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How to Hobble the Economy and How to Revive It

Summary:
While people like me are fortunate that we work mainly in front of a computer and can do so at home, the majority of Californians are not so lucky. Other retailers are shut down, and those include bars and restaurants, with restaurants (mercifully) allowed to do take-out. Governors of Illinois, New York, Louisiana, Pennsylvania, Michigan, Connecticut, Oregon, New Jersey, Delaware, Nevada, Kentucky, Massachusetts, Ohio, and Indiana have imposed similar restrictions. Interestingly, of the 15 states with such orders, 12 have Democratic governors. Only three—Massachusetts, Ohio, and Indiana—are Republican. (The nationwide split is 24 Democratic governors and 26 Republican.) These governors have badly overreacted. There is good, if arguable, evidence for the view that

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How to Hobble the Economy and How to Revive It

While people like me are fortunate that we work mainly in front of a computer and can do so at home, the majority of Californians are not so lucky. Other retailers are shut down, and those include bars and restaurants, with restaurants (mercifully) allowed to do take-out. Governors of Illinois, New York, Louisiana, Pennsylvania, Michigan, Connecticut, Oregon, New Jersey, Delaware, Nevada, Kentucky, Massachusetts, Ohio, and Indiana have imposed similar restrictions. Interestingly, of the 15 states with such orders, 12 have Democratic governors. Only three—Massachusetts, Ohio, and Indiana—are Republican. (The nationwide split is 24 Democratic governors and 26 Republican.)

These governors have badly overreacted. There is good, if arguable, evidence for the view that the risk of the coronavirus is much smaller than Newsom and other government officials have claimed. But there is no uncertainty about the fact that the damage these restrictions will do to the U.S. economy is huge. And remember that while “the economy” is an abstract concept, 330 million humans are not. The damage to them is already real, and will increase. There are good and bad ways to recover from the recession that is almost certainly upon us as a consequence. Fortunately, the Federal Reserve looks as if it will engage mainly in the good ways. Unfortunately, many of the solutions being proposed by Congress and President Trump at the time of this writing (March 24), look to be mainly bad.

This from my latest Defining Ideas article, “How to Hobble the Economy–and How to Revive It,” Defining Ideas, March 25, 2020.

Also, while I rarely make predictions about unemployment rates for the next month or so, I’m reasonably confident about this one:

Of course, how much damage the state governments’ restrictions will do depends mainly on how long they last. On April 3, the Bureau of Labor Statistics will report the March unemployment rate, and the unemployment rate is probably the most important indicator of economic conditions. But because the extreme restrictions started last week, and because the BLS collects data throughout the month, we won’t see the full effect. So we might see an unemployment rate of 4.5 to 5 percent for March, up from 3.5 percent in February. But if the “shelter in place” restrictions are not lifted by, say, April 10, that month’s unemployment rate will likely top 8 percent. Even if it jumped to “only” 7 percent, that would be the biggest one-month jump in the unemployment rate since the federal government started tracking the monthly rate in the 1930s.

Read the whole thing, especially if you want me to respond to your comments.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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