Monday, April 13, 2020

The economy

V shape L shape or U shape? How far are we from financial collapse?

17 million people have filed for unemployment. In the first three weeks of the shutdown alone! The current rate 6 million per week. This is an astonishing number. The US labor force is about 165 million. One in 10 are out of a job in three weeks. 

In one sense this may not be as bad as it seems. I hear more and more anecdotes that companies and workers are reacting to the huge expansion of unemployment insurance (including self-employed and gig workers) by firing, laying off, furloughing workers that retain an attachment to the firm, and both sides are ready to get back to the same job quickly. So "unemployed" means "not working" and "we'll take the Federal government up on the offer to pay wages for a while."

This is arguably preferable to companies borrowing borrow money to pay the workers, which might have to be repaid, and has advantages over the European system in which the government pays companies to pay people who cannot work.

(In some cases, employees even keep health insurance. Bernie Sanders is right that the virus "has exposed for all to see how absurd our current employer-based health insurance system is." He is wrong that the only alternative is government-provided health. Individual, portable, guaranteed-renewable health insurance sticks with you if you lose your job, just like car and home insurance.)

In another sense, though, it is horrific news -- it means that already the employers of 1 in 10 people in the US labor force are shutting down completely. Those employers may not be around if the virus lasts very long.

Update: Olivier Coibion, Yuriy Gorodnichenko, and  Michael Weber look more closely at the numbers, with really depressing results:
Job loss has been significantly larger than implied by new unemployment claims: we estimate 20 million lost jobs by April 8, far more than jobs lost over the entire Great Recession. Second, many of those losing jobs are not actively looking to find new ones. 
So unemployment, defined as those without jobs but looking for jobs will not rise as much or measure the economic damage. In some sense that is optimistic, reinforcing the story that they are just waiting at home for their old jobs to come back. But the direct measure is less comforting.
Third, participation in the labor force has declined by 7 percentage points, an unparalleled fall that dwarfs the three percentage point cumulative decline that occurred from 2008 to 2016. Early retirement almost fully explains the drop in labor force participation both for those survey participants previously employed and those previously looking for work.
If so, those workers are not coming back. Still, people's responses to questions whether they are looking for a job or would take one if offered change quickly over time.

Nearly a Third of U.S. Apartment Renters Didn’t Pay April Rent.
Some tenants will be temporarily protected from eviction... unpaid rent could set off a chain of events that first cause commercial mortgage defaults, zapping investments in bonds backed by those mortgages.
Well, first many landlords are not big businesses but moms pops and small investors who put their life savings into a building, with a mortgage. They default, then whoever holds their mortgage defaults and up the line we go.

Again, it may not be all that bad. When the government announces that evictions and foreclosures are stopped, not paying rent may be a first place to save some cash. And just who is your landlord going to rent to anyway? But it is a signal of just how many people are in some sort of financial distress and again adds up to catastrophe in a few months.

Mortgage servicers are the next to go. Mortgages are no longer largely held by banks. If you don't pay your mortgage, as you are now allowed to do, the mortgage service company still has to pay its creditors, who typically hold mortgage backed securities.
If 25 percent of borrowers fail to make their mortgage payments, the industry would need $40 billion to cover three months of payment....
Bright, who formerly managed the $2 trillion portfolio of government-run mortgage financier Ginnie Mae, said he believes the Fed will come through with an emergency lending program for the industry.
“Even though that language wasn’t included [in the Senate bill], I do think it’s likely that this could be part of [the Fed’s Term Asset-Backed Loan Facility Program] in the end,” he said.
Federal Housing Finance Agency Director Mark Calabria...said this week in a Bloomberg TV interview that he was confident that large banks would continue to extend credit to mortgage servicers for the time being....
Still, he said, “if we get to a situation where this goes longer than two months, absolutely there’s going to need to be a bigger solution.”
Broeksmit said some mortgage companies won’t make it that long,
The article goes on to ask for help from the Fed.

In all three cases, our government's reaction is basically that the Fed will print up money to pay everyone's bills for the duration, subject only to the usual snafus at unemployment offices, bank regulations, SBA offices in actually spending the money. Just how long can that last? A topic for an upcoming post.


  1. So, apartment renters don't pay the rent and 50 million Americans will be unemployed by the end of June if lockdowns persist, or so predicts the St Louis branch of the Federal Reserve.

    But it has been worth it because, according to our top credentialed epidemiologists, we might have saved an unknown number of lives.

    1. Benjamin, up until last week I shared your feeling that the lockdowns had a hideous cost to society.

      However, I am finding that states with no lockdowns have almost as much unemployment so far as the states with lockdowns. Even Sweden has its highest unemployment rate in years, again with no lockdowns.

      The collapse of the hospitality industry means the loss of up to 15 million jobs. That collapse was going to happen with or without lockdowns.

    2. Bob - I do agree that there would have been some very large job loss numbers even without lockdowns.

      I don't, however, find "states with no lockdowns" to be a great comparison for two reasons.

      First, I have doubts about the validity of "no lockdown" claims. There are plenty of states where larger cities and/or counties have stricter government orders than the state-wide provisions. I've also seen press reports referring to Texas (where I live) as "no lockdown" even after we had (1) state-wide governmental closures of bars, gyms, and in-restaurant dining and (2) even stricter government-ordered closures in the largest cities and counties (i.e., covering well over half of the state population).

      Second, the U.S. is of course an integrated domestic economy. Plenty of companies in states without lockdowns are dependent on customers in states that do have government-ordered lockdowns.

  2. "...Fed will print up money to pay everyone's bills for the duration... Just how long can that last?"

    I think it's OK to have this last a while. Should be loans for the businesses, though. Once that is shown not to suffice, bankruptcy proceedings can start.

    The poor should get cash transfers, not tied to unemployment, to tide them over, 'as the poor will not be in a position to service their debt.

  3. I don't notice much price raising, as there should be with masks and food, and apparently especially toilet paper [:-)] This is surely a product of the state anti-gouging laws and perhaps Harald Demsetz's idea that firms set price for a product life cycle.

    Thus, we will have a REPRESSED inflation. Can't buy stuff, so the new, additional, money is hoarded.

    Hopefully, black markets will appear soonish. But they won't be using Greenbacks. I'll be ready to get N95 masks with cigarettes, nylon stockings, or cognac. :-)

  4. I can confirm that a lot of people are laid off because the CARES act made it better for companies to lay people off than institute pay cuts. Those same people are not going to be applying to work at Dominos or Amazon anytime soon.

  5. I am curious if in the aftermath, this will set off a Nationwide rush to save. A deep drop in consumption and into savings. Larry Summer's ultimate doomsday scenario, though it won't be unexpected so in that sense the economy should have plenty of adjustment time. OTHO it will result in a lot of sectoral shifts and our labor force doesn't seem very nimble.

  6. I agree with the overall points here, though I will note this caveat on rent. Quoting from the same WSJ article linked in the post:

    "Only 69% of tenants paid any of their rent between April 1 and 5, compared with 81% in the first week of March and 82% in April 2019, the data show."

    So it's definitely true that fewer people are paying rent, but the relevant comparison in good economic times is apparently not anywhere close to 100%.

    I assume that part of the answer, by the way, is not that almost 20% of renters fail to pay rent in a given month, but that quite a lot pay rent late. It's possible that won't be the case here, due to financial stress and also due to some amount of people taking advantage of "no eviction" orders. I surmise, though, that we could see a lot of rent payments made after the extra $600 per week of federal UI checks reach people.


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