
"Well, the one surviving coffee shop (a great local business that I wholeheartedly endorse btw) ought to experience a windfall of increased demand and muted competition."
I agree with the upside here for this coffee shop and all employed there, but I am concerned about the former owners and employee of the other three shops. The impact of unemployment can be extremely detrimental to mental and physical health (APA Article below). Moreover, I believe a sudden shock like the one experienced by millions earlier this year will have an even greater impact. The bottom truly fell out without warning - a fear that I believe underlies the collective psyche in a society where most couldn't handle an unexpected expense of a couple hundred dollars.
My concern is what this collective fear, mostly of the working poor and others making under $20/hour, portends for our future. The impact of the pandemic ended for the rich long ago but most Americans are still in the throes of it and will be for some time. What kind of impact will this collective fear drive? In my opinion, the abysmal government response will only fester existing skepticism of government for those greatly impacted for the rest of their lives. It is not a hot take to say that the pandemic exacerbated existing faults in our social safety net. But it also highlighted that above that net most are walking a tightrope and while the wealthy stroll across a reinforced bridge.
I am concerned this collective fear will grip multiple generations of Americans. Fear breeds our worse tendencies: resentment, discontent, intolerance, xenophobia. We've already seen how some folks who have paid off their student debt are up in arms that others might have a measly portion of their own forgiven. It is not hard to imagine in the next national/global challenge that Americans impacted by this crisis will be against stimulus because they only got $1,800 the last time.
I agree that, on paper, the economy will likely bounce back faster in 2021. I am also fortunate enough to be in a position where I will benefit from that. But I am concerned about the impact five and ten years down the road. When we will tell a story that we've moved forward from this crisis, a giant portion of our population will still live in the 2020. What will the impact of being left behind be? Raising Trump is starting to feel like Reductio ad Hitlerum. But with multiple generations of permanently impacted: it is easy to see how this crisis could lead toward similar political choices in the future.
By the measure of this piece, I am concerned that the scarring left by this crisis could lead millions of individuals to make collective choices or to be permanently left behind in a way that drags on some of the assertions of macroeconomic growth to come.
More importantly, I am scared for the millions of Americans who had their worst fear - the bottom actually falling out - realized this past spring and how that will impact them for the rest of their lives.
APA article: https://www.apa.org/monitor/2020/10/toll-job-loss#:~:text=The%20mental%20health%20impacts%20of,satisfaction%2C%20among%20other%20negative%20outcomes.
My biggest concern is that the economic recovery depends on the health care system being able to actually get vaccines into arms. Right now if the pace of vaccine administration is far too slow. The U.S. has "allocated" over 11M doses and as far as I know shipped at least half of that total but only administered about 600K as of this morning. Now this may be a data reporting delay but everything that I have seen locally here in Northern California is that the health officials have no sense of urgency and are taking days and weeks to administer the doses they have received. As an example Santa Clara county has received and set-aside 6,000 doses for nursing home staff. They have also set-up a drive through vaccine administration site to give out those shots but the site is only serving about ~200 people a day! No one in authority seems to know or care to ask why they can't serve ~1000 or more of this ultra-high priority group a day. Even spacing out shots to account for shift work, workers out a day or two for side effects, etc., it seems like a reasonable pace here would be a week to 10 days to complete this group and instead they are planning to take over a month. My prediction is that the big story/scandal in early to mid-January will be that hospitals and health departments are sitting on millions of doses with no plan to administer them in a timely matter.
That sounds like a combination of government regulation, institutional inertia, and lack of creativity. It should be possible to massively scale up drive through vaccination centers very quickly, but those in charge will need to get over the idea that only a "qualified" medical professional can stick a needle in someone's arm.
We actually have enough qualified professionals. We gave out 190 million flu shots in 60-90 days this fall and I never saw a line. CVS and Walgreens etc have the staff and they are trained. Get them the product (that's the bottleneck) and the retail dispensing is the easy part.
I was replying to his comment in the sense that his hypothetical is true. I another comment below the same commenter seems to be basing his opinion on comparing apples to oranges, i.e., what has been shipped versus what has been put into people's arms.
I would be pretty surprised if the dispersed latter stages of the logistics chain were anything like as efficient as the centralized beginning stages this early in the game. It's the same "last mile" problem that consumer logistics has been struggling with for years.
Its genuinely perplexing because India, one of the most over-regulated countries in the world, was able to do a mass polio vaccination campaign, that involved giving over 100M kids two doses in a matter of a few days in 2011. Now, kids and polio has less of the persuasion problems on the demand side than adults and COVID. But its clear that if India can get through the supply constraints.
In Canada, Manitoba (and other provinces to a lesser extent) is calling on 'dentists, medical laboratory technologists, midwives, occupational therapists, pharmacists, physiotherapists, respiratory therapists, second-year students and former practitioners in these areas, paramedics, veterinarians and veterinary technologists.'
I wonder if it is physical distancing/room occupancy concerns that are driving the lag in Chris' account.
But isn't the polio vaccine oral? That _drastically_ reduces the complexity of getting it administered, literally anyone can hand it to the kid and make sure they take it.
That's a very good point, that definitely makes the easier at the ground level and personnel level easier but you get more slack in the COVID vaccination scenario with not having to reach the same % of pop. targets, let alone the absolute numbers. It still stands to reason that national missions in decentralized systems are definitely doable.
"In Canada, Manitoba (and other provinces to a lesser extent) is calling on 'dentists, medical laboratory technologists, midwives, occupational therapists, pharmacists, physiotherapists, respiratory therapists, second-year students and former practitioners in these areas, paramedics, veterinarians and veterinary technologists.'"
See, when I said "lack of creativity" I meant going beyond people with medical training. Like bring in a National Guard infantry battalion and teach them how to administer shots.
In any event I would imagine the limiting factor at the moment is the logistics. That seems to have been figured out at the macro level and it'll smooth out locally eventually.
I live in California, just give people the vaccines outside! Obviously, nursing home patients need an on-site visit but that at least seems to have been planned for (though not as quickly as it could have been). If you need large sites virtually every sports stadium and arena in the country is sitting empty right now. Plenty of space, parking, etc. It just boggles my mind that no one seems to be in a rush over this. I think that it is notable that there seems to be a large and growing difference between states over how much of their allotment they have been able to use. Colorado has administered 43% of their doses, while California has only used about 12%, and Ohio is at only 4%! (tracker here - https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/).
Allotted for distribution and administered are two quite different things. For example, a dose cannot be administered until it has been received, which necessarily lags distribution.
I would really like to see some objective criteria for how much capacity each state/city/county should be spinning up. My rough estimate of a reasonable pace is that we should be injecting .5% of the population per day for the next 30 days. 1% per day for the 30 days after that then 2% per day going forward after that. Noting that with the two shot regime we need to inject something like 150% of the population to reach herd immunity. I live in a city of about 100,000 people so this pace for my town would need to be at 500 people a day from now to Jan. 15, 1,000 a day from Jan. 15 to Feb. 15 then 2,000 a day from Feb. 15 going forward. That certainly seems logistically doable and fairly closely matches the projected national supply. We should also make sure that we have more injection capacity than anticipated so that we can take advantage of unexpected supply (like the 6th dose per vial that folks are finding with Pfizer). Unfortunately we are well behind that pace so far (see https://covid.cdc.gov/covid-data-tracker/#vaccinations)
Distributed means shipped and administered means done. There are several steps between the two.
IMHO the aspiration of "full employment" is an outdated myth. Not meaning to disrespect the human suffering linked to unemployment, but I think one of the core problems we face is technological and sociological, and has been lurking for more than 50 years: With the introduction of agriculture, it became obvious that people had to work to eat, despite their wishes to the contrary. Over the past 10,000 years, culture has developed and internalized intense pressures to maintain this need for labor. Unfortunately, the technical reality of the present no longer corresponds to this myth, and what we need to do now (over the next 100 years, anyway) is to readjust goals and expectations so that we can be happy and fulfilled without work.
I'm skeptical. I think of work as solving problems for people (like a plumber fixing a leak). For most of human history the big problem was food production, but we've got lots of other problems to deal with, and it seems unlikely we'll ever run out of problems.
"...it seems unlikely we'll ever run out of problems."
Yeah, Richard's comment seems like he's fallen hard for the Lump of Labor Fallacy.
"...we need to do now...is to readjust goals and expectations so that we can be happy and fulfilled without work."
Fine: Quit your job and leave everyone else alone.
It is indicative of the Fed's inadequate macroeconomic policy that banks do not have so much low yielding liquidity that they are pushing money onto mortgage holders of the landlords of Matt's coffee shops that they would be happy to give rent forbearance so the coffee shops would NOT be closed permanently.
Also note that Matt's scenario for recovery depends on inflation being temporarily higher, which is consistent with what the Fed says its target is, but which markets do not believe.
What you wrote here sounds crazy to me, but I want to make sure I understand it and I'm not arguing against a straw man.
Are you saying that it would be good for the Fed to push the yield on liquid investments down so much that the most lucrative use of a bank's money is to give mortgage holders such low interest rates that the mortgage holders are incentivized to let the closed coffee shop keep the property for free?
No, not free. And I do not know just how far down yields would go if the Fed were hitting it's inflation target. But in that direction, yes. Some mortgage holders would not push some landlords to evict rather than renegotiate some rents. that's what I was trying to say with "indicative;" there is a relation between monetary policy and microeconomic outcomes.
Right. So I think my counter-argument is:
1. There just isn't a level of liquidity or low interest rates or whatever that would make a difference. In the end of the day, if you have a chain of businesses who cannot zero out their costs and have no cash coming in, they have a _solvency_ issue, not a _liquidity_ one; only negative interest rates (e.g. pay the landlord a monthly stipend for his mortgage that covers his property taxes) would be enough, and even then I don't know how it transfers through rents to the poor business itself.
2. Since the money can go anywhere, when you get to really low yields, lots of _dumb_ (but not negative) investments start to look pretty good.
In other words, the Fed can't save restaurants, Congress can. When all you have is low interest rates, everything starts to look like a carry trade. :-)
I've been frustrated since October 2008 because all we hear about is "interest rates are zero. Interest rates have been cut", when another part of the story is Interest on Reserves. For 95 years, the Fed paid Zero interest on reserves, so banks minimized reserves (ie, lent to people and businesses. And to each other.). Starting in October 2008, the Fed started paying IOR. Initially at 1.00% if I recall correctly. Reserves skyrocketed. Banks stopped lending to businesses and instead put the money back at the Fed. For most of 2009 through today, the Fed paid banks more for reserves (overnight money) than the Treasury paid you or me to hold 3 month Treasury bills. This is the main reason that the Fed's balance sheet has increased. It's also the main reason that this increase has had a modest stimulatory effect (modest in both the real and nominal sense).
While I, too, find IOR curious, it is not an insuperable obstacle to the Fed buying enough of something (and even without the "Special Facilities in the March relief bill) to carry out it's mandate.
You are right. However, it does increase the amount of those somethings to attain the same effect. IOR increases the Demand for money - ie, offsetting the effects of the increases in supply at the worst moments possible.
I'm getting a little more optimistic about monetary policy as I keep my eyes on the 5-year inflation breakevens. I will be worried about the Fed until it lets the 5-year breakeven exceed 2.5% (CPI, which equates to about 2.2% in PCE). Hopefully they don't tighten in any way until the 5-year breakeven hits 3%.
Right - I think this gets at the fundamental tension of the 2008 financial crisis (and also why it's probably not comparable to any other recent recession or now). In 2008 we had the simultaneous problems of the real economy (recession, unemployment, below capacity, etc.), a contracting monetary supply but also the banks balance sheets being a mess.
The goal of getting the banks to lend to help the economy and to get their own house in order don't go together well.
Without minimizing the difference between the Great Recession and earlier ones, the current recession is the real outlier in that it is partially a supply shock.
I think you'll find Matt and his readers to be pretty keen on negative interest rates, relabeling solvency issues as liquidity issues, and merging our fiscal/monetary authorities.
I subscribed here partially because I want to figure out for myself if it's possible to disagree with Matt on these points while otherwise finding his judgement sound.
While I have no very strong objection to negative ST interest rates, that not what I advocate and is not implied by what I DO advocate, the Fed achieving its inflation target.
I don't know what "merging fiscal and monetary authorities means for you. In a way I'm assuming the best course is separation: the Fed runs the nominal macro economy and Congress taxes and spends looking at the real economy and distribution.
I have no very strong priors on what Matt and others already think about these issues, though like you I do hope to clarify and even change my own opinions.
"merging fiscal and monetary authorities" in this context would mean proposals like Matt has made such as: in the future, the Fed will deposit money directly into individual and business accounts as needed, and this is A Good Thing.
Hmmm...I'm definitely in the camp of "monetary policy is a poor substitute for fiscal policy" when the goal is to actual stimulate the economy by spending money or give money to people who will spend it (or who would otherwise cut consumption in bad ways without money).
I've sort of assumed that that's not controversial for the center-left, but maybe not?
In my terminology, I'd say the opposite; "fiscal policy is a poor substitute for monetary policy." But I also have a very specific view of "fiscal policy." Generally and especially in times of recession, I'm a fan of giving people money and "stuff" like health insurance and food, unemployment payments. I also want the Federal government to run its expenditures according to an NPV concept. In a recession the government's borrowing rate will go down and the marginal costs of many inputs into government services and outputs will drop below their market prices. Following this rule will look very much like "Keynesian" stimulus and will certainly put moony into the hand of people who will spend it and who would not have had it to spend otherwise.
I don't think what you've just said is controversial when it comes to the organizing logic of the center-left.
But in terms of the actual Democratic party... I think they expect to need both their fiscal policies and ever-increasingly accommodative monetary policy just to tread water. (IMO this was proven to be true of the GOP during the Trump admin)
Consider that in stimulus negotiations, elected Democrats went to bat for all of the emergency Fed programs that Sen. Toomey insisted must require explicit reauthorization. This includes the primary and secondary Corporate Credit Facilities. They could have only defended the Main Street Lending Program and the Municipal Credit Facility.
I do not think you are disagreeing that more aggressive monetary policy, the Fed meeting it's targets, would not help firms like Matt's coffee shop at the margin. But if not, not. It is going to help on some margins. The target is the price level trajectory, not the number of coffee shops that do not close.
Matt, how dare you provide economic analysis without the piled higher and deeper Union card. This will infuriate my professional colleague's, particularly since you do better than much of the drivel PhD economists produce. I'm a very inflation dovish economist myself. I'd be well content of the Fed committed to maintain measured inflation in a corridor between 2 and 4 percent. I stress measured inflation because inflation measurement is very imperfect science. As you point out, recovery after the plague will cause rising prices in some sectors. The Fed's preferred personal consumption index measure of inflation will spike significantly. The correct response is, so what? As you point out, this is just the price system doing it's job.
Good piece, and to the extent that I understand macro issues, I agree with you.
You are calling for a plan that would not only flatten the curve for unemployment, but stomp it into the ground.
I'm afraid that the decision-makers will screw this up as badly as they did on the pandemic -- too little, too late, declaring premature victories and then surrendering when it gets tough, etc.
So, keep banging the drum. Neither of us works in Treasury, the Fed, or OMB, so making noise is all we can do.
What happens if we also get a minimum wage hike at the same time? Not likely, but not impossible.
Could add inflationary pressure.
Housing prices in some places are sky high compared to local median income. (Welcome to Boise)
Will those small businesses come back, or is Amazon going to run the world?
High employment is the goal. Inflation is not a good thing for its own sake. If we added 30 million jobs and the unemployment rate fell to 2% (I'm exaggerating a bit) yet inflation stayed a 1%, we should cheer.
"What happens if we also get a minimum wage hike at the same time? Not likely, but not impossible.
Could add inflationary pressure."
Why? The money supply doesn't increase just because government (or The People) decide to put price floors in place.
Day laborers working for less than minimum wage are a few taps away on popular phone apps, yet folks forget this the second they get a chance to pitch a minimum wage increase.
Yeah, I think there's good reason to be concerned that one result of this is going to be even more centralization of the economy.
I remember reading about Coal Towns where the company owned the stores, paid the wages, owned the houses.
I really think that sooner or later we will have to take on Amazon. Ironically, I say this after having two or three amazon packages delivered a day for the last week.
I can see places like Amazon bringing back a stronger labor movement. They have been pretty successful and union busting so far, but sooner or later one will succeed.
Are the sectors where supply constraints are likely in the early part of the recovery really big enough to drive up headline inflation numbers in the way you suggest? Really we are talking about restaurants, travel, and live entertainment - which will have positive wage dynamics for people who work in those industries but not drive a lot of inflation through the supply chain.
I think that is what he is getting at. It won't be enough to create real inflation so we shouldn't worry, but it could create the appearance of inflation to a casual observer because of rising prices in high visibility products; ie gas, restaurants, etc.
The problem is stickier than this. We actually _need_ inflation to quickly return to full employment. So the real Q is how long the Fed will allow AIT to run before losing their nerve.
I’d push back against yours and Matt’s assumption that those are the only sectors facing inflation pressures. The cost of goods made from plastics have increased quite a bit over the last 4 months. We haven’t seen these price increases yet in the inflation data because there is a lag between the costs increasing on the suppliers and when Walmart finally agrees to raise prices. I’d wager that you’ll start seeing this over the next quarter
I believe the biggest threat to our economy comes from the "financilization" of our economy and some violent reversion to the mean in financial markets. And since the current state of the markets is based on psychology, I'm not sure there is anything we can do about it.
The current state of the markets is based on low interest rates, a ton of liquidity in the system (Thanks, Fed!), high margins and the growth outlook Matt mentions for 2021. Psychology only affects the last item, in terms of being feelings about the future I guess.
If Congress, the President and the Fed act smartly in 2021-2023 (the one area where Trump did OK), then a path to full employment and those rising wages and still-high stock valuations is very plausible.
As John mentioned, the market is only up when measured in a deprecating asset the USD.
“We are in a flood of money and credit that is lifting most asset prices,” says Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, the world’s biggest hedge fund. Indeed, with interest rates at rock bottom as they are today, “there’s no good reason that stocks couldn’t trade at 50 times earnings”.
Matt, of all people, is no stranger to the shortage of housing in the US. As a serious concern, this reared it's head post-crisis (although it's always been a problem in some areas NYC, SF, ...).
I am worried we could be looking at a similar over-correction here. Fewer people will want to open restaurants, be in the hospitality industry, or make investments in the category of 'crowded meat-space.'
If this happens, the inflationary pressure will be overestimated (or correct, but for unfortunate reasons). On top of that, these are industries that tend to employ the lowest wage workers. This could grow the chasm in pandemic outcomes, one that is already very likely to be bad.
There is only so much the fed can do if the national mood has turned in the wrong direction.
This has been one of my favorite posts so far. Partially because I agree with so much of it (and the macro framework underlying it) but more importantly because it highlights the importance of macro and especially monetary policy which I still think is vastly under appreciated (and often ignored) in most political discussions.
Different Fed policy during the great recession would have led to a very different economic situation in the last decade which wouldn't have just spared millions of people needless economic hardship but would've also changed the narrative around inequality, losers from trade, etc. and potentially the political fallout from that.
I have to admit not to know much about Jerome Powell outside of his work as Fed chairman (and have not thought of him as a partisan figure) but have been extremely impressed with everything he's done so far so I'm hoping that he'll continue to do so under a Biden administration.
What's the counter-factual fed policy for the great recession that would have had a better outcome? What should they have done?
If I understand correctly, wasn't the target rate 25 bp without moving from 2010 -> mid 2016?
I've heard Obama-era economists and others who are more to the left say "the stimulus was too small, that was the problem", but that's the fiscal side.
I'm having a bit of a hard time quickly finding one article that explains it well. My own explanation is going to be very rushed, basic, and likely inadequate but my TLDR would be that people generally look at the target rate to judge whether money is loose or tight when they actually need to look at it in context - if the economy is continuing to slow in the face of a certain target rate that actually means that money is tight, and if it's expanding with a high target rate money is likely too loose. Leading into the great recession people thought money was loose or being loosened because the rate was low but the economy was collapsing faster than most people realized -> money was too tight. In terms of the recovery there were lots of discussions about how money was likely too tight but also enormous pressure from people who are always worried about inflation no matter what - both in the US and in the EU (where the ECB did a terrible job).
I should note that I generally believe in market monetarism which influences a lot of what I just wrote and while that is still outside of the mainstream it seems to explain a lot of economic history best and recent moves by the Feds are shifting in the direction of a similar framework.
I found a Voxsplainer on all of this but I haven't had a chance to more than skim it so reader beware (going to read it this evening): https://www.vox.com/2014/7/8/5866695/why-printing-more-money-could-have-stopped-the-great-recession
Ah...I think my trite summary from the Voxsplainer (which isn't bad) is that they could have done "QE, but with more feeling."
I'm a little wary of "Japan devalued their currency by printing money, their exports became competitive and increased and that worked well for them" as something that would be portable to the US.
But yeah, I get that if you think the problem in 2008 was a lack of money supply, that's on the Fed, not congress. And for the 2008 recession in particular, where there was just a massive credit contraction, that strikes me as not crazy, albeit possibly very specific to the financial crisis.
Certainly the "zOMG inflation" worries do seem a little silly in hindsight. :-)
You want growth and inflation? Me too, let's include a chart of money velocity and do more than handwave how it will rise enough to counteract long-term decline.
If you're not going to do that, can you at least share the prewrite blaming Republicans for low growth?
And you can show the TIPS chart all you want to suggest inflation is coming (was in a previous post) but it's no secret that the Fed is buying over 50% of all TIPS sold on any given day.
Thanks for making this post public!