Thursday, April 23, 2020

The Pandemic Normal: Whither Income Flows? — Brian Romanchuk

I see very few reasons to expect a return to pre-COVID normal in most countries any time soon. Countries will need to adapt to the "pandemic normal," where activities will have to in line with preventing super-spreading incidents. Right now, the economic concern is cascading business/household failures. Fiscal deficits will put a floor under that process. What will the new steady state look like? The main interesting question is how income flows are re-shaped....
I have a couple of observations.

1. What about debt-servicing? When the majority leader of the Senate talks about US states filing for bankruptcy instead of being bailed out by the federal government, one wonders.
2. We know from the Great Depression that the elite pressured FDR to tighten the fiscal stance, which he did prematurely, short-circuiting the recovery. The recovery did not take place owing to "Keynesianism." It resulted from the massive deficit spending to fund WWII, which no patriotic person would question as necessary. We we facing anything similar?

Bond Economics


Joe said...

"I do not expect any immediate attempts to impose austerity policies. The only parties gullible enough to actually believe stories about fiscal sustainability -- e.g., the Democratic Party of the U.S., the Labour Party of the U.K. -- are not in power. "

Yup, just like I said the other day, the only hope of recovery is for the big deficit party to stay in power, unfortunately.

Is there any hope that wages won't get slashed? We saw wage freezes and cuts in 2009. The upward pressure we were seeing is certainly over. That'll act as a headwind.

Matt Franko said...

"We know from the Great Depression that the elite pressured FDR to tighten the fiscal stance, which he did prematurely, short-circuiting the recovery."

I would bet that every year during the 30s that Federal spending increased...

Joe said...
actually doesn't appear to by the case.

1930 ($1) ($1) (0.8%) Smoot-Hawley
1931 $0 $1 0.6% Dust Bowl
1932 $3 $3 4.5% Hoover tax hike
1933 $3 $3 4.5% FDR New Deal
1934 $4 $5 5.4% GDP up 10.8%, debt also rose
1935 $3 $2 3.8% Social Security
1936 $4 $5 5.1% Tax hikes
1937 $2 $3 2.4% Depression returned, third New Deal
1938 $0 $1 0.1% Dust Bowl ended
1939 $3 $3 3.0% Depression ended

Matt Franko said...

Joe that's the deficit I said spending... the deficit is savings...

I wouldnt be surprised if savings decreased during the 30's...

Joe said...

I think these are the right numbers now, from Table 1.1—Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789–2025

Receipts Outlays Surplus/Deficit (in millions)
1930 4,058 3,320 738
1931 3,116 3,577 -462
1932 1,924 4,659 -2,735
1933 1,997 4,598 -2,602
1934 2,955 6,541 -3,586
1935 3,609 6,412 -2,803
1936 3,923 8,228 -4,304
1937 5,387 7,580 -2,193
1938 6,751 6,840 -89
1939 6,295 9,141 -2,846
1940 6,548 9,468 -2,920

Years 37 and 38 were particularly rough years.