'We Know This Is A Recession, But We Don't Want This To Go Into Depression Territory,' Says Economics Professor
(CBSNewYork) -- The COVID-19 pandemic rages on, and the economy is in a precarious place. What happens in the coming weeks and months will affect millions of people yet remains largely outside their control.
Almost halfway through the summer, as the pandemic wanes in many parts of Europe and Asia, the number of new cases in the U.S. has topped 50,000 almost every day in July. The domestic daily death count routinely exceeds 1,000. Many states are seeing near-record highs for infections. Hospitals across the country are stretched thin, even as proven methods to counter the virus, like masks and social distancing, remain political.
Lest we forget, summer was supposed to be the lull before the virus's autumn resurgence.
With a public health crisis in full effect, the economy continues to stagnate. Initial gains from reopening were promising but have started to recede as local economies pull back in the face of rising infection rates. Unemployment remains near record levels, with over 1.4 million new claims added last week. And the latest economic numbers from the Commerce Department confirm what experts suspected about the first shutdown. In the second quarter, the U.S. economy endured its worst quarter on record, sinking at an annual rate of 32.9 percent. (The previous record was the first quarter of 1958, when the economy shrank by 10 percent.)
>>READ: United States Economy Shrinks By Record 32.9 Percent In Second Quarter
This is the health and economic climate politicians hope to mitigate with the second round of stimulus. The particulars and the timing of the stimulus have yet to be determined. But recent economic numbers shine an unyielding spotlight on the urgent need.
"We know this is a recession, but we don't want this to go into depression territory," says Giacomo Santangelo, who teaches economics at Fordham University and the Stillman School of Business at Seton Hall University. "We're not going into depression territory, because we are, in some way, stimulating parts of the economy. The economy's still chugging along, no breadlines yet. We shouldn't expect that there will be breadlines. What we should expect to see is increases in personal debt."
There will also be -- and there already has been -- an increase in national debt.
According to Santangelo, "stimulus is not an option, stimulus is a requirement. This economy needs to be held aloft. No one questions the need for stimulus... the issue is really at what expense. We want to stimulate the economy, but at what expense? Because we have no idea how we financed the first stimulus."
That is a much longer-term issue. Consumers have more immediate concerns. Approximately 20 percent of the workforce is currently receiving unemployment benefits. (A much higher percentage fears that they may soon join them.) Some are still unable to collect the benefits they're owed, even on claims dating as far back as March. Those collecting benefits, up through this week, have received an extra $600 per week.
That money made its way into the economy in the form of grocery purchases, rent and countless other expenditures. It made a huge difference for households that lost jobs during the crisis. Remove the expenditures that the stimulus allowed, and the macro-economy will feel the effects. "The purpose of unemployment insurance has always been to help smooth consumption," Santangelo points out.
Removing that money from a more micro economy, like a household budget, can be catastrophic. Many incomes would fall by more than half. "No one thought anyone was going to try and live off of unemployment benefits," Santangelo says. "And right now, a lot of people are living off of their unemployment benefits."
"Unemployment benefits lower the necessity to find a job immediately," Santangelo elaborates. "In economics it's referred to as the job-finding rate. Unemployment benefits slow down the job-finding rate. That's why, in the United States, unemployment benefits are terrible, because we don't want people to attempt to live off of them. If you look at European countries, countries with longer unemployment benefits tend to have longer durations of unemployment."
But the decision-making changes when there are very few jobs to find.
And without childcare options -- be they daycare, summer camp or, come September, school -- working can become untenable for large segments of the workforce. The choice comes down to holding a job or caring for a child. Even those with the good fortune to work remotely have to pull double-duty.
"There are gaps, which in any just society would be filled in," Santangelo says. "There are gaps, which we knew about before. It's not like this is showing us that [in] public school systems or people's homes, there is inequality in technology, in access to technology. We knew that before. All this is doing is shining a brighter light on it."
Those gaps and so many others will grow in the coming days and weeks, as consumers watch the stimulus run out and await a second stimulus. Food insecurity, which soared last month, will continue to rise; 30 million people didn't have enough to eat last week. People will need to make choices on which bills to pay. Personal debt will grow. In hard-hit states like Florida, where the economic forecast is bleak and more layoffs are imminent, bankruptcy becomes an option.
Once the next act is signed into law, it will be another couple weeks before more money starts to find its way to consumers. (Democrats and Republicans remain at an impasse over the size and scope of a second round of stimulus; Congress has taken off for the weekend.) Most will have to wait even longer for any sort of stimulus. In the meantime, the economy and individual budgets will pay the price in the ongoing economic crisis.