Why the Economy Will Struggle to Restart

Restarting the economy is going to be more difficult than it was stopping it. A vigorous discussion on the topic is desperately needed as many feel talking about opening the economy is akin to reigniting the infection rate when in reality the discussion is needed to formulate an appropriate and workable plan.

Talking about restarting the economy is good policy. Shutting down large swaths of economic activity was necessary for public health. And for the most part it was a fairly easy process: governors gave the order and their state ground to a halt as people sheltered in place, giving COVID-19 no viable path to propagate. The same happened around the world. It is The Day the World Stopped.

The spread of COVID-19 had slowed and in many countries has all but stopped. Concerns the virus is picking up steam where social distancing is relaxed is still a real risk. However, policies designed to slow the spread of the virus appear to be working. Multiple medical therapies hold promise and a massive effort to develop a vaccine are in progress. A vaccine would be a game changer, but realistically that is still as much as 1 ½ years away before it becomes available. The economic price would be too high, and the resulting harm to human health from lack of services, too damaging to wait over a year before reopening the closed parts of the economy.

Reopening the economy can begin in as little as a few weeks to a month if handled properly. Germany has made signs they are ready to slowly restart economic activity. China, the first to suffer the scourge, has already reopened much of its shuttered economy. The real question now is: How well will it work? If the virus takes off again it will set us back. However, if enough people have built an immunity while social distancing is still practiced, many parts of the economy can reopen.

Turning economic activity back on will not be like flicking a light switch. There are several issues when restarting an economy after such a brutal and abrupt stoppage. We will now turn our discussion to an appropriate and safe way to reopen a shuttered economy. Even more important than opening closed businesses is how to get money flowing again. If nobody shows up for the party we are no better off.

 

A Plan for Reopening Shuttered Industries

While it is true the current economic downturn may be the most abrupt (fastest) and deepest decline in modern history, it isn’t the first time an economy had to plan on restarting after such a shock to the system. The situation (and rules) are different from rebuilding after the destruction from war; the rules, however, have many similarities, albeit on a much smaller scale. 

After World War II, Germany and Britain were in ruins, along with much of the rest of Europe and Japan and other areas of the Far East. While a contagious virus wasn’t running wild, a plan was developed for rebuilding the destroyed areas. Without the Marshall Plan, Europe would have suffered much longer as they worked to rebuild. A similar reconstruction plan was instituted in Japan. 

We don’t need anything as drastic as a Marshall Plan today. But the lessons can still be learned.  For example, you didn’t start rebuilding a war torn Britain by investing in industries that heavily rely on infrastructure before the infrastructure was funded and well on its way to becoming operational. In other words, there has to be an order to the reopening of an economy. 

It can happen fast. The Marshal Plan was a 4-year plan to fund investment in rebuilding cities and industries, and remove trade barriers between European nations and those nations and the United States. 

We do not need 4 years to reignite our economy! Still, it will take time and it will not always be a smooth process. Prior to a vaccine for COVID-19 there stands a strong chance there will be pockets of infection flareups. Fear will be the common enemy.

It would be unwise to open everything at once. A step-by-step process will allow for the fastest opening of the economy without undue risk to public health. The real question is: What gets opened first, second and so forth and to what degree?

Step 1 

Before any plan can work social distancing must be practiced by the public until an effective vaccine is found, effective and fast testing is available or most people are inoculated. If enough people develop a natural immunity (prior infection) the same result can be achieved, if only over a much longer time frame and higher number of dead.

A requirement everyone wear a mask in public would also go a long way, if not very fashionable. Social distancing and a mask would reduce the spread of COVID-19 to such an extent it might not remain viable for long as it can’t keep finding new hosts.

A cheap, fast and easy way to test for those currently contagious would also allow for a faster opening of economic activity.

Step 2

The first businesses to reopen should be retail establishments. It is easy to practice social distancing at a furniture mart and therefore, these businesses should be allowed to open soon.

Certain service businesses can be opened at this time as well. The law office, bank and public buildings and parks all allow for social distancing without much inconvenience to people.

Factories and other manufacturing facilities can reopen along with service businesses and retail outlets. Safety policies might mean some factories run at less than full capacity, but they would be open and should be able to find ways to slowly increase business activity until fully operational, or nearly so.

Churches and other places of worship would also be some of the first places to reopen. 

Step 3

After an adequate waiting period (say two or three weeks) to determine the virus is not spreading faster again, it will be time to open even larger swaths of economic activity. 

This is where it gets difficult. Bars and restaurants really could use a return to normalcy. Unfortunately, large groups of people gather at these establishments and social distancing is extremely difficult. Unless a natural immunity or vaccine reduces risk, large gatherings are a serious threat to reigniting the infection rate. 

Instead, it might be proper to open salons. Social distancing is impossible in these situations; by design the hair stylist has to be close to you to cut your hair. However, a mask might be enough to solve the problem. Yes, the hair stylist is close to the customer when cutting her hair, but the room isn’t crowded tight with people. A mask and hand washing between clients could do the trick. (This is more important than you think! Do you want to now what our world would look like after people go a year without any hair care? Yikes!)

An accurate and fast way to test for those currently contagious would also facilitate a quicker opening of these businesses.

Step 4

As serious as the matter is, certain businesses need to reopen as some point. Gyms are a high risk place, but social distancing, frequent hand washing and sanitizing equipment between use should make it a viable solution to reopening our exercise centers. A fast, accurate and low cost testing method to reveal who is contagious would certainly allow for these establishments to open sooner.

Restaurants are next. We might limit the number of people in the room and require masks for all employees. (Kind of hard for patrons to eat while wearing a mask.) The same for bars. A reasonable plan would be to allow a certain number of people per area and slowly raise the density of people allowed per gathering as long as infection rates remain low.

Step 5

The hardest hit is the last to reopen. Concerts and sporting events pack people in too tight for proper safety with a highly contagious virus on the loose. Yelling and cheering at a packed sporting event all but assures you will face a high risk of infection if an infected individual is present. Sporting events with empty stands is an option, but there is something about a full stadium that makes the event serious, real.

Travel will also be among the last to fully reopen. Packing a plane is not the best idea when a highly contagious virus is on the loose. Proper precautions could be taken to reduce risk. Disinfecting after each use and masks on public transportation would make sense. Testing, when available, would allow for a full opening of economic activity even if a vaccine is not yet ready.

 

These steps do not have to take place in a vacuum. Fully reopening the economy could happen in a few months with most business activity functioning at a high level within 30 days. Accurate, fast and low cost testing would also speed the reopening of the economy. A vaccine would be the best option, but the economy will still need time to reset as it opens after such a shock. Things will not pick up where they left off.

We have learned a lot about COVID-19 so far. Treatments are getting better and more equipment is available. That reduces the seriousness of the infection. Even without a vaccine there will be a growing number of people with a natural immunity. As we discover how effective an immunity infection provides, we can also focus on how many have been infected without serious symptoms. At some point we need to know how many people already are not at risk due to immunity. Reinfection issues will need to be addressed.

It is growing clearer each day we can reopen economic activity without undue risk to human health. There are measurable risks to locking people down to prevent the spread of disease. At some point it is a better choice to take precautions while letting the herd out in the pasture.

 

Velocity of Money

The velocity of money is the gorilla in the room nobody is talking about. Opening businesses is only the first step. My guess is there will be a surge in business activity as the wildlife gets a whiff of fresh air. Then the economic reality of the family budget will bear down. 

The stimulus money will certainly help, but that money helped people muddle through the abyss. Some jobs are not coming back. Some businesses will not survive the assault inflicted upon them. There is no amount of money that will put things back exactly as they were.

Will back rent need to be paid or will landlords suffer the loss? Will all employees be called back to work? What about businesses that close? If tenants are forced to pay a backlog of rent it will retard tenants’ spending on other goods and services. If the landlord swallows the loss the landlord will be forced to reduce spending. Either way money will not move as fast in the economy. The same applies to employees not called back to work as their employer closed permanently. 

The same applies to mortgage payments and other loans. Will payments be pushed to the back of the loan? Regardless, the family budget is worse off. Many questions still need answering for a smooth re-opening of economic activity.

And will jobs still pay the same with higher unemployment? 

 

 

Bars and restaurants might get an initial surge of business, but not all industries will enjoy such a bump. Travel and entertainment take time to set up. Planning a concert takes time. The day the switch is flipped is not the day people have airline tickets to get away. People will start closer to home before venturing further. Planning a vacation will not happen instantly.

And some industries are of the trickle-down type. For Boeing to sell more airplanes, airlines need to book more passengers. The money flows downhill and Boeing is not first in line for a check.

The above chart shows a damning detail about the American economy. From 1960 to 1990 the speed at which money exchanged hands in the economy was static. The accelerating economic growth of the 1990s bumped the velocity of money a bit higher before coming back down in the early 2000s.

But ever since the Great Recession the speed that money changes hands has been slowing. Part of the issue is the level of the money supply. The Federal Reserve has not been bashful about increasing the money supply over the last decade. If people don’t increase spending at the same pace the Fed increases the money supply we see the velocity of money come down. Each new dollar the Fed dumps into the economy has less effect than the one prior. This is a form of spin-down and it always comes to an end at some point.

That has been a problem for the last decade. More and more money gets pumped into the economy, but it has had a smaller and smaller effect. Money just does not move the way it used to, even when more is pumped into the system. 

The third major bear market in 20 years might drop the velocity of money even lower. A vibrant, healthy economy has a strong velocity of money as money is earned, spent, saved and invested. For a decade we have seen money pumped into the economy and mostly it arrived with a loud thump. Most of the past decade of economic gains is attributable to public spending on the national credit card. Without this so-called stimulus, we had no discernible economic gains. I will leave it to you, kind readers, to determine if this is a viable long-term solution.

The real challenge is not the reopening of businesses; it is the reinvigorating of the movement of money. If everyone has a million dollars, but they all sit on it — none of it moving — there is still no economic activity, at least as measured by Gross Domestic Product which tracks how much money has been put to work buying goods and services. If the velocity of money slows even more it could be a very anemic recovery, indeed! Or worse.

The economic expansion after the Great Recession was slow by historical standards. It is also a likely reason it lasted so long since the excesses of too rapid of growth were avoided.

But slow growth is like watching paint dry or suffering water torture if you need a job or are working to build a business. If money isn’t moving it means it isn’t going to wages or small businesses either. 

The challenge is starting a national dialog on reopening the economy as soon as safely possible and developing plans to avoid an incredibly slow recovery, even slower than the 2009-2019 expansion.

It seems during my entire adult life (from the early 1980s) each economic expansion has started slower and was harder to accelerate. Interest rates have dropped for 30 years until we are now at 0% yet again. If the Fed creates more money, only to see the velocity of money slow more, there will be little value gained by future Fed actions. 

Maybe a Keynesian style government infrastructure spending program might do the trick. However, China has tried to do this every time they want to spike growth and the benefits are not all they desired.

I guess the Fed could print money forever without consequences and give it away as a basic income. I also have a bridge I’d like to sell you if you believe there is such a free lunch without consequences. 

I certainly do not have all the answers. I think my plan for opening the economy is sound with some modest tweaks by the powers that be. The real problems start when the economy is back open and it isn’t what we remember when we last saw it.

And we better start tossing ideas around because I think time is running shorter than anyone wants to admit.

 

 

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