Let’s jump to the end of economist Eugene Steuerle’s Washington Post op-ed on how our present fiscal situation is different from that at the end of World War II:

Budgetary shortfalls are good in bad times, bad in good times — and horrible when scheduled regardless of the times.

while I didn’t know whether to laugh or cry at his prescription:

To make room for tomorrow’s needs, Republicans need to agree that tax rates must be set high enough to cover spending in good times, while Democrats must agree to schedule significantly less automatic future growth in spending. That leaves to future Congresses both sustainable budgets and enough slack to address future problems, whether another pandemic, recession or war, or how our spending and tax policies have largely abandoned low- and moderate-income working families — the ones suffering the most economically in the current crisis.

At present the only thing that Republicans actually agree on is that federal tax rates should be cut while Democrats generally think that automatic future growth in federal spending constitutes an advance over enacting ad hoc budgets year after year. Can we agree that neither party will abandon its own self-identity in the interest of fiscal prudence?

As for those who think that we can continue to extend ourselves credit indefinitely and spend it on whatever we care to without adverse consequences, I have several points to make. First, that might actually be true if aggregate product were growing faster. But it isn’t and I don’t believe that without specific, focused attention it will.

Second, to quote Paul Krugman’s terse response to Modern Monetary Theory it just doesn’t work that way.

Finally, you simply cannot consider yourself to be forming your views based on science or data and believe that. The best knowledge we have now tells us that economic growth slows at higher levels of public debt. The present level of debt is going to be a headwind to growth forever.

In a Washington Post op-ed former Chicago Mayor Rahm Emanuel offers some advice to Democrats which I wonder if they’ll be willing to take:

Trump wants to color this moment as one in which he is leading America forward and Democrats are dragging their feet. It is a narrative that falls nicely into his grievance-driven worldview. Each time we resist his efforts to reopen the economy, we come off as that much more effete and out of touch. He’s setting a trap for us.

And in politics, you can’t beat something with nothing. Rather than centering our agenda on resistance to the reopening he intends to trumpet, Democrats should respond by explaining how we intend to rebuild America.

To be clear, the issue here isn’t policy — or even economics. It’s culture. Democrats are so aligned with data, science and logic that we’ve lost sight of why so much of the country is skeptical of expertise. It was the elites who claimed we’d be welcomed as liberators to Iraq, where we would find weapons of mass destruction. It was the elites who talked up collateralized mortgages, and then bailed out Wall Street while Main Street suffered. In too many cases, the elites have gotten the big ones wrong and never paid any price.

Let me interrupt him. Are the Democrats really the party of “data, science and logic” or are they the party of credentialism? Scientists have preferences, agendas, and political preferences, too. Not every policy recommended by an expert reflects data, science, or logic but it’s a rare expert who will recommend a policy with which he or she disagrees ideologically.

He continues:

What if, rather than sparring with Trump, Democrats presented a comprehensive plan to rebuild our roads, bridges, dams, school, hospitals and more — so we emerge from this crisis with a more vibrant economy? We will need millions of additional coders, cybersecurity analysts, nurses, construction workers, teachers, aides and more in the decades to come. How about offering these workers this bargain: As their hunt for work continues, Washington will give them another bonus if they pursue an online degree in coding, advanced manufacturing or nursing assistance, among other areas. We can turn crisis into opportunity, transforming our workforce into an army of American rebirth.

which completely confirms the point I made above. His answer is to seek credentials. That those credentials won’t be of much use when everyone in the world with a PC, an Internet connection, and a credential is competition for “coders” and willing to work for $5/hour. Or that there are, literally, millions of Mexican and Central American workers who would be delighted to take jobs as construction workers in the U. S. Or that Filipino nurses can be brought into this country and will work for less. Or that at least hereabouts there’s already a waiting list to get a job as a public school teacher and that by and large teachers’ aides are the next thing to volunteers—their pay is a pittance and, frequently, they aren’t even eligible for benefits. More than one qualified teacher is working as a teacher’s aide, not even able to pay off his or her educational debt.

And will Democrats take his advice? Will they take the risk of emerging from lockdown? And will they be willing to shelve “Green New Deal”-type plans in favor of producing and building more in the United States?

V? L? W? What form will economic recovery take? At FiveThirtyEight they polled macroeconomic researchers on the question and here’s what they learned:

Overall, the researchers predicted that although the economy will probably start to improve in the second half of this year, there won’t be a quick rally from this recession. “The panelists believe, on the whole, that the recovery from this crisis is going to be a very, very lengthy process,” Timmermann said. “We’re going to be seeing serious effects for years and years.”

Our sample of economists thought it was more likely than not — with an average probability of 54 percent — that the next quarter to see positive real GDP growth in the U.S. (relative to the previous quarter) would be the third quarter of 2020. But that’s probably a low bar to clear; the economy shrunk by 4.8 percent in the first quarter and is likely to contract even more in the second quarter. And there’s a significant chance that the contractions could continue further into the future: The forecasters we polled thought there was a 23 percent chance that the economy would not grow again until the fourth quarter of 2020 and a 22 percent chance that it wouldn’t grow until the first quarter of 2021 or later.

“The economy almost has to grow [in the third quarter] because we’ll be starting from such a low base,” Wright said. “Unless, of course, things seem to be looking good right now and then in July or August there’s another wave and we go straight back to lockdown. Then you could have another negative quarter.”

Another way to think about the recovery process is by considering the shape of the recession. We presented the economists with four specific options of how the trajectory of GDP might look as charted over 2020 and beyond: V-shaped, with a sharp fall and a sharp rebound; U-shaped, with a long period between the beginning of the recession and the recovery; W-shaped, with a sharp recovery followed by another sharp fall and recovery; or “Swoosh”-shaped, with a sharp decline followed by a very slow recovery (picture the Nike logo). More than half of respondents — 58 percent — thought the long, slow recovery of a “Swoosh” shape was most likely, with 19 percent predicting a U-shape and 13 percent calling for a W-shape with multiple declines and recoveries. Tellingly, only 1 out of 31 economists forecasted a V-shape, which would see a quick recovery after the sharp decline of the past few months.

In some ways that’s a nightmare scenario for Democrats. Should the economy grow sharply in the third quarter of 2020, President Trump may be able to claim, truthfully, that his administration saw the fastest recorded growth ever. Being tagged as the lockdown party is risky. More on that in the next post.

Whatever the shape of the recovery, don’t expect things to get back to normal. Ever. The analogy I have been making is to driving into a tunnel. Right now we’re in the tunnel. When we emerge the landscape won’t be the same as it was on the other side of the tunnel. Additionally, there will be three very different styles or modes of business strategy: in the tunnel, exiting the tunnel, and outside the tunnel. Some, maybe even many businesses will never leave the tunnel.

The Centers for Disease Control (CDC) have issued new guidance on serological testing and it’s pretty disappointing. CNN reports:

(CNN)Antibody tests used to determine if people have been infected in the past with Covid-19 might be wrong up to half the time, the US Centers for Disease Control and Prevention said in new guidance posted on its website.

Antibody tests, often called serologic tests, look for evidence of an immune response to infection. “Antibodies in some persons can be detected within the first week of illness onset,” the CDC says.

They are not accurate enough to use to make important policy decisions, the CDC said.

“Serologic test results should not be used to make decisions about grouping persons residing in or being admitted to congregate settings, such as schools, dormitories, or correctional facilities,” the CDC says.

“Serologic test results should not be used to make decisions about returning persons to the workplace.”

I guess that in the final analysis what that tells us is that the point I have been making all along is the one that will guide us. Reopening will depend more on recalibrating how risk is assessed rather than on testing.

BTW, take the observation about retesting with a grain of salt. When a test provides incorrect results half the time, a retest won’t necessarily give you a correct result. You should be able to convince yourself of that by flipping a coin.

You might find this article from Lisa Du and Grace Huang at Bloomberg as interesting as I did. The article considers how Japan managed to avoid a bloodbath from COVID-19 without mass testing or a lockdown. The answer is that nobody knows:

Analyzing just how Japan defied the odds and contained the virus while disregarding the playbook used by other successful countries has become a national conversation. Only one thing is agreed upon: that there was no silver bullet, no one factor that made the difference.

“Just by looking at death numbers, you can say Japan was successful,” said Mikihito Tanaka, a professor at Waseda University specializing in science communication, and a member of a public advisory group of experts on the virus. “But even experts don’t know the reason.”

One widely shared list assembled 43 possible reasons cited in media reports, ranging from a culture of mask-wearing and a famously low obesity rate to the relatively early decision to close schools. Among the more fanciful suggestions include a claim Japanese speakers emit fewer potentially virus-laden droplets when talking compared to other languages.

Experts consulted by Bloomberg News also suggested a myriad of factors that contributed to the outcome, and none could point to a singular policy package that could be replicated in other countries.

There also was no national plan.

My guess is that it was due to some combination of a less contagious, less lethal variant of the virus making its way to Japan, cultural cleanliness and social distancing, and pre-existing antibodies to SARS-CoV.

I thought you might find the graph above, from the web site of the St. Louis Federal Reserve, informative in evaluating my concerns about private domestic business investment. I wish it were a bit more long-term—2011 is as far back as the series goes.

In your consideration you should also take into account that something between half and three quarters of the investment is in financial instruments. Only a minority of business capital investment these days is in actual productive capacity.

In his most recent Wall Street Journal column Walter Russell Mead warns about alienating our allies:

A normal president would be crushed under the burden; Donald Trump is still tweeting and playing golf. To some degree, the crisis enveloping the country and his presidency is his natural milieu. Theatricality has always been central to Mr. Trump’s political method. As an insurgent populist candidate, and as an incumbent who nevertheless wants to run as an outsider fighting an entrenched system, he thrives on conflict and drama.

Yet even for Mr. Trump there can be too much of a good thing. The cascading crises ricocheting across the world threaten to become so acute and so overwhelming that they upstage him. Manageable crises can make a president look big; unmanageable ones can make him look small. For Mr. Trump, looking small would be fatal.

At home, the response to the pandemic, for better or for worse, seems increasingly independent of the briefings and tweets that come from the White House. In foreign affairs, other countries seem to be paying less attention to Mr. Trump these days. An oil tanker from Iran, sent in defiance of administration warnings, docked umolested in Venezuela. North Korea is making noises about doubling down on its nuclear program. China has defied Western pressure over Hong Kong, intensified its global propaganda campaign, and ratcheted up its military pressure on the Indian border.

The international crises come at a time when Secretary of State Mike Pompeo is contending with a congressional investigation of his role in the president’s decision to fire the department’s inspector general. The building is in revolt and the press hounds are baying on his trail, yet Mr. Pompeo’s biggest problem isn’t a stream of news stories that will likely get little attention beyond the Beltway. His biggest problem is the narrowing path for American diplomacy abroad.

Mr. Trump’s first wave of top national-security aides saw their task as trying to impose a conventional foreign policy on an unconventional president. Sometime during his first 18 months in office, the president decided that he no longer needed tutelage and looked for people who would implement his policy wishes, however unconventional. Mr. Pompeo, among others, took up this task, hoping to develop a policy framework around the president’s intuitions that would work both in the Oval Office and in the wider world. This isn’t an easy thing to do, as Mr. Trump’s instincts often work at cross-purposes.

Take China policy. Mr. Trump clearly believes that economic power is the key to national strength and that enhancing America’s economic vitality is necessary to maintain the country’s position in years to come. He also believes that under its current leadership China is a threat to American security and world peace. But Mr. Trump and his aides alike struggle to create a coherent policy around these ideas, in large part because the economic strategy and the China strategy, while they overlap in places, don’t ultimately mesh.

For Mr. Trump, restoring American economic strength involves fighting what he sees as a profoundly unfair global trading system and the major abuses of that system both by adversaries like China and friends like Germany, India, South Korea and Japan. Mr. Trump’s security concerns about China highlight a need for deeper relations with key allies, but his concerns about the foundations of American power lead to bitter quarrels with those allies he needs the most.

What allies? The United States has no allies. We have clients and we have trading partners, generally vendors since we import so much more than we export.

In the last century we fought two wars with Germany and one with Japan. Since those two wars Germany has ruthlessly pursued its own interests, frequently to the detriment of ours. This time around it has been using industrial might rather than military force and it has worked out better for them. But allies? Far from it. An ally would not allow its military to deteriorate as Germany’s has, it would not be supplying “dual use” technology to Iran, and it would not be cozying up to Russia. Germany’s status is better characterized as “belligerent, non-combatant”.

There are similar stories for each of the other countries he mentions.

Like it or not we’re on our own and whatever support we receive from other countries is completely contingent on military and economic might. Failure to understand that is a major deficiency.

I say all of this without defending President Trump’s ham-handed approach to foreign policy. That’s the conundrum I face. I don’t like Trump but I wouldn’t like doing the opposite of what Trump has been doing, either. As a country we need to import less and produce more of what we consume. If that requires levying tariffs against goods from China, so be it. Could what is necessary be done more gracefully than President Trump has? I like to think so. Would President Biden do what is necessary?

I thought I should bring this snippet of information, hidden in a Wall Street Journal editorial, to your attention:

A McKinsey analysis last week estimated that 40% of workers in Los Angeles and 36% in San Francisco will lose jobs or income during the pandemic. The Southern California Association of Governments predicted the “pandemic’s economic impacts [on the region] will be severe and long lasting.” Unemployment in Southern California will average 12.2% in 2021, the outfit forecast, and sales will decline between 53% and 65% at restaurants over the next two years.

It could be worse in New York City since 15% of Manhattan residents have left, according to cell-phone data analyses. Not all will return once businesses are allowed to reopen, and some finance and tech companies say they will let more employees work remotely. New York landlords say many tenants aren’t paying rent, and they have to make mortgage and tax payments. New York City (3.9%) and Chicago (3.8%) have the nation’s highest effective commercial property tax rates after Detroit (4.2%).

Eventually there will likely be business foreclosures, evictions and bankruptcies, which will reduce property values and in turn government tax revenue. California, New York, Illinois and New Jersey make up 30% of the national economy, so their business carnage will affect farmers, meat processors, truckers, manufacturers and suppliers nationwide.

Maybe not anymore. The emphasis above is mine. 15% of the population is a quarter million people. I wonder how much total income those people represent?

I don’t know what the situation in Los Angeles is but hereabouts I have seen quite a few “For Sale” signs going up, moving vans moving households out, but no moving vans moving households in.

When the big cities raise their heads in a week, a month, or three months, what will they see? Let me remind you that this there’s a decennial census being conducted, too.

Economist Kevin Warsh takes to the pages of the Wall Street Journal with an op-ed that underscores points I have been emphasizing for months now:

The current economic crisis is principally a supply-side shock to businesses on Main Street. Because of the pandemic and lockdown, workers have been forcibly distanced from their jobs, and new capital has been scared to the sidelines. Service businesses—representing the bulk of the U.S. economy—are at risk of becoming the greatest casualties.

There are downstream effects from the supply shock on aggregate demand, including weak consumer spending, and from the Main Street carnage on listed securities on Wall Street. The bulk of the government’s largesse to date has been devoted downstream. To right the balance—and avoid a slower, weaker recovery—policy makers should direct their attention upstream, to the supply side of the economy and Main Street.

He has three warnings. First, when you’re in a hole stop digging:

First, Congress is understandably tempted to try to re-create the status quo ante. The pandemic wasn’t the fault of our citizens, so shouldn’t government simply and fully replenish the coffers of those harmed, as if the crisis never happened?

That isn’t feasible. The depth and duration of the recession are unknown. Businesses and households can’t be made whole when the economic hole is still deepening. And it is impossible to know what would have happened absent the pandemic. A prosperous future is possible only if capital and labor move with due speed to the business models and jobs of the postpandemic era. American-style dynamism isn’t an obstacle to recovery; it’s the essential element.

The U.S. economy isn’t a pop-up store. It’s a complex organism built on relationships—between supplier and business, employee and employer, customer and company. Relationship capital is the most precious and, at present, the most precarious. As the economy reopens, the after-tax rewards for work and new capital investment should increase. Otherwise, relationships will atrophy and the economy will suffer.

And in this war there have been war profiteers—retailers and 3PLs that have continued operations through the lockdowns unencumbered. They should not remain ignored. Second, vultures always gather around carcasses:

Second, when the government puts out a shingle offering money, the line tends to get long and the opportunity for mischief multiplies. The Treasury and Fed are working in a difficult environment to support businesses affected by the pandemic. They should resist the temptation to play favorites. Bailouts don’t age well, especially when they are bespoke.

The ink of the Cares Act was barely dry before the recriminations against disfavored beneficiaries began. Liquidity for all solvent comers—without fear or favor, without strings or restrictions—should be the guiding ethos. We should trust the good sense of businesses and households to know what to do with the money.

We should not be surprised that when money is thrown from a helicopter that there are those with gathering nets waiting below and, by and large, they aren’t the most needy or deserving of help. And third, there ain’t no such thing as a free lunch:

Third, there are limits to government spending. (Humor me.) The debt markets may seem to have infinite capacity to fund Washington’s fiscal profligacy. But it’s an inopportune time to bet on the perpetual kindness of strangers. Economists didn’t forecast the striking fall in real and nominal interest rates over the past 30 years. Nor is there accord on what would change the direction. The pandemic should remind us of tail risks, including sovereign risk.

The design of Washington’s pandemic response is far more important than its size. The strength of the postpandemic recovery is not chiefly about the magnitude of new government spending. The preoccupation with managing aggregate demand is misplaced, especially in this crisis.

That last is a shot across the bow of the Modern Monetary Theorists who no doubt believe that this is their moment. Sadly, I’m confident that Congress is eager to apply their demand side playbook to the present downturn which is quite different from the sort about which John Maynard Keynes wrote.