The Great Unknown

Guest Post by The Zman

If we use President Trump’s address to the nation on March 11 as a start date, the coronavirus panic is now three weeks old. That Thursday morning, the airlines were overwhelmed with requests to cancel and change flights. People ran out to buy a lifetime supply of toilet paper. States began to clamp down on civil life with shut down orders and so forth. In the fullness of time, that speech will be seen as the point we moved from indifference to complete panic over the virus.

Now, the week following the initial panic was not a total lock down of civil life, as only a few states had started down that road. It was the following week when the great shutdown of the economy started in earnest, so we are just about ready to wrap up the second week of limited economic activity. Friday is when the government releases the weekly unemployment claims. Last week the number was 3.3 million and this week the number is expected to dwarf that figure.

As this goes to post, the estimates for the number of new claims are between 3.5 million and 5.25 million. The record for number of claims in one week was set last Thursday, so the next report is expected to be the new record. To put that into perspective, these are numbers four and five times higher than previous highs. There is no precedent with tens of millions of people being suddenly furloughed, as businesses are forced to close around the country, because they are told to close by the state.

Right now, 31 US states have some form of lock down in place. Not all are the same and not everyone obeys the edicts. There are plenty of people out and about, but major east coast cities now look like ghost towns compared to normal times. Lots of people are working from home, of course, but retail life has just about come to a halt, which means wholesale life is also slowing to a trickle. No one knows how long this will go on, but conventional wisdom currently says another month.

What this all means for the economy is completely unknown. The St. Louis Federal Reserve is out with a report claiming 47 million people will be out of work at the peak of the fallout from the lock down. That equates to a 32% unemployment rate. We are in unprecedented territory now. According to the report, “These are very large numbers by historical standards, but this is a rather unique shock that is unlike any other experienced by the U.S. economy in the last 100 years.”

Now, there is some hope that the depression will be V-shaped. That is, the economy comes back on in May or June and all of a sudden all of those furloughed people are hired back as business reopens. There will certainly be some of that, as the businesses that have not run out of cash will reopen, hoping to remain viable long enough to weather the storm. Many will have gone under, having run out of cash. Even in a V-shaped recession, it takes a while to fully recover.

The stock market is not always a useful guide for judging the economy, but in this case it can give us some clues. Right now, the robots that do 99% of the trading have factored in what they expect over the next six months. They have also factored in what they expect from government stimulus and bailouts. The Dow Jones has settled in around the 21,000 mark this week. The big sell-offs have subsided and investors are slowly buying into what many think is the bottom of the market.

Still, it is all guessing at this stage. Some states are talking about extending the lock-down into May or even June. China having a second lock-down is going to be seen by the alarmist as a sign the lock-down must continue forever. Given that we’re still at peak hysteria and have yet to hit peak infections, it is not unreasonable to think this carries into May. That means the lower end of that V-shaped recession gets much deeper and the angle coming out of it becomes much more gradual.

The only thing we can be sure of at this point is whatever lies on the other side of this is going to be very different from just a month ago. Politics, for example, are already changing, as the players respond to the new reality. Trump is turning into the wartime president, which is always good for the president’s numbers. He will no doubt become the great cheerleader of the recovery this summer, as he will want to take credit for the recovery from the lock-down, assuming there is one.

The question though is what will politics look like in a world of 30% unemployment, even if it is short-lived? If half the furloughed workers come back by June, that still means a world of unemployment levels not seen in generations. The last time we had double digit unemployment was 1982. You have to go all the way back to the Great Depression before seeing double digit unemployment again. Even allowing for the way these numbers are calculated, no one alive has seen what’s coming.

Lots of people will rush forward at this point arguing that these unprecedented times will suddenly make their preferred world view popular. The libertarians are smugly sure that this time, people will lose faith in government and join the libertarian revolution. The neocons are sure their treachery will be vindicated. On this side of the great divide, there are lots of cheers for the death of the economy, in the belief that putting millions of white people out of work will radicalize them.

That’s the thing though. This is uncharted territory. America is not Weimar Germany or 18th century France or 19th century Russia. We have no examples of a country turning itself off like this. We don’t really know why our rulers are doing this. The claim is the virus threat, but we have had worse virus threats and the ruling class did not go insane like this, so something is different this time. All we can say for sure is we moved from a world we generally knew and understood into a world of the unknown.

How will a people used to excess respond to a world of want? It is entirely possible that we get lots of real poor people again. That is, people with barely enough to feed themselves and a place to sleep. More important, those poor people will be visible to the middle-class again. How will people respond to that? How will people look at the plutocrats in a world with real poverty in plain sight? How will those plutocrats respond to such a world? No one has thought about it, so no one knows.

That means the politics of the future are probably not going to look like anything we have imagined. The old Left-Right axis makes no sense. The Left-libertarian versus Right-libertarian dynamic is now as relevant as Whiggism. If it is a short depression, then politics will revolve around the new state controls that are credited with “saving the economy” from the virus. If it is a long depression, then politics becomes a zero-sum game to see who fills the void of the discredited old politics.

Perhaps we are the first people to look out into the distance and get a glimpse of what comes after post-scarcity society. Maybe it is just a return to scarcity. Maybe it is a world with a high tech palace economy and fewer and fewer people working. Maybe the white nationalist get their wish and everyone becomes a dependent of the state. Maybe this look into the void frightens us and we scurry back to the safety of the past. For now though, we are staring out into the great unknown.

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