The Week That Was and The One That Will Be

Last week was a good week for Democrats. Joe Biden’s wins in key primary states just about put paid to socialist Bernie Sanders’ chances of snagging the party’s presidential nomination and forcing Democrats to march into battle against Donald Trump singing The Internationale, calling for an end to the days when “the rich are free from obligation”. Democrats opted for reform over revolution. And House Speaker Nancy Pelosi put frosting on the Democrats’ cake by seizing the initiative in crafting the first legislative relief measure for victims of the coronavirus.

It was a good week for policy makers who have been warning about the dangers of all-out globalization. The outbreak of the coronavirus will accelerate the deglobalization trend already underway. Shortages of life-saving medicines and disease-preventing medical supplies created by an initially unreported event in China have shown what the regime can do if it chooses to create shortages as a deliberate act of policy, just as OPEC cut off oil supplies to America in 1973-1974 because Arabs were unhappy with US policy in the Middle East. The New York Times reports that Chinese companies supply more than 90% of our antibiotics, vitamin C, ibuprofen and hydrocortisone. The administration now plans to require federal agencies to buy American-made pharmaceuticals and medical gear to increase the incentive of pharmaceutical companies to locate manufacturing facilities here and reduce our dependence on China.

Tariffs will become an increasingly common feature of U.S. trade policy, with the support of both political parties. Multinational companies will think hard before leaving in place supply chains that run through countries incapable of managing events such as the coronavirus. Foreign firms, especially those controlled by hostile governments, will find it more difficult to gain approval for acquisitions of data-laden American companies, obtain visas for their nationals, and retain already-acquired American companies. In short, we will sacrifice some of the presumed efficiencies of freer trade for the safety of increased self-sufficiency. Getting the balance right will be no small task.

It was a good week for American capitalism, or at least could be. The system that has created the greatest wealth the world has ever seen, and removed hundreds of millions or perhaps more than a billion people from poverty (estimates vary), has been under siege as the captains of industry neglected their obligation to perform in a manner that assured the long-term acceptability of the system that was making them rich. The outbreak of the virus just might be changing that.

Walmart, Uber and others have announced they will compensate workers for wages lost if they contract the virus or are subject to quarantine orders, or if they feel uncomfortable reporting to work.

Darden Restaurants, owner of several chains and a long-time opponent of paid sick leave, announced that all hourly workers will henceforth receive sick leave benefits.

CEOs of leading banks assured the President that they are well capitalized and promised to make it easy for small businesses and consumers to obtain credit if regulators take steps to make that possible. Regional banks are also helping. Washington Federal in hard-hit Seattle is devoting $100 million of its capital to five-year loans to companies that have suffered revenue falls of 10% or more due to the virus, with the first 90 days interest free.

CEOs of major pharmaceutical companies promised during an Oval Office meeting with the man who has been their tormentor but now considers their CEOs “geniuses” to develop a coronavirus vaccine and “We will make this drug affordable.”

Unfortunately, one industry with which consumers – who are also voters – have contact is the airline industry. The major carriers have competed in developing run-arounds for travelers seeking refunds or fee-free re-ticketing, documented in a scathing article in that famously anti-business newspaper, The Wall Street Journal. Whether this abuse will result in political resistance to the airline bailout the President is contemplating is uncertain. Billionaire Warren Buffett’s Berkshire Hathaway, which owns substantial stakes in Delta, American, United and Southwest would be a beneficiary of any measures to shore up airline stocks, on which Buffett has reportedly lost $3 billion. Trump, who learned the meaning of the phrase at considerable pain, might demand as a quid pro quo that airlines relax their grip on landing slots to allow new competitors to vie for consumer favor.

It was a bad week for the oil industry. When Vladimir Putin refused to join Opec in cutting back production to boost crude prices, the Saudis reacted by flooding already-oversupplied markets. Prices of crude oil fell in half. Neither Putin nor Mohammed bin Salman is yet prepared to blink, which might make this battle for market share a protracted one as neither has available in this instance the more effective means on which they generally deploy to deal with adversaries. Putin hopes to turn pain for heavily indebted American frackers into price gains for Russian oil. We will soon find out whether the fracking industry can maintain its top rank among the world’s oil producers with crude prices in the $30 range. My guess is that after the most heavily indebted companies go bust and their assets are in financially stronger hands, the fracking industry will keep America in first place in the oil producing game. Meanwhile, consumers will have tens of millions of dollars to spend on other things as gasoline prices sink to $2 per gallon.

It was a bad week for the President. Share prices, the metric on which he relies to measure his performance, went on a wild ride and landed in bear-market territory, some 20% below their February 19 peak, but still higher, by the same 20%, than on the day on which Trump took the oath of office.[1] He who lives by the soaring S&P might die by the sinking S&P come November if voters are focused on the recent price collapse.

Also, the government proved to be completely unprepared for the virus outbreak, in part because the President had gutted the staff of the Centers for Disease Control, an event of which he denied knowledge on Friday. Worse, at one point, an ill-informed or lying Trump announced, “Anybody that wants a test can get a test.”

Enough about the week that was. What about the weeks soon to come? The odds of contracting the coronavirus in America are significant enough to warrant caution, the odds of being very sick are considerably lower, and the odds of dying from the disease lower still for all save the elderly.

No matter. The economy is taking a hit. In the absence of hard data, rely on observation to see if Americans are worried. We are washing our hands repeatedly, slathering on Purell, replacing handshakes and hugs with air kisses, an art long practiced in Hollywood. Business meetings, Broadway shows, and sporting events are cancelled. Airplanes are grounded for lack of passengers. Schools are closed just as working at home becomes more common: expect a spurt in sales of noise-cancelling earphones.

Supplement observation with anecdote. Corporations are withdrawing their earnings predictions as markets price in a 10% profit drop for this year. Layoffs have begun in some industries (travel, restaurants, oil). Restaurants are half empty, foot traffic in stores is down, fewer potential buyers are visiting show homes.

Consumers’ response to the shock will determine the extent and pace of any recovery. Some economists expect consumers to rein in spending until share prices again climb, the so-called negative wealth effect. But New York University economist Edward Wolff reckons that 84% of all stocks owned by Americans are owned by the wealthiest 10% of households. “For the vast majority of Americans, fluctuations in the stock market have little effect on their wealth, or well-being, for that matter.”

Analysts at JPMorgan Chase, who until now were predicting that the U.S. economy would avoid a recession this year, now say its views of the coronavirus outbreak “have evolved dramatically in recent weeks” and that the economy is already in the early days of a recession. The bank is predicting that GDP will shrink by 2% in the first quarter of this year and 3% in the second.

A phase-one policy response was hammered out late last week by Pelosi and Treasury Secretary Steve Mnuchin, and approved by the President. Included are tax credits for small businesses, relaxation of tax filings, paid sick leave, and free virus testing. This demonstration “that we are able to work together to get a job done,” said Pelosi, should be reassuring to the American people. Indeed.

Eventually, the underlying strength of the economy will reassert itself, with the length of “eventually” affected by the magnitude and quality of the policy response. We are experiencing an event-induced economic impact, not suffering from intrinsic weaknesses of the nation’s economic system and financial institutions. Those matters remain to be dealt with when this crisis is over.

[1] On Friday, prices jumped 10%, largely while Trump and health experts were briefing the press and nation on steps taken to contain the virus and develop programs to offset its worst financial effects.