When the stock market crashed in 1929, the Dow plummeted from its September peak of 381.17 to a low of 41.22 in July 1932. Because so few Americans owned stocks, it took three years for the financial collapse to cycle though the rest of the economy. Unemployment only gradually increased, to a peak of about 25 percent in early 1933. Gross domestic product fell steadily, ultimately declining by about 30 percent.
The economic crash caused by the coronavirus, if anything, will be sharper and steeper. If we set out to deliberately destroy an economy, requesting most people to stay home is a very effective way. The virus itself is disrupting production, but the necessary public health response to the virus is economically catastrophic — and if government doesn’t act massively to offset the damage, the collapse will worsen.
As airlines, hotels, restaurants, theaters, auto production lines and much of retail shut down while people self-quarantine, there will be enormous layoffs. Households reduce their purchases to bare necessities, causing more shutdowns and more job losses. A ravaged stock market adds to the downdraft.
The financial crash of 1929 turned into a decade-long depression because government was too slow and too timid to counteract the broader impact. Will we repeat that epic mistake?
Treasury Secretary Steven Mnuchin told the Senate Republican caucus that unemployment could soon rise to 20 percent, and that could be optimistic. Goldman Sachs projects that G.D.P. could decline by 24 percent in the second quarter of 2020, an unprecedented drop for a single quarter. Even the trillion-dollar stimulus package proposed by the Trump administration, as embellished by Democrats, will be woefully insufficient. Giving everyone $1,000, even $2,000, will help. But that’s about three weeks’ pay. Paid medical leave, extended unemployment benefits, investment in needed medical equipment, aid for devastated industries like the airlines and small businesses, as well as deferrals on tax and debt payments, are all minimally necessary. So are the Federal Reserve’s rate cuts and gigantic purchases of bonds to keep financial markets solvent.
But none of these measures is remotely sufficient, given the scale and rate of likely economic collapse. We could easily see G.D.P. decline by Great Depression levels, and at a much more rapid rate than in the early 1930s. And the lessons we need to take are not from the 1930s, but from the 1940s.
Even after eight years of the New Deal, the economy was still not out of depression by 1940, as critics of Roosevelt never tire of pointing out. Unemployment was still over 14 percent when World War II broke out.
It was the war, and the astonishing mobilization for war, that finally cured the Great Depression. During each of the four war years, the government borrowed an average of more than 20 percent of G.D.P. for the war effort, and at its peak spent more than 35 percent of G.D.P. on the war, raising the difference from taxation. As a byproduct, America rebuilt production capacity, went on an invention spree and modernized its economy. We lived off that investment for much of the postwar boom.
After Pearl Harbor, in the first six months of 1942, the Department of War entered about $100 billion of military production contracts — more than the entire G.D.P. of 1939. As half-idle factories roared back to full production, retooling from autos to tanks and planes, unemployment melted to under 2 percent by 1943.
Direct public spending is more effective than other forms of fiscal relief because every nickel gets spent and jobs are created directly. What is today’s equivalent of the World War II buildup, minus the war?
First, we need huge investment in hospitals and medical supplies. We need to reclaim supply chains for products like N-95 masks and ventilators that have been moved abroad. Government has the authority in an emergency to produce these needed materials itself if contractors can’t be found. In World War II, the Reconstruction Finance Corporation underwrote more than $20 billion in war production plants. Some of these were called GOCOs, for government-owned, contractor-operated. Upgrading our capacity to deal with the public health crisis could be phase one of the plan.
Second, according to the American Society of Civil Engineers, the United States will need $4.5 trillion for deferred maintenance of basic public infrastructure by 2025 — roads, bridges, water and sewer systems, power grids, rail lines, tunnels and public buildings. Take the train from New York to Washington and you will see a living museum of 19th century infrastructure.
Modernizing some of this will take advance planning, but there are trillions of dollars in projects that state and local government could begin this year or next. All that’s missing is the federal money. These projects will of course take trained workers, and a big part of the World War II model was investment in worker skills.
Third is the need for massive investment to slow down global climate change and prepare for expected storm surges and coastal flooding. We need to replace carbon-based energy sources with clean and renewable ones. We need to upgrade commercial buildings and homes to make them far more energy efficient.
“Smart” power grids can save costs and make the economy more resilient to climate change. We will need to spend a lot of money on flood barriers. With fossil fuel companies devastated by crashing prices and the toll on fracking and shale, this is a particularly good time to invest in green energy alternatives. If government is going to spend huge sums to keep the economy afloat, we should get something tangible beyond mere survival.
Even with the strategy of social distancing to slow down the spread of the virus, there are still plenty of essential workers on the job — police and fire, first responders, people who keep gas, electric, phone, cable and water systems running. They could be joined by work crews on public infrastructure projects. Ironically, many construction projects have been shut down — partly because construction workers use the same N-95 masks that have been rationed for health professionals.
The need for a Green New Deal can rendezvous with the imperative of anti-depression public investment. Much of this sweeping proposal is on the drawing boards and has not been done for lack of funding. Some of it will take some advance planning. The time to start is now.
All of this will add up to several trillion dollars. But do the arithmetic. Total output in 2019 was about $21.4 trillion. If G.D.P. falls by 20 percent — less than the 30 percent that it fell between 1929 and 1933 — that’s an annual loss of over $4 trillion of economic activity. This time, with government deliberately shutting down commerce, it could well fall faster. Only a World War II-scale response can make up that difference.
Where will government get the money? At a time when inflation is close to zero and the government can borrow for 30 years at less than 2 percent, this is precisely the moment to borrow to underwrite a recovery that also modernizes the economy.
The worst thing Congress and the Trump administration could do would be to chase a collapsing economy downward, with aid packages that are too modest at each step of the way, as Herbert Hoover did. We need to get ahead of this collapse now, and we have a superb model in the World War II mobilization.
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