I think that the gravest problem with this Wall Street Journal editorial:
The market has figured out that American commerce is shutting down right before our eyes with no end in sight. Hotels are at 10% occupancy, airline flights are two-thirds-empty except for college kids on spring break who think they’ll live forever. U.S. car makers suspended production Wednesday to reduce danger to their workforce and because people don’t buy cars when they’re at home.
This national economic shutdown is accelerating by the day, and second quarter GDP could fall by 10% or more. For comparison, the worst single quarter during the financial panic was minus-8.4% at the end of 2008. Mass layoffs could begin soon in the hardest hit parts of the economy, spreading and growing if there’s no sign of recovery.
The market has also figured out that Washington is even more panicked than the markets and is throwing money at the wrong problem in the wrong way. The Fed is deploying its 2008 tools to ease constraints in money markets, and that’s useful for the economy’s financial plumbing and banks. The commercial paper facility is good for the biggest companies. But this doesn’t address the dramatic and immediate need for liquidity—financing, i.e., loans—across the breadth of American business to survive this unprecedented economic shutdown.
is that they, too, are trying to solve the wrong problem. We are presently enormously over-invested in banks and other financial institutions, airlines (particularly international flights), the hospitality industry, interstate highways, higher education, and, dare I say it, health care. We are tremendously under-invested in primary and secondary production.
We will inevitably increase our national investment in health care during a health care crisis. But pouring money into banks and airlines will mean that you have richer bankers and airline executives rather than more solvent banks and more profitable airlines. That the CEO of General Motors has pledged to use idled GM plants to manufacture ventilators tells you one thing without a shadow of doubt: there are idled General Motors plants.
We should also avoid pouring money into bureaucracy-laden dinosaurs like General Motors. We need to be able to respond in an agile fashion to changing circumstances and that means less centralized responses and more smaller companies.
The COVID-19 outbreak will undoubtedly be studied in public policy and B-schools for decades to come. I wonder what they’ll determine has caused empty shelves in retail stores? What will they decide the relative roles of panic-buying by consumers, market consolidation, issues inherent in just-in-time inventory practices, and just plain delays in moving product from where it is to where it’s needed might be? I doubt they will decide the problem is a lack of liquidity.
Our leaders are sending out the message to not panic, but their actions belie their words. Looks like they’re going to throw 2 or 3 $Trillion at it , adjourn, and head for their boltholes.