Guest Blogger: Contributed by Dr. Thomas D. Simpson, Executive in Residence at the UNCW Cameron School of Business. Dr. Simpson joined the Department of Economics & Finance after his retirement from the Board of Governors of the Federal Reserve System in Washington, DC (this post originally appeared on WilmingtonBiz.com on April 15, 2020).
The Corona Virus pandemic has been a shock to the global economy, precipitating a global recession. For the United States, the news of a 3 million surge in workers filing for unemployment insurance in just one week has sent a clear message that we are not immune to the downturn.
The only question remaining has to do with the type of recession that we are entering. Is it a “V,” a “U,” or a rotated “L”? A “V” describes a quick downturn and an equally quick snapback. A “U” describes a more prolonged bottom, before the recovery takes hold. A rotated “L” characterizes the 2008 recession, with a long period of weakness before the recovery got traction.
The current recession is unlike any other that we have experienced, meaning we cannot get many clues from the past. Demand for many things — airline travel, restaurant meals, hotels, and hair salons — has collapsed, while demand for other things — ventilators, store-bought food, and hand sanitizer — has soared. But the net effect has not been neutral. Total demand in the economy has contracted at a time when numerous bottlenecks have developed in the course of redirecting production toward those items in greater demand.
The policies that have been put in place in Washington are focused on the numerous sectors that have been hit hard by the shutdown. Businesses in these sectors are facing huge shortfalls of revenue from unavoidable costs. To limit their losses, they have let workers go, forcing some of their shortfalls onto their employees.
There are basically three ways businesses and households can deal with such shortfalls: draw down assets; borrow; or receive a grant. A large number find themselves with insufficient assets to cover the shortfall or there are obstacles to selling the assets they own because of markets that have dried up or stiff penalties on IRA and 401(k) withdrawals.
Many also have discovered that affordable loans have disappeared. In these circumstances, they are faced with missing lease or utility payments or defaulting on current loans and, in so doing, digging a hole for themselves that would force austerity for many years ahead.
The recent fiscal rescue package and other extraordinary programs are intended to address household and business shortfalls. Relief payments from the Treasury are going out to households and unemployment insurance benefits have been boosted (both of which fall into the category of grants). Federal loan guarantees have been provided to numerous businesses, encouraging lenders to assist in covering shortfalls.
Bank regulatory agencies also have eased regulations on lending and have encouraged forbearance in an effort to get credit flowing. The Federal Reserve (Fed) has initiated various programs aimed at improving the functioning of markets so that assets can be sold more easily and at more favorable prices.
Moreover, the Treasury has authorized penalty-free drawdowns of 401(k)s and other retirement plans and has shifted back the date for making tax payments by three months. Meanwhile, the Fed lowered its policy interest rate to near-zero and ramped up its purchases of Treasury and certain other securities in an effort to support aggregate demand.
These measures are likely to foster a snapback in the economy as restrictions are lifted and people and businesses return to more normal activities. When this will take place depends on when public health policies prove effective in bringing us through the epidemic, but the snapback will not happen overnight.
Moreover, scars will be left and households and businesses are likely to be cautious in resuming spending for postponable things. In such conditions, the Fed will extend its aggressive monetary policy for another year or even longer. Nonetheless, looking in the rear-view mirror several years from now, the recession of 2020 will resemble a “V.” Looking ahead, though, the legacy of servicing an additional $2 trillion of national debt from the 2020 fiscal rescue package will be compounding strains on public finances.
Robert T. Burrus, Jr., Ph.D., is the dean of the Cameron School of Business at the University of North Carolina Wilmington, named in June 2015. Burrus joined the UNCW faculty in 1998. Prior to his current position, Burrus was interim dean, associate dean of undergraduate studies and the chair of the department of economics and finance. Burrus earned a Ph.D. and a master’s degree in economics from the University of Virginia and a bachelor’s degree in mathematical economics from Wake Forest University. The Cameron School of Business has approximately 60 full-time faculty members and 20 administrative and staff members. The AACSB-accredited business school currently enrolls approximately 2,000 undergraduate students in three degree programs and 200 graduate students in four degree programs. The school also houses the prestigious Cameron Executive Network, a group of more than 200 retired and practicing executives that provide one-on-one mentoring for Cameron students. To learn more about the Cameron School of Business, please visit http://csb.uncw.edu/. Questions and comments can be sent to firstname.lastname@example.org.