• Matthew C. Mai

How to Destroy An Economy

Two weeks ago, jobless claims set a new record when 3.3 million Americans filed for unemployment benefits. For a little perspective, consider that jobless claims peaked at 665,000 during the Great Recession. Before that, the worst week on record was in 1982 when claims hit 695,000.

Today, the Department of Labor reported that over 6.6 million Americans filed for unemployment benefits last week.

Not only have the federal and state governments put millions out of work but they are also in the process of substantially increasing their power over the private economy. Writing in the Wall Street Journal this week, Hoover Institute senior fellow Amit Seru and University of Chicago Booth School of Business professor Luigi Zingales refute the federal government’s foolhardy $2.2 trillion economic intervention through the Cares Act which was passed last week:

“The last thing we need at this moment is a Keynesian stimulus. Since the lockdowns constrain supply, stimulating demand would lead only to a rise in prices.”

Mailing out individual $1,200 checks will make this worse. As people burn through their savings and businesses dip further into their inventory, a vicious cycle of decreasing supply and increasing prices will only lead to more pain. If we’re lucky, the funding in the Cares Act will get us just beyond the month anticipating that state governments loosen up their restrictions:

“The greatest resource most companies have is their teams of employees. If they dismantle those teams because of the pause in the economy, production capacity will be lower at the end of the pandemic. Only $377 billion of the $2 trillion package is directly targeted to this goal. These are loans to small firms (fewer than 500 employees), which are forgivable if the funds are spent on payroll, rent, mortgage interest and utilities. By using 2017 census data (the most recent available), we calculated the total expenditures in payroll, interest expenses and rents of U.S. small firms amounts to $258 billion a month. Unless the Trump administration introduces criteria for selective targeting, the money allocated in Cares will run out in a month and a half. Designing the conditions for such targeting isn’t easy, since every requirement will slow the money’s deployment and speed is of essence. Thus, we fear that the administration will soon come back to Congress with a new request for money.”

But that’s not all. The Federal Reserve will have gone from being the “lender of last resort” to the only lender left:

“Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses… The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector. The expectation is that the central bank will leverage this money 10 to 1, enabling it to lend up to $4.54 trillion to companies. That sum is more than all U.S. commercial and industrial loans outstanding at the end of 2019 ($2.35 trillion) plus all the new corporate bonds issued during 2019 ($1.41 trillion). Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken.”

This is a massive expansion of federal control over the economy that is unlikely to recede once the crisis ends. The Fed’s extraordinary intervention also puts the American taxpayer on the hook for any losses incurred through these lending mechanisms without the prospect of future compensation from companies taking advantage of this artificial liquidity. There’s nothing politicians love more than spending other people’s money.

So far, public health has taken priority over economic health. Understandably, we needed to bide our time so the healthcare system would not be overrun as testing became more available. Yet, New York governor Andrew Cuomo’s declaration that “We will fight to save every life we can” seems to be the mentality of our elected officials. However, crafting public policy requires making trade-offs that sometimes put people’s lives at risk. Dr. Fauci estimated that 100,000 Americans could die from the virus while millions more are infected. Consider that in 2019 almost 39,000 people died from car accidents while another 4.4 million required medical attention from serious injuries. Does Governor Cuomo want to ban cars too?

Yes, the coronavirus doesn’t compare to auto accidents but the standard cannot be to “save every life we can”. The fact is that the coronavirus is going to linger longer than we can manage a national lockdown. It will just have to be another risk we endure while living our lives.

There has already been damage done to our economy that will not be undone. Some businesses won’t be able to hang on long enough to survive the lockdown before going under and letting go of their workers. Does anyone really expect that millions of Americans will be able to find employment during a severe contraction? If these draconian measures remain in place much longer, the number of “deaths of despair” stemming from the resulting economic hardship will be impossible to calculate. Saving the economy saves lives too.

The federal government cannot pass another multi-trillion-dollar bailout package and maintain its insistence that Americans stay home through April 30th. Already it has pushed private lenders out of capital markets and attempted to take equity stakes in private companies. Not only is this a gross abuse of power but short of loosening up its guidelines, nothing will keep the economy from going over a cliff.

Similarly, governors need to stop acting like tyrants by enacting blanket regulations of our commercial activities. State governments need to remove restrictions on business activity and let people use their own discretion when they leave their homes. Some businesses may opt to remain closed while others open up and begin to enact their own social distancing procedures. Either way, people need to be allowed to exercise their own judgment and take risks when and where they are comfortable doing so.

The last two weeks of unemployment data have made it clear that the consequences of our public health lockdown are growing exponentially. Government has no right to destroy the livelihoods of millions of Americans all while expanding its control over the private sector. Americans have been remarkably patient and understanding throughout this crisis but now it’s time for us to have our economy back.

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