How to fix a pandemic-driven recession

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Guest Columnist

I polled people online, trolling for suggested topics for this column. I was surprised by the number of suggestions. The most popular was how do we fix a pandemic-driven recession, the second most was how wonderful our area is. I have chosen to write about one of my favorite subjects, economics, often called the “dismal science.’”

The way to get out of a recession is to spend money. If you look at the two most successful recoveries, the thing they have in common is massive amounts of Government spending, mostly on the military. 

The Great Depression begins in 1929 and continues for over 10 years. Unemployment soars to 25%.  The recovery is slow, and our economy does not truly start rolling again until World War II.  Once we started building Liberty Ships and B-24 bombers, the economy recovered rapidly.  Early in the Depression, President Hoover raised taxes and interest rates to protect the currency.  He also tried to implement wage and price freezes.  All of this just made things worse.  Roosevelt’s New Deal helped, especially building the hydro-electric plants, but his decision to close banks led to decline in liquidity that prolonged the recovery. Unemployment was still around 15% in 1939.  The deficit increased markedly.

In the late 70s, the economy all but collapsed from a combination of rampant inflation followed by a severe recession. The Federal Reserve rate spiked up to 22%. Unemployment peaked around 12%.  When Ronald Reagan took office in 1981, the economy was a mess. He called his plan Trickle Down Economics. The idea was that if we spent enough on weapons and cut taxes, that the profits would trickle down to the average worker.  Reagan spent heavily on weapons, building new jets and tanks and even refurbishing World War II era battleships. The deficit soared, but the economy recovered, and the stock market surged.

In 2008, an overheated housing market, driven by speculation and ridiculously easy mortgage money, collapsed and took down the American economy with it. Unemployment would peak around 10%. Congress spent billions to save banks and insurance companies. Money was also ear-marked to bail out other businesses, including General Motors. This was controversial. The Fed lowered interest rates and printed money. Once again, the deficit grew massively.   The jury is still out on how long-lasting those fixes were. But there is little question that the billions in bail out stopped the U.S. from slipping into a Depression that might have rivaled the Great Depression.

The US has history of at least one post pandemic recession. The first modern recession occurred in 1920-21, 14 months after the end of World War I and immediately following a Spanish Flu pandemic that killed 675,000 people. Some of the similarities to today are striking.  In addition to the flu, which swept through the country leaving a swath of devastation, race riots broke out across the country. The baseball season was shortened in both 1918 and 1919.  To make up for lost revenues, owners lengthened the world series. Players made less and the situation was rife for the scandal that rocked the sports world when the White Sox threw the 1919 series. Bars closed in 1920, for different reasons. The federal reserve raised interest rates to a then record high of 7%. Unemployment briefly exceeded 10%. The economy, somewhat bolstered by the illegal booze trade, began to turn around when Treasury Secretary Andrew Mellon pushed for lower rates.

The current recession sprang out of a global pandemic and subsequent economic shutdowns that ravaged economies around the world. Here in the USA, the employment rate peaked around 15% a couple of months ago and has slowly declined since. Once again, the Government moved to bail out large corporations and, once again, the deficit soared. This time, an effort was also made to get money into the hands of small businesses and, for the first time, individual citizens. The concept of putting money directly into the hands of individuals was novel, just like the virus that engendered the need.  Conventionally, Governments have fought recessions using a top down technique, cheap money and spending. Our economy is consumer based. Putting money into consumer hands raised some eyebrows and left online retailers and tech companies drooling over the increased spending. Wall Street is hoping these extra unemployment benefits will be renewed. They want the people to get the money and then SPEND IT.

Scott A Grant is a local author, historian, and columnist. By day, Mr. Grant is President of Standfast Asset Management.  He is a regular contributor to the Recorder.

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