The Normal Economy Is Never Coming BackRoundup
tags: economics, finance, coronavirus, 2008 financial crisis
Adam Tooze is a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter: @adam_tooze
As the coronavirus lockdown began, the first impulse was to search for historical analogies—1914, 1929, 1941? As the weeks have ground on, what has come ever more to the fore is the historical novelty of the shock that we are living through. The economy is currently in something akin to free fall. If it were to continue to contract at its current pace, 12 months from now GDP would be one-third lower than at the beginning of 2020. That is a rate of shrinkage four times faster than during the Great Depression of the 1930s. There has never been a crash landing like this before. There is something new under the sun. And it is horrifying.
As recently as five weeks ago, at the beginning of March, U.S. unemployment was at record lows. By the end of March, it had surged to somewhere around 13 percent. That is the highest number recorded since World War II. We don’t know the precise figure because our system of unemployment registration was not built to track an increase at this speed. On successive Thursdays, the number of those making initial filings for unemployment insurance has surged first to 3.3 million, then 6.6 million, and now by another 6.6 million. At the current rate, as the economist Justin Wolfers pointed out in the New York Times, U.S. unemployment is rising at nearly 0.5 percent per day. It is no longer unimaginable that the overall unemployment rate could reach 30 percent by the summer.
Thursday’s news confirms that the Western economies face a far deeper and more savage economic shock than they have ever previously experienced. Regular business cycles generally start with the more volatile sectors of the economy—real estate and construction, for instance, or heavy engineering that depends on business investment—or sectors that are subject to global competition, such as the motor vehicles industry. In total, those sectors employ less than a quarter of the workforce. The concentrated downturn in those sectors transmits to the rest of the economy as a muffled shock.
The coronavirus lockdown directly affects services—retail, real estate, education, entertainment, restaurants—where 80 percent of Americans work today. Thus the result is immediate and catastrophic. In sectors like retail, which has recently come under fierce pressure from online competition, the temporary lockdown may prove to be terminal. In many cases, the stores that shut down in early March will not reopen. The jobs will be permanently lost. Millions of Americans and their families are facing catastrophe.
The shock is not confined to the United States. Many European economies cushion the effects of a downturn by subsidizing short-time working. This will moderate the surge in unemployment. But the collapse in economic activity cannot be disguised. The north of Italy is not just a luxurious tourist destination. It accounts for 50 percent of Italian GDP. Germany’s GDP is predicted to fall by more than that of the United States, dragged down by its dependence on exports. The latest set of forecasts from the Organization for Economic Cooperation and Development are apocalyptic across the board. Hardest hit of all may be Japan, even though the virus has had a moderate impact there.