Commentary / World

The Cape Cod theory of pandemic response

by Peter R. Orszag

Bloomberg

The economic impact from the new coronavirus pandemic can be thought of in two different ways — with drastically different implications for the next several months. The first, articulated by a friend and former colleague, suggests it’s like Cape Cod during the winter: The economy goes into a deep freeze, but then reopens the next summer. This view suggests there will be little lasting damage, and it’s possible to return to the way things were with minimal long-term adjustment.

The second perspective is that the pandemic is more like Cape Cod during a summer with a sudden series of shark attacks. As during the winter, economic activity plummets. But this stoppage was unexpected. And unlike during winter at the beach, it’s not clear when it will be safe to return. There may be false starts in which it appears the water is shark-free but the risk returns. Under this view, the economy probably suffers longer-lasting damage because of the direct and indirect effects of the lingering uncertainty and fear.

Very roughly speaking, the Trump administration and the stock market prior to Thursday have seemed to embrace the Cape Cod-in-winter story. The May jobs report bolstered this view, as did the retail sales figures for the month. On the other hand, Federal Reserve Chairman Jerome Powell and the stock market on Thursday seemed to lean more toward the shark-attack narrative.

So which one is it? The May jobs report was not the signal of economic strength it might have appeared to be. The rising COVID-19 caseloads in Arizona, Texas, Florida and many other states also tilt strongly in shark-attack direction.

The key variable distinguishing the two scenarios is how consumers respond: Do people feel it is safe to return to previous activities, whatever the government does or doesn’t mandate? Despite the strong retail sales numbers for May, I suspect the answer is that, unless the virus mutates toward a less lethal form, or a vaccine or effective antiviral or therapeutic drug arrives sooner than we expect, consumers will remain hesitant to return to their old activities, whether the government imposes more social distancing. This is why solving the economic crisis has to start with solving the public-health one.

In other words, count me in the shark-attack camp: You have to get rid of the sharks to bring back the vacation rentals. The consequences are far-reaching.

In the shark-attack world, we face the same two unappealing alternatives we’ve encountered since the pandemic hit: Tolerate cascading bankruptcies for both companies and individuals, or continue to socialize the costs of the shock by providing ongoing rounds of massive fiscal assistance.

In this Hobson’s choice, the first option is not workable. It would involve economic damage with lasting problems for years to come, as unemployment remains high and firms close. To be sure, this approach would speed the adjustment to the new businesses that will crop up after the pandemic ends, but at the cost of inordinate economic pain for an extended period as the aftershocks of elevated unemployment and bankruptcies ricochet throughout the economy.

We are thus left with the necessity of additional fiscal support for the economy. Indeed, one interpretation of the news that the administration of President Donald Trump is now favoring substantial additional fiscal stimulus is that it is coming around to the view that we’re not in a simple freeze-and-thaw world. But as the backlash against the CARES Act builds, concerns (legitimate or not) increase about rising public debt, and any temporary political truce fades back into hyper-polarization, it will prove increasingly difficult to enact sufficient additional stimulus.

Assuming we meet this challenge and cushion the blow with more fiscal support, the question must shift to the end game. Will we continue to socialize the costs of the dislocation without end until the pandemic ceases? And if we’re going to spend trillions of dollars, how can we try to invest in the future economy rather than prop up the past?

The vain hope that the economy is merely a beach in winter causes us to slide into these monumental decisions. Instead, we should recognize the de-thawing story for the mirage it is, and begin to debate the least unappealing paths forward.

Peter R. Orszag is a Bloomberg Opinion columnist. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.

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