By Jack Rasmus
July 20, 2020 "Information
Clearing House" - The US economy at mid-year
2020 is at a critical juncture. What happens in the next
three months will likely determine whether the current
Great Recession 2.0 continues to follow a W-shape
trajectory—or drifts over an economic precipice into an
economic depression. With prompt and sufficient fiscal
stimulus targeting US households, minimal political
instability before the November 2020 elections, and no
financial instability event, it may be contained. No
worse than a prolonged W-shape recovery will occur. But
should the fiscal stimulus be minimal (and poorly
composed), should political instability grow
significantly worse, and a major financial instability
event erupt in the US (or globally), then it is highly
likely a descent to a bona fide economic depression will
occur.
The prognosis for a swift economic recovery is not
all that positive. Multiple forces are at work that
strongly suggest the early summer economic ‘rebound’
will prove temporary and that a further decline in jobs,
consumption, investment, and the economy is on the
horizon.
A Second Wave of Permanent Job Losses
Through mid-June to mid-July, the COVID-19 infection
rate, hospitalization rate, and soon the death rate,
have all begun to escalate once again. Daily infections
consistently now exceed 60,000 cases—i.e. more than
twice that of the earlier worst month of April 2020.
Consequently, states are beginning to order a return to
more sheltering in place and shutdowns of business,
especially retail, travel, and entertainment services.
The direction of events cannot but hamper any initial
rebound of the economy, let alone generate a sustained
economic recovery. Exacerbating conditions, a second
wave of job layoffs is clearly now emerging—and not just
due to economic shutdowns related to the resurging
virus.
Reopening of the US economy in June resulted in 4.8
million jobs restored for that month, according to the
US Labor Department. That number included, however, no
fewer than 3 million service jobs in restaurants,
hospitality, and retail establishments. These are the
occupations that are now being impacted again with
layoffs, as States retrench once more due to the virus
resurgence underway. But there’s a new development as
well: A second jobless wave is now emerging in addition
to the renewed layoffs due to shutdowns not only of the
resumed service and retail occupations, but reflecting
longer term and even permanent job layoffs across
various industries.
Household consumption patterns have changed
fundamentally and permanently in a number of ways due to
both the virus effect and the depth of the current
recession. Many consumers will not be returning soon to
travel, to shopping at malls, to restaurant services, to
mass entertainment or to sport events at the levels they
had, pre-virus.
In response, large corporations in these sectors have
begun to announce job layoffs by the thousands. Two
large US airlines—United and American—have announced
their intention to lay off 36,000 and 20,000,
respectively, including flight attendants, ground crews,
and even pilots. Boeing has announced a cut of 16,000,
and Uber,n just its latest announcement, a cut of 3,000.
Big box retail companies like JCPenneys, Nieman Marcus,
Lord & Taylor, and others are closing hundreds of stores
with a similar impact on what were formerly thousands of
permanent jobs. Oil & gas fracking companies like
Cheasepeake and 200 other frackers now defaulting on
their debt are laying off tens of thousands more.
Trucking companies like YRC Worldwide, the Hertz car
rental company, clothing & apparel sellers like Brooks
Brothers, small-medium independent restaurant and hotel
chains like Krystal, Craftworks—all are implementing, or
announcing permanent layoffs by the thousands as well.
Reflecting this, since mid-June new unemployment
benefit claims have continued to rise weekly at a rate
of more than 2 million—with about 1.3 million receiving
regular state unemployment benefits plus another 1
million independent contractors, gig workers,
self-employed receiving the special federal government
unemployment benefits. The latter group’s numbers are
rising rapidly since mid-June.
As of mid-July no fewer than 33 million are receiving
unemployment benefits, with another 6 million having
dropped out of the labor force altogether and no longer
even being counted as unemployed. Unemployment therefore
remains at what will likely be a chronically high
number, at around 40 million—with about 25% of the US
labor force unemployed—as renewed service-retail sector
layoffs, plus new permanent layoffs, both loom on the
horizon.
Added to the growing problem of renewed service
layoffs and the 2nd wave of permanent layoffs in the
private sector is the growing likelihood of significant
layoffs in the public sector, as states and cities
facing massive budget deficits are forced to lay off
several millions of the roughly 22 million public sector
workers in the US. This potential public employee layoff
wave will accelerate and occur sooner, should Congress
in summer 2020 fail to bail out the states and cities
whose budgets have been severely impacted by the
collapse of tax revenues while facing escalating costs
of dealing with the health crisis. Estimates as of last
May are that the states and cities will need $969
billion in bailout funding this summer—roughly
two-thirds for the states and the rest for cities and
local governments.
The resurgence of layoffs from all these sources is a
sure indicator that the economy’s rebound—let alone
recovery—is in trouble. Rising joblessness means less
wage income for households and therefore less
consumption and, given that consumption is 70% of the
economy, a slowing of the rebound and recovery. Problems
in consumption in turn mean business investment suffers
as well, further slowing the economy and recovery.
Exacerbating the decline in personal income devoted to
consumption due to unemployment is the evidence that
even those fortunate enough to return to work after
spring 2020’s economic shutdown are doing so
increasingly as part time employed—which means less wage
income for consumption compared to the pre-COVID period
before March 2020.
Overlaid on these negative prospects for employment,
consumption, business investment is the intensification
of economic crisis-related problems.
Rent Evictions, Child Care & Education Chaos
There is an imminent crisis in rents affecting tens
of millions. At the peak in April, it is estimated that
roughly one-third of the 110 million renters in the US
economy had stopped making rent payments due to the
COVID-related shutdowns of the economy. The CARES ACT,
passed in March, provided forbearance on rental
payments, although perhaps as many as 20 states failed
to enforce it. That forbearance directive expires at the
end of July, with as many as 23 million rent evictions
projected in coming months. A major housing crisis is
thus brewing, as well as the second wave of job layoffs.
A combined education-child care crisis is about to
occur almost simultaneously. The K-12 public education
system is approaching chaos, as school districts plan to
introduce remote learning on a major scale in order to
deal with the renewed COVID-19 infection and
hospitalization wave. The heart of the crisis is that
tens of millions of US working class families dependent
on two paychecks to survive economically cannot afford
to accommodate school district practices for remote
learning—especially for young children in the K-6 grade
levels. Even if such families could afford to pay for
expensive child care, the current US child care system
is far from being able to accommodate them. Many
minority and working class households, moreover, lack
the computers and networking equipment, or even the
requisite skills to set it up, to enable their children
participate in remote learning.
Several forces are driving the shift to remote
learning: school district fears of liability actions by
parents if children become ill, the significant cost of
ensuring disinfected classrooms, the lack of classroom
space to allow distance learning on site, and the
growing concern of teachers regarding their own exposure
to infection. At least 1.5 million public school
teachers are over age 50 and have health conditions that
put them at greater risk of serious infection, should
they attend closed-in classroom environments.
The child care plus K-12 education crisis will likely
erupt within months on a major scale. Chaos in education
is around the corner.
This fall, higher education—colleges and
universities—will also experience chaos of their own
kind. While distance learning will not be as serious an
implementation problem as it will in K-12 levels, costs
from the pandemic will force many smaller, private
colleges into bankruptcy, consolidation or closure.
Public colleges’ funding problems will require them to
sharply reduce available services. Remote education will
create a two-tier system of higher education—educational
services delivered remotely and those of a more
traditional nature on campus; or a hybrid of both.
However, demand for higher education services will
likely decline sharply in the short term, during which
higher education will experience a devastating decrease
in tuition and other sources of college revenues. Some
estimates show a third of freshmen plan to take what’s
called a ‘gap year’: i.e. accept entrance but not attend
for a year. That’s a massive revenue loss. Some
estimates foresee a 15%-30% decline in new student
attendance, with another 5%-10% decline in transfer
students, and a similar decline of 5%-10% in continuing
students. In addition, the attendance by international
students, the ‘cash cow’ for most colleges, will also
decline sharply due to the Trump administration’s new
rules.
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Still other developments will sharply reduce college
revenues. Students forced to attend classes via remote
learning will demand lower tuition. One can expect a
wave of legal suits as students seek to ‘claw back’ full
tuition expenses. Other secondary sources of college
revenues—from fees, on-campus room and board, endowment
earnings and gifts, and sports revenues—also spell a
looming revenue crunch.
A wave of college consolidations and closures is
inevitable. And with student loan debt at $1.6 trillion
it is unlikely that the federal government will
introduce new aid through that channel. Nor will States
increase their subsidization of public colleges, given
the severe state budget deficits on the horizon.
In short, the economic crisis is about to assume more
socio-economic dimensions and character: rent,
child-care, education chaos will soon overlay the
continuing unemployment problem and worsening recession.
Social and political discontent, frustration, and
anxiety are almost certainly to rise in turn in coming
months as a consequence.
Global Recession & Sovereign Debt Defaults
The weakness of the global economy is yet another
factor likely to ensure the US economy’s W-shape
trajectory. As noted previously, with 90% of other
countries in recession, global demand for US exports
will remain weak or declining. In addition, global
supply chains have also been severely disrupted by the
health crisis, or even broken, and will not be restored
soon. The global economy is suffering from deep problems
of both demand and supply. This too is a unique
historical event. Never before have demand and supply
problems occurred congruently. Together, they increase
the potential for a global depression.
Commodity producing economies have been hard hit,
especially oil and metal producing countries. Many were
in a recession well before the COVID health crisis.
Global trade in general had stagnated, registering
little to no growth in 2019, for the first time since
modern records were kept. Many countries had
over-extended their borrowing, expanding their sovereign
debt loads during the last decade. This was money
capital borrowed largely from western banks and capital
markets (i.e. shadow banks).
Now, with global trade flat and declining, and prices
for their export goods deflating in price as well, these
debt-extended countries cannot earn sufficient income
from exports in order to pay the principal and interest
on their debt. As a result, several countries in the
worst shape may soon default on their debt payment to
western banks, hedge funds, private equity firms, and so
on. Debt defaults potentially mean the same western
financial institutions that loaned the funds now
experience financial crises in turn. In such a manner,
financial instability events abroad are often
transmitted to the domestic US economy through its
banking system. It would not be the first time,
moreover, that foreign bank crashes have spilled over
the US and rest of the world economy and in the process
significantly exacerbated a recession already underway.
Theoretically, countries experiencing severe
sovereign debt crises could borrow from the
International Monetary Fund. However, the IMF has
nowhere near the funds to accommodate multiple large
sovereign defaults that occur simultaneously. Nor is it
likely that the US and Europe will increase the IMF’s
funding to enable it to do so. Once it becomes clear the
IMF cannot handle a crisis of such potential dimensions,
the global capitalist economy will slip even further
toward global depression.
The further deterioration now already occurring in
economic relations between the US and China may also
potentially impact the Great Recession in the US, and
ensure its continued W-Shape recovery. Trump’s trade
pact with China signed December 2019 has proven thus far
a colossal failure. The president declared at the deal’s
signing it would mean $150 billion in China purchases of
US goods in 2020—especially farm products, oil & gas,
and manufactured goods. At mid-year, China has purchased
only $5 billion of the agreed $40 billion in farm
products and only $14 billion of $85 billion in US
manufactured goods. Trump’s promised $150 billion was
never agreed to by China, even before the Covid pandemic
struck the US economy in 2020. China never agreed to a
dollar value of purchases of US exports, but announced
it would purchase based on conditions in 2020-21.
Trump’s $150 billion was typical Trump misrepresentation
of a deal never made. At best China would purchase
perhaps $40 billion in agricultural goods—i.e. about the
level of it purchases before Trump launched a trade war
with it in March 2018. Failure to deliver his
exaggerated public promise in 2020 Trump turned on on
China and embraced further his anti-China hard line
advisors on trade and other matters. The former ‘trade
war’ with China will likely transform now, in the wake
of Covid, into a broader economic war with China.
Furthermore, the deterioration of relations with China,
set in motion by the current recession and the collapse
of global trade, shows signs of spilling over to other
political and even military affairs.
Permanent Industry Transformations
The COVID health crisis is accelerating the
transformation of entire industries and sectors of the
economy, US and global. As noted above, household
consumption patterns are already changing fundamentally
and will continue as changed even after the health
crisis passes. Entire industries will shrink as a
consequence. Company consolidations and downsizing are
inevitable in airlines, cruise lines, and even public
land transport. So too will companies fail, consolidate
and restructure in the hospitality, leisure and hotel
industries, in mall-based retail establishments, inside
entertainment (movies, casinos, etc.) to name but the
obvious. Sports and public entertainment companies are
struggling to redefine their business models and how
they bring their ‘product’ to the public for
consumption. Even education—public and private—is
undergoing a radical shift. Not so obvious is similar
fundamental change in oil & energy industries, and later
as well in manufacturing as supply chains are slowly
returned to the US economy.
Not only will these changes significantly (and often
negatively) impact employment levels and wage incomes,
but business practices as well. Already businesses are
instituting new cost cutting practices under the
pressure of the health crisis and shutdowns. These
practices will become permanent. And since much of the
practices and cost cutting will focus on workers’ pay
and benefits, more of what economists call ‘long term
structural unemployment’ will result—in addition to the
current ‘cyclical unemployment’ occurring due to the
current recession.
An historic consequence of the current Great
Recession precipitated by the COVID-19 health crisis is
the accelerating introduction underway of what some call
the Artificial Intelligence revolution. AI is about
cost-cutting. It’s about new data accumulation, data
processing and statistical evaluation, to allow software
machines to make decisions previously made by human
beings. AI will eliminate millions of low level
decision-making by workers in both services and
manufacturing. A 2017 report by the business consulting
firm, McKinsey, predicted no less than 30% of all
workers’ occupations will be severely impacted by AI by
the end of the present decade. 30% of jobs will either
disappear or have their hours reduced significantly.
That means less wage income and less consumption still.
The important linkage to the current Great Recession
2.0 is that the introduction of AI by businesses will
now speed up. What McKinsey formerly predicted for the
late 2020s decade will now take place by mid-decade. The
economic consequences for the next generation of US
workers, the late Millennials and the GenZers will be
serious, to say the least. After decades of the
permeation of low pay, low benefits ‘contingent’ part
time and temp jobs since the 1990s, after the impact of
the 2008-09 crash and aftermath on employment, after the
acceleration of ‘gig’ jobs with the Uberization of the
capitalist economy since 2010, and after the even more
serious negative economic effects of the current Great
Recession 2.0, the tens of millions of US workers
entering the labor force today and in coming years will
have to face the transformation of another 30% of all
occupations. The future does not portend very well for
the 70 million millennials and GenZers. US neoliberal
economic policies and the Great Recession 2.0 is
accelerating the long term structural unemployment
crisis of both the US and the global capitalist economy.
Return of Fiscal Austerity
The US federal budget deficit under Trump averaged
more than a trillion dollars annually during his first
three years in office. The federal national debt at the
end of 2019 was $22.8 trillion. As of July 2020 it has
risen to $26.5 trillion—and rising. Earlier projections
in March were that it would increase by $3.7 trillion in
2020. That has already been exceeded. So, too, will
projections for 2021, or another $2.1 trillion. The
deficit and debt will likely rise to more than $4
trillion in this fiscal year and another $3 trillion in
2021. That means the current national debt within 18
months will reach $30 trillion. And that’s not counting
the debt level rise for state and local governments,
already $3 trillion; nor the debt carried on the US
central bank, the Federal Reserve, balance sheet which
is scheduled to rise another $3 trillion at minimum.
The point of presenting these statistics is that the
US elites, sooner or later, will introduce a major
austerity program. It will likely come later in 2021.
And it will make little difference whether the
administration that time is headed by Democrats or
Republicans. It will come and it will target social
security, Medicare, Medicaid, Obamacare, education,
housing, transport and other social programs.
The first Great Recession provides a historical
precedent. Obama’s recovery program in January 2009
provided for $787 billion in stimulus. But the joint
Republican-Democrat austerity agreement introduced in
August 2011 took back nearly twice that stimulus, or
$1.5 trillion, in 2011-13. That austerity contributed
significantly to the W-shape recovery from the 2008-09
economic crash and contraction—i.e. the first Great
Recession. With the current deficit surge of $6 trillion
to date, likely to increase to $9 to $10 trillion, the
US economic elites will no doubt pursue a new austerity
regime at some point within the next few years. That
austerity will, like its predecessor, ensure at best a
W-shape recovery typical of Great Recessions. At worst,
it may prove the final event that pushes the US economy
into another Great Depression.
Financial Instability
Those who deny that the US and global economy have
already entered a second Great Recession offer the
argument that the 2008-09 crash and recession was caused
by the banking and financial crash of 2008-09, and
therefore, since there has not yet been a financial
crash, the economy at present is not in another Great
Recession. But they are wrong.
Great Recessions are always associated with a
financial crisis, but that crisis need not precede the
deep contraction of the real, non-financial economy. The
COVID-19 pandemic has played the role of a financial
crash in driving the real economy into a contraction
that is both quantitatively and qualitatively worse than
a ‘normal’ recession. Furthermore, a subsequent banking
system-financial crash is not impossible in the coming
months, although not yet likely in 2020.
The preconditions for a financial crisis are in
development. It won’t be precipitated by a residential
mortgage crisis, as in 2007-08. But there are several
potential candidates for precipitating a financial crash
once again. Here are just a few:
• The commercial property sector in the US is in
deep trouble. Commercial property includes malls,
office buildings, hotels, resorts, factories, and
multiple tenant apartment complexes. Many incurred
deep debt obligations as they expanded after 2010 or
just kept operating by accruing more high cost debt
when they were unprofitable. Today they are unable
to continue servicing (i.e. paying principal and
interest) on their excessive debt load. Many have
begun the process of default and chapter 11
bankruptcy reorganization. Banks and investors hold
much of the commercial property debt that will never
be repaid. Excess derivatives (credit default swaps)
have been written on the debt. A debt crisis and
wave of defaults and bankruptcies in 2020-21 in the
commercial property sector could easily precipitate
a subprime mortgage-like debt crisis as occurred in
2008-09. And derivatives obligations could transmit
the crisis throughout the banking system—as it did
in 2009. Regional and small community banks in the
US are particularly vulnerable.
• The oil and gas fracking industry, where junk
bond and leverage loan debt had already risen to
unstable levels by the advent of the COVID crisis.
The collapse of world oil and gas prices—which began
before the COVID-19 impact and continues—will render
drillers and others unable to generate the income
with which to service their debt. Already more than
200 companies in this sector are in default and
bankruptcy proceedings. Again, regional banks that
financed much of the expansion of fracking in Texas,
the Dakotas, and Pennsylvania will be impacted
severely by the defaults. Their financial
instability could easily spread to other sectors of
banking and finance in the US.
• State and local governments, should Congress
fail to appropriate sufficient bailout funding in
its next round of fiscal spending in July 2020.
State and local governments are capable of default
and bankruptcy—unlike the Federal government, which
is not. The US has a long history of state defaults
associated with the onset of Great Depressions. This
time around, state financial instability will
quickly spill over to public pension funds, and from
public to private pensions, and from there to the
municipal bond markets with which state and local
governments raise revenue by borrowing to fund
deficits.
• Global sovereign debt markets, as previously
noted. Defaults on massive debt accumulated since
2010 by many countries could result in serious
contagion effects on the private banking systems of
the advanced economies, including the US, Europe,
and Japan. Should the IMF fail to contain a chain of
sovereign debt crises that could follow in the wake
of the current Great Recession, a chain reaction of
defaults across emerging market economies in
particular has the potential to precipitate a global
financial crisis.
History shows that financial crises often originate
from unsuspected corners of the economy. The above
candidates are the ‘known unknowns’. There may also lurk
in the bowels of the capitalist global financial system
still more ‘unknown unknowns’—i.e. what are sometimes
called ‘black swan’ events.
Political Instability
The US and other countries are on new ground in terms
of potential political instability. The piecemeal
curtailment of democratic and civil rights has been
progressing at least since the mid- 1990s. In the 21st
century it has been accelerating, both in the US and
across the globe. Recent years have seen a growing
public confrontation between contending wings of the
capitalist elites and their political operatives.
Institutions of even limited capitalist democracy are
under attack and atrophying. And now political
instability is growing as well at both the institutional
and grass roots levels. One should not underestimate the
potential for even more intense political confrontation
among elites, or between segments of the US population
itself, from having a negative impact on the current
economic crisis and 2nd Great Recession. A Trump
‘October Surprise’ or a November 2020 constitutional
crisis are no longer beyond the realm of the possible,
but even likely.
The expectations of both households and business may
serve as transmission mechanisms propagating political
instability into more economic and financial
instability. Political instability has the effect of
freezing up business investment and therefore employment
recovery. It has the further effect of causing
households to hoard what income they have and raise the
savings rate—at the expense of consumption. It also
leads to government inaction on the policy necessary to
provide stimulus for recovery.
On a global front, political instability may even
assume a global dimension. History in general, and US
history in particular, reveals that US presidents seek
to divert public attention from domestic economic and
social problems by provoking foreign wars. Targets for
US attack, in the short term, are Iran and
Venezuela—especially the latter, which is more
susceptible to US military action. But tomorrow, in 2021
and after, it could well be Russia (Ukraine or Baltics
US provocations), North Korea (a US attack on its
nuclear facilities) or China (a US naval confrontation
in the South China sea)—irrespective of the unlikely
success of such ventures.
Like another financial-banking crash, a major
political instability event—domestic or foreign—could
easily send an already weak US economy struggling in the
midst of a Great Recession into the abyss of the first
Great Depression of the 21st century.
Dr. Jack Rasmus, Ph.D Political
Economy, teaches economics at St. Mary’s College in
California. He is the author and producer of the
various nonfiction and fictional workers, including
the books The Scourge of Neoliberalism:
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