8 Reasons Why Economic Disaster Won’t Happen

People have lost jobs because of the coronavirus, so they will spend less. That will trigger more layoffs, more spending cuts, in a vicious downward spiral of economic collapse. That’s what people are telling me, but they are wrong. Eight good reasons stand in the way of disaster.

1. Unemployment of 15% means 85% of people who want jobs have jobs. They have, for the most part, unchanged ability to spend money. Certainly some of them will be nervous about future layoffs, but many have secure jobs that they can continue to do, either in an essential industry or a work-from-home environment.

2. The unemployed are getting money to spend. The usual unemployment insurance check is for about half of that person’s past weekly pay up to some limit, for up to 26 weeks. (The details vary from state to state.). But wait! There’s more! Congress has extended the time for benefits by 13 weeks, and even more weeks will be available in states with high unemployment rates. But wait! There’s more! In addition to regular UI benefits, everyone unemployed gets $600 a week extra through July 31. For people who earned less than $30 an hour, the total benefit is more than their old wage. But wait! There’s more! Unemployment is now available to independent contractors and gig workers, even though they have not been paying into the unemployment insurance system.

3. Retirees on fixed incomes continue to get their incomes. That counts pensions and Social Security. The downside for retirees is those dependent on the stock market, who tend to skew upper income. Also hurt are retirees using interest income to fund their expenses. Net net, though, retirees are a large, stabilizing force within the economy.

4. Economic Impact Payments are coming to most people at $1200 per adult, plus $500 per child under 17. High earners need not apply, however.

5. Good deals are available. The slowdown in spending leads to markdowns on many discretionary products, including cars and boats. Plus interest rates are very low. Those who are on the fence about making a major purchase will jump on these offers. And with gasoline very cheap, many will buy big trucks and SUVs.

6. Business investment will continue. Most companies are still operating, and they’ll need to replace equipment as it wears out. Across business, depreciation of equipment runs about 14% per year. Companies can stretch out replacement times a bit, but the change in the economy is also triggering increased demand for some business equipment, such as laptops and barriers between workers. Low interest rates make these investments pretty cheap.

7. Inventories will be intentionally increased. Inventories usually rise early in a recession, as companies fail to sell as much as planned. This time round, though, inventories will grow by design. Widespread plant shutdowns due to the coronavirus are leading businesses to want more inventory. Here again, low interest rates make the decision easier.

8. Federal spending will help buoy the economy. In addition to the stimulus money described above, the federal government is maintaining existing programs, such as the military and homeland security. Nobody seems to care about deficits, especially not in a recession.

Some of these eight effects occur automatically, such as regular unemployment insurance and a portion of the decline in interest rates. Other stabilizing effects come from fiscal and monetary policy. Stabilizers can also prevent strong economic growth from becoming too strong. Last year, for example, as the tight labor market prevented the economy from growing more rapidly. Despite these stabilizers we still get fluctuations, but we don’t go completely out of control.

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Or Sign in with
Gary Anderson 4 years ago Contributor's comment

Too rosy. Even the chairman of the Fed is not so sanguine.

Alpha Stockman 4 years ago Member's comment

Good read.