The guest commentary below was written by written by Daniel Lacalle
The crisis caused by the forced shutdown of the economy has given us some important lessons. Number one, shutting down the economy entirely is a dangerous experiment with important long-term implications.
Number two, there is no such thing as “lives or the economy”.
Many countries have implemented support systems to address the pandemic while preserving the business and productive factory. South Korea, with less than 300 dead in a 51 million population, published an unemployment rate of 3.8% and its economy, closer to China than many, is estimated to fall less than 1% in 2020. South Korea is also a country with lower government spending to GDP and lower healthcare spending per capita than the average of leading nations and the OECD. They are just better at managing.
A similar success in providing health support, managing the health crisis and keeping the business and economic fabric alive can be seen in Singapore, Taiwan, Austria, Switzerland, Denmark, Sweden, and other nations. It is not “lives or the economy”, it is “lives and the economy”. The voices that demand “Open America Now” are right, and the government is working to reopen the economy quickly, safely, and effectively.
The United States faces a deep contraction, massive job losses, and mounting debt. However, the nation can recover and prevent long-term depression. The V-shaped recovery may now be elusive, but the nation can recover at a reasonably fast pace and quicker than the eurozone or Japan if the government avoids copying those two examples. If the United States follows the path of massive intervention, huge government spending, and negative rates, American citizens may realize that copying Japan and the eurozone delivers Japan and eurozone-style stagnation.
A large stimulus bill has been passed, but this may prove ineffective if the shutdown remains. The little demand that the stimulus plan may incentivize will go to sectors that already had overcapacity, while the bleeding in sectors that had no debt or access to subsidies remains.
In many cases, stimulus creates demand in the wrong areas, while the job losses and business closings rise exponentially in the sectors that are most impacted by the shutdown. The April jobs report signals a few risks to a rapid recovery. 80% of the jobs lost are classified as temporary. That is a good thing. However, a prolonged shutdown may move those unemployed figures to permanent. 7.7 million jobs were lost in Leisure and Hospitaliy, 5.5 of which came from bars and restaurants. Those jobs will not come back if the lockdown remains or if the return to activity includes severe restrictions. That is why it is so important to learn from the example of nations that have successfully managed to keep the economy open and provide equipment and protocols to guarantee the health of citizens.
No stimulus plan is going to bring back 7.7 million jobs lost in Leisure and Hospitality, 2.5 million lost in Education and Health Services and even less 4 million lost in Professional & Business Services and Retail Trade. What the April jobs report tells us is that no government plan is going to stop the bleeding of the Services sector.
That is why it is so dangerous to add another $3 trillion relief bill to an already large $2 trillion package. The first one was aimed at allowing businesses and citizens to endure the lockdown, the new “relief” plan passed by the House is very likely to add a lot more debt for no real result and create longer-lasting damages. It makes no sense to double the stimulus shortly after the first plan is announced when the results of the first package have not even been analyzed. Even more, adding trillions of spending to a forced shutdown is not going to improve the economy, only worsen the already challenging fiscal situation of the United States.
It would be ridiculous to pass a 29% of GDP total stimulus when the economy has not lost productive capacity, it is in a forced lockdown.
The interventionists try to tell us that there is a massive need for government spending to “rebuild the economy”. Yet the argument is simply farcical. The American productive capacity remains intact, its human and technological capital untouched and its competitive strengths unchallenged. More importantly, there is ample financial and investment capacity to recapitalize the economy if the shutdown is lifted.
The figures of deaths and infection risk prove the mistake of a generalized lockdown. Destroying the economy is a very bad experiment when the average mortality by age group shows a minimal impact on citizens of 70 years of age or less.
The United States government does not need to spend trillions, the Fed does not need to implement negative rates that have decimated the eurozone economy and sent it to stagnation. What the United States government needs to do is provide equipment and protocols for businesses to manage the pandemic, provide safety control measures to the high-risk age groups, and provide massive tests to guarantee the pandemic is under control. the government needs to open the economy now before a deep crisis becomes a deeper depression.
America does not need more trillion dollar bills. It needs less political interventionism.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.
