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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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Why Has the U.S. Economy Been Doing So Well?

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arthurmacewan_cla_fall2012_hb_bio

This question immediately invites a couple of additional questions: What does it mean to say the economy has been “doing so well”? And: Has the U.S. economy really been doing so well?

Long and Slow

The most widely used measure of how well an economy is doing is the growth of gross domestic product (GDP). On the one hand, GDP has been growing for an unusually long time. Since the economic expansion began in June of 2009, it has continued for 118 months, as of April 2019. If the expansion continues into the summer, it will surpass the longest expansion on record, which lasted for 120 months in the 1990s.

On the other hand, it has been an historically slow expansion, with GDP averaging about 2.24% per year. In the two years since Trump took office, GDP grew 2.22% in 2017 and 2.86% in 2018, the latter almost as fast as the 2.88% in 2015. This is quite slow compared to the 3.6% rate in the 1990s, and the 4.8% rate in the 106-month expansion of the 1960s. (All figures are adjusted for inflation.) It is remarkable that, in spite of this comparison with the rates of growth in other long expansions, media reports frequently refer to the economy as “roaring” or “sizzling.”

The employment situation also has its positive and negative aspects. On the one hand, the unemployment rate has fallen almost steadily since its 2009 peak at 10% during the Great Recession. And the rate has been at the historically unusual rate of less than 4% for the past year. Relatively few people who want jobs are unable to get them. On the other hand, in spite of the low unemployment rate, wages have risen quite slowly. Between mid-2009 and today, the average hourly rate for all private employees on private payrolls has gone up by only slightly over 4%; about half of that increase has come in the last two years.

Even with many more people employed than at the time of the Great Recession, the very slow increase in wages has meant a rise in income inequality. In 2007, the average income of households in the top 5% was 25 times as great as the average income of households in the bottom 20%. By 2017, the average income in the top 5% was 29 times that in the bottom 20%. (These figures are for pre-tax income. The after tax distribution was slightly less unequal, but changed in the same way. Moreover, the tax cut at the end of 2017 surely has made the after-tax distribution of income more unequal.)

Perhaps the combination of the slow increase of GDP and the rising income inequality can be summarized as: The economy is doing well, but the people aren’t.

What Keeps the GDP Growing?

In the spring of 2019 it appears that the growth of GDP is slowing. Still, even if the economy tanks soon, the current expansion will be the longest on record. A record requires some explanation. Part of the explanation, ironically, is that the expansion has been so long because it has been so slow. Because growth was slow and the unemployment rate, while falling, came down slowly, wages have risen very slowly. This limited the extent to which wage costs were cutting into firms’ profits.

Another factor, also easing cost pressures on profits, was that commodity prices fell and remained low—that is, prices of basic raw materials, everything from copper and oil to soy beans and corn. In 2017, the Bloomberg index of commodity prices was only 43% of its 2011 peak. While it has gone up and down in recent months, at the beginning of April 2019 the index was still only 46% of its 2011 high. These price changes were partly affected by the large increase of U.S. production of oil, but also by the slowdown in the growth of demand in the United States, relative stagnation in Europe, and even weakening of the Chinese economy. Still another factor keeping businesses’ costs down and the recovery growing, however slowly, was the low interest rate policy of the U.S. Federal Reserve. From the Great Recession until 2018, the real interest rate at which banks could borrow was effectively zero, or even negative. (The “real” interest rate is the nominal rate less the anticipated inflation rate.)

These factors affecting firms’ costs kept the economy growing. However, the government provided only limited stimulus to demand, so the growth has been slow. The federal government provided some stimulus in the American Recovery and Reinvestment Act of early 2009. The Act did help boost the economy out of the recession, but was neither large enough nor lasting enough to sustain strong growth in subsequent years.

Now and Going Forward

The large tax cuts put in place by the Republicans at the end of 2017 do appear to have had some stimulatory impact, as people spent the gain they received. But the tax cut greatly favored the very rich, and the rich tend not to spend at a high rate. So the growth impact was limited. Also, while the Republicans promised that the tax cut for corporations would lead to a surge of investment, the surge never materialized. Instead, major corporations used their windfalls from the tax cut to buy back large amounts of their stock, an action which enhanced the incomes of their executives and other stockholders, but has had created no lasting stimulus for the overall economy.

Then there is the developing trade war with China. All indications are that this conflict will not be resolved soon and will have a negative impact on economic growth—not only on the U.S. and China, but possibly on the global economy.

We are left, then, in early 2019, with an impending economic slowdown of an already slowly growing economy. While many things can happen in the coming months, it is unlikely that a year from now anyone will be asking, “Why has the U.S. economy been doing so well?”

 is professor emeritus at UMass Boston and a Dollars & Sense Associate.

 Arthur MacEwan and John Miller, “The U.S. Economy: What is Going On?” New Labor Forum, Vol. 27, Issue 2, Spring 2018; Census Bureau, “Income and Poverty in the United States: 2017” (census.gov); Bureau of Economic Analysis, “National Income and Product Accounts” (bea.gov); Investing.com, “Bloomberg Commodity Historical Data” (investing.com); Bureau of Labor Statistics, “Real Earnings Archived” (bls.gov).

This article originally appeared at dollarsandsense.org on May 30, 2019. Reprinted with permission.

 is professor emeritus of economics at UMass-Boston and a Dollars & Sense Associate.


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A COUNTRY is Not a COMPANY: CEOs Should Sit Down and Shut Up

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Jonathan TasiniI am continuously amazed by the reverence accorded company bosses. Put aside the incompetent ones, who get huge severance packages when they leave, or those who have looted their companies of tens of millions of dollars in pay and benefits, even when the companies lose money or collapse. I’m talking about even the ones who oversee profitable companies.

Why would anyone think that a CEO knows how to run a country? A country is not a company, as Paul Krugman wrote many years ago.

I’m struck by this point today because of three different public pleas by CEOs who essentially say, “the country is screwed up, I know what’s best so listen to me…you fools”. I’ll come back to the pleas in a moment. First, to Krugman.     Back in 1996, Krugman wrote a trenchant article entitled, “A Country Is Not A Company” (which was published as a short book). The beginning of the book is on the mark:

What people learn from running a business won’t help them formulate economic policy. A country is not a big corporation. The habits of mind that make a great business leader are not, in general, those that make a great economic analyst; an executive who has made $1 billion is rarely the right person to turn to for advice about a $6 trillion economy.

Krugman’s book talks about two areas that CEOs claim expertise but demonstrate they nothing about: Exports and Jobs, and Investment and the Trade Balance. I don’t think you need to know the specifics of his argument on those specific areas (but they are pretty interesting) to be able to move to his general observation:

Yet even if a business leader may not be very good at formulating general theories or at explaining what he or she does, there are still those who believe that the businessperson’s ability to spot opportunities and solve problems in his or her own business can be applied to the national economy. After all, what the president of the United States needs from his economic advisers is not learned tracts but sound advice about what to do next. Why isn’t someone who has shown consistently good judgment in running a business likely to give the president good advice about running the country? Because, in short, a country is not a large company.

Many people have trouble grasping the difference in complexity between even the largest business and a national economy. The U.S. economy employs 120 million people, about 200 times as many as General Motors, the largest employer in the United States. Yet even this 200-to-1 ratio vastly understates the difference in complexity between the largest business organization and the national economy. A mathematician will tell us that the number of potential interactions among a large group of people is proportional to the square of their number. Without getting too mystical, it is likely that the U.S. economy is in some sense not hundreds but tens of thousands of times more complex than the biggest corporation.

Moreover, there is a sense in which even very large corporations are not all that diverse. Most corporations are built around a core competence: a particular technology or an approach to a particular type of market. As a result, even a huge corporation that seems to be in many different businesses tends to be unified by a central theme. [emphasis added]

The point is that actually CEOs, and business people generally, are quite narrow-minded. I don’t, in this context, mean that pejoratively. It is simply that they think in terms of their industry, their product–and they have almost no capability to think in broader terms that we need as a country.

Finally, Krugman says:

The next time you hear business-people propounding their views about the economy, ask yourself, Have they taken the time to study this subject? Have they read what the experts write? If not, never mind how successful they have been in business. Ignore them, because they probably have no idea what they are talking about.[emphasis added]

This argument is elegant and simple–and does not even take into account the most obvious reason not to put economic policy in the hands of business executives: today’s CEOs generally are not interested in the plight of their workers, the middle-class or the poor.

Which brings me to a whole roster of business people who want to give us advice on how to run the country: Steve Schwartzman, Howard Schultz and today’s Heinz-like concoction of 57 varieties of business people et al who are squawking about the phony debt and deficit crisis. Let me take them in turn.

Leading off is the almost comical, if not pathologically perverse, CEO of Blackstone, Steve Schwartzman. Hand-wringing today in the Financial Times, Schwarztman calls for “shared sacrifice” and writes in a piece entitled–hold your laughter, please–“An olive branch to Obama: I will share the pain”:

This problem began when the administration sought to attribute blame for the financial and economic crisis and alienated large segments of the business and banking community. They cast them as villains regardless of their culpability. Predictably, business reacted with fear and limited economic expansion, hiring and new lending. A second response to this was the rise of the Tea Party, which in turn attacked the administration and the Democrats. Unless we end targeted class warfare in the US, we cannot solve our economic problems or stop a long period of potential decline.

So, let me get this “economic logic” straight: the president mildly castigates an industry that was clearly and demonstrably responsible for the financial crisis that obliterated trillions of dollars in wealth and because the president hurt the feelings of the people running this industry and others stopped investing? You mean, as opposed to the economy freezing up because of plummeting demand?

Forget for a moment the whining about “class warfare” (which, in Schwartzman’s mind, is the criticism of the super-wealthy who have robbed the country). How can anyone take seriously a man who connects criticism to the cause of the massive economic crisis? That’s just loony.

Now, in fairness, I understand where Schwartzman is coming from with his bruised feelings because, as I wrote about in The Audacity of Greed”, he’s truly a party man:

Here’s a question to ponder: does Stephen Schwarzman still stare at the giant portrait of himself that hangs in his living room and thinkabout what a financial genius he is—even though his company, the private equity firm Blackstone, lost $232 million in the first quarter of 2009? I’m going to bet that a man who has the desperate need to constantly look at a larger than life representation of himself is not capable of admitting that the vision he has of himself as a financial wunderkind is, based on real world results, a fantasy.

…On top of earning a lot of money, Schwarzman also seems to have a compulsive need to flaunt his wealth, as he has engaged in some ostentatious spending sprees over the years. His sixtieth birthday party in 2007 is already the stuff of society legend in over-the-top self-indulgence. Held in New York City’s cavernous Park Armory, whose entrance was redone to resemble the birthday boy’s apartment, the event included performances by Patti LaBelle, who sang a song about Schwarzman, and Rod Stewart. The emcee was comedian Martin Short. The tab for the party: $3 million. And, to top things off, the massive portrait of Schwarzman was temporarily borrowed from his living room and hung in the Armory for all to gaze upon.

The birthday party was just the tip of the iceberg when it came to Schwarzman’s spending orgy. As detailed in The New Yorker, “In May, 2000, Schwarzman paid $37 million—reportedly a record sum at the time for a Manhattan co-op—for a thirty-five-room triplex on Park Avenue that was once owned by John D. Rockefeller, Jr. In 2003, he paid $20.5 million for Four Winds, the former E. F. Hutton estate in Florida, which occupies a choice spit of land between the ocean and the Intracoastal waterway.…In 2006, he paid $34 million for a Federal-style house, on eight acres on Mecox Bay, in the Hamptons, that was previously owned by the Vanderbilt heir Carter Burden.” In addition to those homes, Schwarzman also owns a coastal estate in Saint-Tropez and a beachfront property in Jamaica. The total value of the five properties: $125 million. “I love houses,” Schwarzman told The New Yorker. “I’m not sure why.”

Based on the grandiose and very public expressions of his wealth, you would at least think that the actual financial performance of the Blackstone Group under Schwarzman’s leadership would be strong. Guess again. In fact, many of the investments that the company has made under Schwarzman’s watch have turned sour.

So, why would anyone consider this CEO fit to be listened to?

Exhibit #2: Howard Schultz, CEO of Starbucks. You probably have caught his letters to America”.

We must restore hope in the American Dream. We must celebrate all that America stands for around the world. And while our Founding Fathers recognized the constructive value of political debate, we must send the message to today’s elected officials in a civil, respectful voice they hear and understand, that the time to put citizenship ahead of partisanship is now.

Ah, yes, the CEO all worried about “partisanship gridlock”…we’ve heard that song before. Putting aside why anyone would listen to a guy who knows one thing (coffee), why would a country want to listen to someone who wants to restore the “American Dream”, but conveniently forgets how aggressively he has resisted and fought any attempt to unionize Starbucks?

He’s another charlatan.

And, finally, riding to the rescue is the Ketchup brigade, who want us–you and me, dummy–to really think “big” when it comes to the phony debt and deficit “crisis”:

A group of at least 57 prominent business executives and former government officials have signed a petition in support of a greater deficit reduction, which they are to release at a news conference on Monday. Among them are former treasury secretaries, budget directors and economic advisers to eight presidents from Richard M. Nixon to Mr. Obama; former Congressional leaders; and executives of top companies.

Their letter reflects a broad sense of urgency in both parties, and among economists and businesses, that the nation must put in place long-range measures to shrink future deficits.At current spending levels, those deficits are expected to balloon over the next decade as the population ages and as health care costs rise.

The letter does not call for short-term job-creation measures like the tax cuts and infrastructure spending Mr. Obama proposed last week, which would add to deficits initially.[emphasis added]

Ahem. The group is led by David Cote, the CEO of Honeywell, whose main distinction, as far as I can tell is, that he was paid $15.2 million while his company got a $471 million refund and maintains at least five tax havens off-shore

And this is a guy who we want to listen to about ANY policy relating to economic health of the country? Who helps a corporation not pay taxes AND stashed money abroad?

To sum up: it is just foolish to believe that CEOs have any clue how to run a country. The only reason, in real life, that they have any megaphone is simply because they can buy it–either full-page ads, or think-tank loyalty, or literally our politicians.

But, we shouldn’t give them the time of day.

This blog originally appeared on Working Life on September 12, 2011. Reprinted with permission.

About the author: Jonathan Tasini is the executive director of Labor Research Association. Tasini ran for the Democratic nomination for the U.S. Senate in New York. For the past 25 years, Jonathan has been a union leader and organizer, a social activist, and a commentator and writer on work, labor and the economy. From 1990 to April 2003, he served as president of the National Writers Union (United Auto Workers Local 1981).He was the lead plaintiff in Tasini vs. The New York Times, the landmark electronic rights case that took on the corporate media’s assault on the rights of thousands of freelance authors.


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