Trillions of dollars in federal aid to households and businesses has allowed the U.S. economy to emerge from the first six months of the coronavirus pandemic in far better shape than many observers had feared last spring.
But that spending has now largely dried up and hopes for a major new aid package ahead of the Nov. 3 election are all but dead, even as the virus persists and millions of Americans remain unemployed. Already, there are signs that the economic rebound is losing steam, as some measures of consumer spending growth decelerate and job gains slow. Applications for jobless benefits rose last week, with about 825,000 Americans filing for state unemployment benefits.
The combination of a moderating economic rebound and fading government support are an eerie echo of the weak period that followed the 2007 to 2009 recession. In the view of many analysts, a premature pullback in government support back then led to a grinding recovery that left legions of would-be employees out of work for years. In recent weeks, prominent economists have warned that both the United States and Europe, where many early responses are drawing to a close, were at risk of repeating that mistake by cutting off government aid too soon.
“The initial response was good, but we need more,” said Karen Dynan, who was chief economist at the Treasury Department in the Obama administration and now teaches at Harvard. The decision to pull back on spending a decade ago, she said, “really prolonged the period of weakness after the great recession.”
In Europe, some national governments that have spent aggressively to subsidize wages and curb layoffs are wrapping up those efforts. While large countries including Germany have indicated that they remain willing to provide more support, some economists warn that continued aid announced in France and elsewhere might fall short of what is needed in the near term.
In the United States, the situation is more immediately worrying. Leaders of both major political parties have expressed support, at least in theory, for additional aid. But the parties remain far apart, with Democrats pushing for a large package and Republicans arguing that a smaller plan will suffice.
The ability to reach a compromise in the coming weeks has been further complicated by a looming confirmation battle to replace Ruth Bader Ginsburg on the Supreme Court.
“That’s my great concern, that we’re going leave and not have a stimulus Covid package put together,” Senator Roy Blunt, Republican of Missouri, said Thursday.
Top Democrats, responding in part to growing concern among moderate lawmakers about the stalemate over providing aid, were working on a scaled-back package, according to a person familiar with the plans. It remains unclear whether the House will vote on such a measure, which would provide roughly $2.4 trillion in aid, or whether negotiations will resume in earnest.
One factor making a quick agreement even less likely: The economic revival is slowing, but not as sharply as some economists predicted would happen once expanded unemployment insurance and other programs began to ebb.
Job growth slowed in July and August but remained positive. Consumer spending, which rebounded sharply once federal money started flowing in April, has likewise seen a more gradual rebound but has not fallen. Layoffs, as measured by claims for unemployment insurance, have continued to trend down, although they remain high by historical standards.
But many economists said that allowing the economy to slow at the current moment — with millions out of work or underemployed — could lead to long-term economic scarring. Employers have still hired back less than half of the 22 million workers they laid off in March and April, and the unemployment rate is higher than the peak of many past recessions. Even optimistic forecasts imply that gross domestic product will shrink more this year than in the worst year of the last recession.
“A stalling recovery when we’re stalling at near the worst point of the great recession is a terrible outcome,” said Tara Sinclair, an economist at George Washington University.
Jerome H. Powell, the Fed chair, made clear during congressional hearings this week that the economy, while recovering, would likely need more support.
“The power of fiscal policy is unequaled, by really anything else,” Mr. Powell said during testimony before a House subcommittee on Wednesday. “We need to stay with it, all of us,” adding, “the recovery will go faster if there’s support coming both from Congress and from the Fed.”
His colleague Eric Rosengren, president of the Federal Reserve Bank of Boston, said Wednesday that additional fiscal policy “is very much needed” but noted it “seems increasingly unlikely to materialize anytime soon.”
Some economists warn that the economy could begin to shrink again if Congress doesn’t act. Many households were able to save in the spring, thanks to federal aid and shutdown orders that kept them from spending money on restaurant meals and hotel stays. Households socked away about one-third of their disposable incomes in April, and while the savings rate has come down since, it remained sharply elevated from pre-crisis levels through July. That should create some buffer.
But those funds won’t sustain jobless families indefinitely now that extra unemployment benefits have expired and a partial supplement supported by repurposed federal funds is on the brink of running out. And businesses that were kept afloat during the summer may struggle when colder weather puts an end to outdoor dining and other activities.
There is an alarming precedent for what happens when support fades in the midst of an uncertain economic moment.
In the early stages of the 2008 financial crisis, Congress and the White House — first under President George W. Bush, then under President Barack Obama — pumped billions of dollars into the economy in the form of tax cuts for individuals and companies, infrastructure spending, extended unemployment benefits and other measures.
But Mr. Obama was unable to win approval for further large-scale stimulus efforts, and by 2010 Congress had effectively ceded to the Federal Reserve the job of managing the still-tenuous economic recovery.
“The lesson from the last crisis is that we had elevated unemployment for years, and it was a slow grind to work that down,” Robert S. Kaplan, president of the Federal Reserve Bank of Dallas, said in an interview Monday, explaining that he supports extending fiscal aid. “We have a chance here, if we act quickly, to mitigate the lasting damage that we saw.”
The post-financial crisis pullback in government spending was even more dramatic in Europe, where austerity was enforced across countries with weaker economies and higher debt levels, and where the European Central Bank raised interest rates in 2011, removing monetary support years before the Fed first lifted rates in late 2015. Another slump ensued across European economies, bringing with it years of high unemployment, low inflation and weak growth.
There are important differences between the two crisis eras, especially in the United States. The economy was far stronger before the pandemic hit than in 2007, when inflated home prices, risky lending and financial engineering left the banking system vulnerable. And policymakers responded far more quickly and aggressively this time around.
The Fed cut interest rates close to zero in March, before data showing widespread economic damage had even begun to emerge. In the last crisis, the Fed didn’t take that step until the end of 2008, a year after the recession had begun. The European Central Bank rolled out massive bond-buying programs, something monetary policymakers in the currency block resisted in the immediate aftermath of the 2009 crisis.
But central banks have less room to adjust their policies to bolster growth now than they did a decade ago. Interest rates and inflation have fallen to low levels across advanced economies, stealing potency from monetary policy tools that work by making credit cheap.
That’s where fiscal policy — elected officials’ ability to tax and spend — comes in. Economic theory suggests that fiscal policy can be effective at times when monetary policy is not.
Initially, policymakers across advanced economies seemed far more willing to spend heavily and amass huge deficits than they were during the last crisis, at least in part because the same low interest rates robbing central banks of their power have made payments on government debt cheaper.
In the early days of this crisis, Congress approved legislation that sent direct payments to most American households, established a small-business assistance program and added $600 a week to unemployment checks, while expanding the system to cover millions more jobless workers. Together, the programs dwarfed the response to the last recession.
The aggressive response was successful. After shedding millions of workers in March and April, companies began bringing them back in May and June. Stimulus checks and that extra $600 per week lifted personal incomes in April and May, buoying spending. A predicted wave of foreclosures and evictions largely failed to materialize. By August, the unemployment rate had fallen to 8.4 percent, defying expectations that it would remain in double digits into next year.
Mr. Powell said government spending should get “credit” for the pace of the rebound but warned that risks remain if key programs are allowed to permanently lapse. As unemployed workers run through their savings, they might pull back on spending and lose their homes, he said during Senate testimony on Thursday.
Without more help “we’ll see sooner or later, probably sooner, that the economy has a hard time sustaining the growth that we’ve seen — that’s the risk,” he said.
Economists said Mr. Powell appears to have learned a lesson from the aftermath of the last recession: When the Fed is forced to try to rescue the economy on its own, the result is a painfully slow recovery that takes years to reach many of the most vulnerable households.
The consequences of another slow recovery would almost certainly fall disproportionately on low-income families, many of them Black and Hispanic. Those workers were among the last to benefit from the plodding recovery after the last recession, and have been among the hardest hit by the current crisis.
“This pandemic, and our efforts here, could very well create even greater inequality in our nation than there was even before the pandemic,” said Representative Andy Kim, Democrat of New Jersey and a former Obama administration official. “Some are going to be able to get through this much, much better than others, and those that are not? This is one of those once in a lifetime situations that could very well cripple them for a generation if we don’t take some of the necessary steps in the next few weeks and months.”
Peter S. Goodman and Emily Cochrane contributed reporting.
Building a stakeholder economy – Brookings Institution
Norms and expectations of what corporations should do are changing rapidly. In August 2019, the Business Roundtable, an influential club of the chief executives of major U.S. corporations, announced a new statement on the “Purpose of a Corporation”. Signed by 181 CEOs, the statement of purpose called for a departure from “shareholder primacy” to “stakeholderism” as a core principle of corporate governance, with the CEOs committing to “lead their companies for the benefit of all stakeholders”.
This change of heart in corporate America is a belated response to the decades-old critique and activism against shareholder-primacy. Preoccupation with quarterly profits is blamed for making corporations short-sighted, leading to environmental pollution, income inequalities, weakening workers’ rights, and lower capital investments—all of which are believed to undermine social cohesion and long-term competitiveness. Stakeholderism, also called stakeholder economy/capitalism by the World Economic Forum, is expected to encourage a long-term orientation by rebalancing the asymmetric power of shareholders vis-à-vis other stakeholders, and revitalize the legitimacy of business.
A sizable share of corporations already practice some form of stakeholderism in response to pressure from value-conscious investors, consumers, and others. More than 80 percent of large corporations, for example, claim to explicitly contribute to the Sustainable Development Goals. Environment, social, and governance (ESG) investing—a class of value-based investments that target corporations that meet minimum ESG criteria—has been growing rapidly, with an estimated total value of $45 trillion in assets under management.
Ambiguous definitions, mixed results
But stakeholderism has had mixed success. While some companies have managed to create environmental and social value, many engage in “greenwashing” or “impact washing” to mask their unsustainable performances. This is in part due to a mismatch between a renewed corporate purpose that emphasizes stakeholder value, and corporate governance principles and incentive structures that are primarily designed to maximize shareholder returns. Even as corporations make commitments to take greater societal and environmental roles, they often fail to change their governance guidelines and board structures to reflect these intentions. This has resulted in a dissonance between what they aspire to achieve and what they can show for it—a process that can also undo the legitimacy of the emerging stakeholder economy.
This is due to a lack of consensus on how corporate governance should adapt to help build a stakeholder economy, due in part to a lack of clarity on who qualifies as a stakeholder as well as what stakeholder value entails. Think of Facebook, with almost 3 billion users, or Boeing, with thousands of customer airlines and hundreds of millions of passenger users, all of whom would qualify as stakeholders. Without specificity on what value a company creates, for which stakeholder and how, a generic commitment to advance stakeholder interests has little practical meaning.
It is also feared that the ambiguity of stakeholderism could enable corporate leaders to amass too much discretionary power that would enable them to dodge shareholder oversight. A vague commitment to all stakeholders could also undermine long-term competitiveness if managers set out to meet multiple goals that are incompatible with one another. Further, implausibly high expectations can end up making managers risk-averse, forcing them to settle for a minimum acceptable performance for all stakeholders rather than excelling in specific issues where they have greater competitiveness. A vague and broad focus on stakeholder value could thus make shareholders and other societal stakeholders worse off.
Needed: Institutional Reform
These critiques, however, do not warrant the conclusion that building a stakeholder economy is an impossible agenda. A growing body of scholarly work, including a recent British Academy report, has documented that building a stakeholder economy requires extensive reforms of market institutions to incentive the creation of long-term corporate and social value. At a minimum, such a reform would include three ingredients.
- Renewed corporate purpose. This is best defined by the directors of individual businesses, who should specify the stakeholders to whom the businesses will create value, and how this will be achieved. This facilitates effective corporate governance by providing clearly defined goals, and the mechanism for aligning them with corporate strategy. A study by professors Oliver Hart and Luigi Zingales suggests that organizational purpose anchored in maximizing shareholder welfare can help link corporate strategy with stakeholder value. To the extent that shareholders care about certain non-financial outcomes, such as environmental sustainability, the purpose of the corporation should be geared towards producing these outcomes. Corporations can then communicate their performance via third-party verified reports to demonstrate if and how they have created the desired outcomes to their stakeholders.
- Corporate law reform. Corporate law needs to incentivize directors to take responsibility for the company’s long-term interests, including its social and environmental impacts. Corporate law in many countries is anchored on the principle of shareholder primacy, creating legal challenges for firms that adopt a broader conception of purpose. A recent study commissioned by the European Union underscored the need to modify corporate law to foster the pursuit of long-term corporate goals and environmental sustainability by corporate directors. Another positive development is the emergence of legal innovations for new corporate entities with governance structures designed for addressing long-term societal issues. More than 30 states in the U.S. have introduced legal mechanisms for “benefit corporations” that pursue a hybrid mission of creating financial and social/environmental value. Similar innovations could facilitate investments into corporate innovations for addressing social and environmental problems.
- Complementary regulations. Stakeholderism should not be expected to substitute for the regulation of negative environmental and social externalities. Many of the issues that currently fall within ESG domain are in fact negative societal and environmental externalities that are not suited for self-regulation by markets. Effective regulation of externalities, such as CO2 emissions, can also level out the playing field by penalizing the distorting effects of non-compliance. In a positive development, the European Commission has recently started to develop a legal framework for mandatory human rights and environmental due diligence, which is expected to outline corporate directors’ duties “not to do harm”.
Building a stakeholder economy requires breaking the artificial boundaries that isolate purpose from performance and creating incentive structures that make corporations drivers of sustainable prosperity. This will entail systematic effort to rewire market and regulatory institutions to ensure that they serve the long-term interests of society.
German economy won't be as bad in third quarter as expected, says minister – The Guardian
A grim milestone and update on pandemic-plagued economy. : In The News for Oct. 28 – Kamloops This Week
In The News is a roundup of stories from The Canadian Press designed to kickstart your day. Here is what’s on the radar of our editors for the morning of Oct. 28 …
What we are watching in Canada …
Canada reached a grim and worrying milestone in the COVID-19 pandemic, surpassing 10,000 novel coronavirus deaths.
Alberta reported two deaths Tuesday from COVID-19 to lift the national tally to 10,001.
COVID-19 case counts slowed across the country through the summer, but have taken a big jump in many areas this fall, with new daily highs regularly being set through Central and Western Canada.
Canada crossed the threshold of 5,000 deaths on May 12, a little over two months after the first one was reported.
Health Canada recently forecast 10,100 COVID-19 deaths in Canada by Nov. 1 as a worst-case scenario and now that number is close, Winnipeg epidemiologist Cynthia Carr said.
Carr said the increased spread of COVID-19 will result in more opportunities for the virus to infect the elderly and other vulnerable people.
But she said she doesn’t believe imposing further lockdowns on peoples economic and social well-being are the answer.
“We’re sabotaging those businesses and people that are paying the price because they are the ones that have been targeted as part of the solution to stop the spread.,” she said.
Prime Minister Justin Trudeau admitted today that the COVID-19 pandemic “really sucks” but added that a vaccine is coming.
Also this …
OTTAWA — The Bank of Canada will release its updated outlook for the country’s pandemic-plagued economy.
The central bank in July said it believed the country had been spared from a worst-case scenario envisioned in April, but warned things could change.
Governor Tiff Macklem has said a severe second wave of the pandemic, health restrictions that extend beyond December and the timing of a vaccine or other effective treatment could all shift the country’s economic course.
This morning the central bank will provide a more detailed analysis of its forecast for the domestic economy as the country marches through a second wave of COVID-19.
Macklem has said the central bank will keep its key policy rate as low at it can go at 0.25 per cent until the economy has recovered and inflation is back at the bank’s two-per-cent target.
That means experts don’t expect the central bank to change the rate from near-zero when the bank makes its announcement later this morning.
What we are watching in the U.S. …
PHILADELPHIA — The lawyer for the family of a Black man killed by Philadelphia police officers in a shooting caught on video says the family had called for an ambulance to get him help with a mental health crisis, not for police intervention.
Police say 27-year-old Walter Wallace Jr. was wielding a knife and ignored orders to drop the weapon before officers fired shots Monday afternoon.
Following a second night of arrests and reports of theft in sections of Philadelphia, a White House statement asserted that the unrest was another consequence of what it called “Liberal Democrats’ war against the police.”
What we are watching in the rest of the world …
Satellite photos show Iran has begun construction at its Natanz nuclear facility.
That’s after the head of the UN’s nuclear agency acknowledged Tehran is building an underground advanced centrifuge assembly plant after its last one exploded in a reported sabotage attack last summer.
Since August, the satellite photos show Iran has built a new or regraded road to the south of Natanz toward what analysts believe is a former firing range for security forces at the enrichment facility.
Analysts from the James Martin Center for Nonproliferation Studies at the Middlebury Institute of International Studies say they believe that site is undergoing excavation.
On this day in 2008 …
Barenaked Ladies frontman Steven Page avoided jail time on drug possession charges provided he seek substance abuse treatment and stay clean for the next six months. Page was charged with drug possession in July after police found cocaine at a Fayetteville, N.Y. apartment. He complied with his probation conditions and the charges were eventually dropped.
In health news …
The Canadian Medical Association says ongoing surgical and diagnostic backlogs will only worsen without immediate government help to address a strained health-care system.
The CMA found average wait-times increased by one-to-two months for the most common procedures in the first wave and it would take $1.3 billion in additional funds to tackle procedures sidelined from January to June because they were deemed non-essential during the pandemic.
A study ordered by the organization looked at the six most commonly delayed procedures: CT and MRI scans, hip and knee replacements, cataract surgeries and coronary artery bypass grafts, which all plummeted in April, when almost no cataract or knee replacements took place.
Although procedures gradually began to rebound in June, the report found more than 270,000 people had their MRI scans — which can detect serious disease or injury — delayed by a national average of nearly eight months, more than seven weeks longer than before the pandemic. Those waiting for knee replacement surgeries had to wait an average of 14 months, about two months longer than before the pandemic.
“The impact on wait times is just going to be the worst-ever in our system,” CMA president Dr. Ann Collins says.
“It’s going to have serious consequences the longer this pandemic goes on.”
An original member of the Jamaican bobsled team featured in the 1993 movie “Cool Runnings” is imploring whoever stole the nose cone from a sled that appeared in the film to return it to a Calgary bar.
Devon Harris, who is also chairman of the Jamaican Bobsled Federation, says he’s not going to lose sleep over the missing bobsled shell, but is disappointed over the news.
“It’s gone too far now,” Harris says. ‘”Just bring it back.”
Police say the shell was last seen at Ranchman’s country bar last week as it hung outside below the roof of the building. The sled was a gift to to the business by the movie’s production crew after some scenes were filmed there. The bar closed last month.
“Cool Runnings” is loosely based on the true story of the national Jamaican bobsled team’s debut at the 1988 Winter Olympics in Calgary.
Harris, who lives in New York, says he saw a friend from Calgary post on Facebook about the stolen black bobsled shell with the Jamaican flag colours — black, green and gold — and immediately rolled his eyes.
He says the sled was a gift from a Canadian bobsled team and was later painted for the movie.
“It’s kind of like this work of art that somebody go hide in a basement and they are the only ones who have the opportunities to enjoy it.”
This report by The Canadian Press was first published Oct. 28, 2020
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