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Government Must Act to Stop Spread of Economic and Financial Consequences of Coronavirus

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The stock market fell 7% at the open Monday morning. That may not sound like a lot, but it’s a catastrophic collapse—a financial crisis type number. Typically, the market might gain or lose in a whole year the value that was lost by the time the sound of the opening bell faded.

The collapse appears to be the result of a combination of the spread of coronavirus and falling oil prices—two events that are themselves connected. But it needs to be interpreted as an alarm bell, because we are dealing with the threat of two deadly kinds of contagions—one biological and the other economic and financial—both of which pose serious but manageable threats to the well-being of working people.

We have heard a lot about biological contagion and how to stop the spread of coronavirus in our workplaces and our communities. You can get up-to-date information on workplace safety and coronavirus at www.aflcio.org/covid-19 and at the websites of our affiliated unions. But what about financial and economic contagion? This is something elected leaders, economic policymakers and financial regulators must take action to stop.

How does it work? Coronavirus is a shock to the global economy. It stops economic activity of all kinds—shutting down factories, canceling meetings, sending cruise ships into quarantine. The only way to prevent that is to stop the spread of the virus (see above). The consequence of economic activity slowing down or stopping is that businesses lose revenue, and generally with loss of revenue comes loss of profits.

People who trade on the stock market usually price stocks by making projections about the future profits of the companies whose stocks trade on the public markets. The stock market reacts instantaneously to changing expectations about what may happen in the economy and to specific businesses. The stock market itself doesn’t create or destroy jobs, but it does contribute to the overall financial health of companies and of people. When stock prices fall rapidly, they can create their own kind of contagion—exposing fragile financing structures for both companies and people. That can in turn lead to retreat—companies pulling back on investments or, in the worst case, going bankrupt.

So the stock market can create contagion all by itself. But the much more serious kind of contagion has to do with corporate debt. We have had low interest rates for years, and businesses around the world have gone on a borrowing spree. This spree has been one of the causes of relatively healthy economic growth in the last few years, but it has also led to businesses carrying a lot of debt relative to their earnings and growth. 

Here is where the danger gets very real, because, as we all know, if you borrow money, you have to make payments on that debt. What if businesses that have borrowed a lot of money suddenly don’t have anywhere near the revenue they expected to have? This is what empty planes and blocked supply chains mean.  

If no one does anything and the coronavirus leads to months of revenue shortfalls in overleveraged companies, there is a real risk of pullbacks in investments by those companies or, worse, bankruptcy. Falling stock markets and debt defaults can lead to weak business balance sheets and to weak financial institutions. That is what financial contagion means. We saw that in 2008 when first mortgage intermediaries failed, then hedge funds and stock brokerages, and then major banks.  

Even more seriously, once investment pullbacks, bankruptcies and layoffs start, that leads, like a spreading virus, to more losses of revenue to other businesses—in other words, economic contagion. Economic contagion, once it starts, is even harder to stop than financial contagion. Economic contagion means recession, unemployment, falling wages. What makes this crisis different is that it starts with a kind of layoff—shutdown of economic activity and quarantines to stop the spread of disease. 

We need government to act to stop financial and economic contagion until the worst of the coronavirus passes and, most importantly, until everyone has a better sense of the exact nature of the threat—that is, until the uncertainty diminishes. Working people must demand that government act, or we and our families will pay the price for others’ lack of action, as we so often have in the past.

What should government do? First, it should directly address the source of economic contraction by dealing effectively with the coronavirus itself and making sure people who are sick or need to be quarantined are able to do what they need to do for themselves and for society without being impoverished. This means emergency paid sick leave for all who need it. House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer have proposed comprehensive emergency paid sick leave for all workers; this is an urgent medical and economic necessity. We need to recognize that until the coronavirus is contained, it will be very challenging to contain the economic consequences of the virus.

Second, government should deliver financial support credit on favorable terms to sectors of the global economy that are threatened by the coronavirus and vulnerable due to overleverage. The U.S. Federal Open Market Committee took a first step in that direction last week by lowering short-term rates by 0.5 percentage point, but that is unlikely to be enough. Central banks need to work with major financial institutions to target cheap credit to vulnerable businesses—airlines, hotels, manufacturers paralyzed by broken supply chains and the like. It is time to discard the old neoliberal idea that we should let banks lend to whomever they want when we appropriately subsidize them with cheap public assets.

Third, government should provide support to the economy as a whole. Congress cannot leave this job to the Federal Reserve. We need to look at bigger emergency appropriations to support our weakened public health infrastructure, particularly hospitals; if the Chinese experience is any indication, we are going to face serious strains to the system as the coronavirus spreads. We need to look at macroeconomic stimulus—public spending to help the economy. This would best be done in the form of investment, such as finally funding infrastructure. But we also need immediate spending; that is why universal paid sick days would be such a good idea, as would be steps to improve the effectiveness of our social safety net—Social Security, Medicare and Medicaid—and make it easier for everyone to get the health care they need right now.

What we don’t need is the standard right-wing response to any and all problems—tax cuts for the rich. Even more than in a normal downturn, that would do harm, diverting desperately needed public resources to those who don’t need them at all.

Most of all, we need leadership and coordination among federal, state and local governments, between the U.S. government and the Fed and governments and central banks around the world, and with multinational bodies such as the International Monetary Fund and the World Health Organization. This is critical, because neither the coronavirus nor the world financial system respects borders, and because people will succumb to fear in the absence of credible leadership.  

If Monday morning tells us anything, it’s that we need that leadership now, because once fear becomes contagious, it may be the hardest thing to stop.

This blog was originally posted on AFL-CIO on March 10, 2020. Reprinted with permission.

About the Author: Damon A. Silvers is the director of policy and special counsel for the AFL-CIO. He joined the AFL-CIO as associate general counsel in 1997.

Silvers serves on a pro bono basis as a special assistant attorney general for the state of New York. Silvers is also a member of the Investor Advisory Committee of the U.S. Securities and Exchange Commission, the Treasury Department’s Financial Research Advisory Committee, the Public Company Accounting Oversight Board’s Standing Advisory Group and its Investor Advisory Group.

Silvers received his Juris Doctor with honors from Harvard Law School. He received his Master of Business Administration with high honors from Harvard Business School and is a Baker scholar. Silvers is a graduate of Harvard College, summa cum laude, and has studied history at King’s College, Cambridge University.


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China Protects its Workers; America Doesn’t Bother

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Leo GerardConfronted with a dire situation, a world power last week took strong action to secure its domestic jobs and manufacturing.

That was China. Not the United States.

China diminished the value of its currency.  This gave its exporting industries a boost while simultaneously blocking imports. The move protected the Asian giant’s manufacturers and its workers’ jobs.

Currency manipulation violates free market principles, but for China, doing it makes sense. The nation’s economy is cooling. Its stock market just crashed, and its economic powerhouse – exports – declined a substantial 8.3 percent in July ­– down to $195 billion from $213 billionthe previous July. This potent action by a major economic competitor raises the question of when the United States government is going to stop pretending currency manipulation doesn’t exist. When will the United States take the necessary action to protect its industry, including manufacturing essential to national defense, as well as the good, family-supporting jobs of millions of manufacturing workers?

While China lowered the value of its currency on three consecutive days last week, for a total of 4.4 percent, the largest decline in two decades, a respected Washington think tank, theEconomic Policy Institute, released a report detailing exactly how the United States lost 5 million manufacturing jobs since 2000.

The report, “Manufacturing Job Loss: Trade, Not Productivity is the Culprit,” clearly links massive trade deficits to closed American factories and killed American jobs. U.S. manufacturers lost ground to foreign competitors whose nations facilitated violation of international trade rules. China is a particular culprit. My union, the United Steelworkers, has won trade case after trade case over the past decade, securing sanctions called duties that are charged on imported goods to counteract the economic effect of violations.

In the most recent case the USW won, the U.S. International Trade Commission (ITC) finalized duties in July on illegally subsidized Chinese tires dumped into the U.S. market. The recent history of such sanctions on tires illustrates how relentless the Chinese government is in protecting its workers.

Shortly after President Obama took office, the USW filed a complaint about illegally-subsidized, Chinese-made tires dumped into the U.S. market. The Obama administration imposed duties on Chinese tire imports from September 2009 to September 2012.

Immediately after the tariffs ended, Chinese companies flooded the U.S. market with improperly subsidized tires again, threatening U.S. tire plants and jobs. So the USW filed the second complaint.

Though the USW workers won the second case as well, the process is too costly and too time consuming. Sometimes factories and thousands of jobs are permanently lost before a case is decided in workers’ favor. This has happened to U.S. tire, paper, auto parts and steel workers.

In addition, the process is flawed because it forbids consideration of currency manipulation – the device China used last week to support its export industries.

By reducing the value of its currency, China, in effect, gave its export industries discount coupons, enabling them to sell goods more cheaply overseas without doing anything differently or better. Simultaneously, China marked up the price of all imports into the country. American and European exporters did nothing bad or wrong, but now their products will cost more in China.

Chinese officials have contended that the devaluation, which came on the heels of the bad news about its July exports, wasn’t deliberate. They say it reflected bad market conditions and note that groups like the International Monetary Fund have been pushing China to make its currency more market based.

Right. Sure. And it was nothing more than a coincidence that it occurred just as China wanted to increase exports. And it was simply serendipity that in just three days, “market conditions” wiped out four years of tiny, painfully incremental increases in the currency’s value.

If the value of the currency truly is market based and not controlled by the government, then as Chinese exports rise, the value should increase. That would eliminate the artificial discount China just awarded its exported goods. Based on past history, that is not likely to happen. So what China really is saying is that its currency is market based when the value is declining but not when it rises.

China did what it felt was right for its people, its industry and its economy. The country hit a rough spot this year. Though its economy is expected to grow by 7 percent, that would be theslowest rate in six years. Its housing prices fell 9.8 percent in June. Car sales dropped 7 percent in July, the largest decline since the Great Recession. Over the past several months, the Chinese government has intervened repeatedly to try to stop a massive stock market crash that began in June.

In the meantime, the nation’s factories that make products like tires, auto parts, steel and paper continue to operate full speed ahead and ship the excess overseas. As a result, for example, the international market is flooded with underpriced Chinese steel, threatening American steel mills and tens of thousands of American steelworkers’ jobs.

This is bad for the U.S. economy. The U.S. trade deficit in manufactured goods rose 15.7 percent ­– by $25.7 billion ­– in the first quarter as imports increased and exports slipped. In the first half of this year, the trade deficit with China rose 9.8 percent, a total of $15 billion.

As EPI points out, that means more U.S. factories closed and U.S. jobs lost. If China had bombed thousands of U.S. factories over the past decade, America would respond. But the nation has done virtually nothing about thousands of factories closed by trade violations.

The United States could take two steps immediately to counter the ill-effects of currency manipulation. Congress could pass and President Obama could sign a proposed customs enforcement bill. It would classify deliberate currency undervaluation as an illegal export subsidy. Then the manipulation could be countered with duties on the imported products.

The second step would be to include sanctions for currency manipulation in the Trans-Pacific Partnership trade deal that the administration is negotiating with 11 other Pacific Rim countries. The deal doesn’t include China, but it could join later. The deal does, however, include other countries notorious for currency interventions.

American manufacturers and American workers demand rightful protection from predatory international trade practices.

This blog originally appeared at OurFuture.org on August 18, 2015. Reprinted with permission.

Leo W. Gerard, International President of the United Steelworkers (USW), took office in 2001 after the retirement of former president George Becker.


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