The Congressional Budget Office on Tuesday released its economic projections for the remainder of 2020 and for 2021. “CBO estimates that real (inflation-adjusted) gross domestic product (GDP) will contract by 11 percent in the second quarter of this year, which is equivalent to a decline of 38 percent at an annual rate. In the second quarter, the number of people employed will be almost 26 million lower than the number in the fourth quarter of 2019.”

It might be worse than that, of course. The CBO assumed that social distancing measures (e.g., stay-at-home orders, shutting down nonessential businesses) peaked in April. “The agency expects that, from that peak, social distancing will drop by roughly two-thirds during the second half of this year and diminish further, but by smaller amounts, through the third quarter of 2021,” the report states. “That decline is in the middle of the distribution of possible outcomes, in the CBO’s assessment, and allows for regional and seasonal variation.” However, if we get a second waveof covid-19 infections, those social distancing measures will go right back to where we were in April. In short, the CBO’s is making an informed economic decision based on the supposition we will not have to close down again, a questionable premise considering the experience in China and some European countries.

Even in the best-case scenario, when stay-at-home orders are relaxed, improvement in the labor market “will not be large enough to make up for earlier losses. Compared with their values two years earlier, by the fourth quarter of 2021 real GDP is projected to be 1.6 percent lower, the unemployment rate 5.1 percentage points higher, and the employment-to-population ratio 4.8 percentage points lower.” And, of course, should the Republican-held Senate refuse to enact more fiscal stimulus, the economy could sink further and the recession could last longer, according to Federal Reserve Board Chair Jerome H. Powell.

A significant part of the economic collapse was the plunge in consumer spending. (“Most states ordered businesses to close and people to stay home during the last two weeks of March, which greatly curtailed consumer spending. . . . Spending may have been down by almost 28 percent as a result of the pandemic; spending on accommodations and restaurants declined by 60 percent to 80 percent; and spending for some goods (such as clothing) dropped by similar amounts.” Even after stay-at-home orders are lifted, unemployed Americans will have less to spend and others may not feel safe returning to stores, entertainment venues, restaurants and bars. To be candid, until there is a cure or a vaccine, do not expect that we will get back to a healthy economy soon.

Given the dismal figures, the aversion from the administration and Senate Republicans to new stimulus seems extremely ill-advised. Democrats prodded Powell and Treasury Secretary Steven Mnuchin in a hearing on the pandemic’s economic meltdown to get behind a stimulus, but Republicans seem unmoved. Sen. Ben Sasse (R-Neb.) fussed that the Fed would be buying up defunct malls. Powell retorted: "I think the credit risk is minimal to us.” The danger he kept reminding the senators is that we are doing too little, not spending and lending too much.

Powell reiterated his view that Congress may have to authorize additional spending to prevent long-term damage to the economy. "What Congress has done to date has been remarkably timely and forceful," Powell said.
“I do think we need to take a step back and ask, over time, ‘Is it enough?’ And we need to be prepared to act further. And I would say we are if the need is there,” Powell added.

Mnuchin, following the lead of Trump and other Republicans, seemed less enamored of passing new legislation.

Democrats such as Sen. Elizabeth Warren (D-Mass.) are rightly perturbed that loans are going to big businesses and the well-connected without sufficient guarantees to keep workers employed. Equally distressing is how little of the original stimulus money has been disbursed.

Trump, rather than be concerned with executing the laws Congress passed and encouraging more fiscal action, is caught up in conspiracy theories, sneering at “blue state bailouts” and pushing crank remedies. As bad as the CBO’s projections were, they might have been duly optimistic.

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