In February of last year, I published in the Hartford Business Journal an article titled, “Is it time to start planning for a recession?”
It was more of a statement than a question. However, I was wrong on when it would start. I predicted that it would happen by the end of 2019. It is happening now.
My slightly cloudy crystal ball was wrong on identifying the cause as a viral pandemic that has slowed global trade and global travel to a halt. Now, the question is not whether it is time to start planning for a recession, but what should be done by government, at all levels; business owners of all sizes; consumers at all income levels; and investors at all levels of wealth in order to minimize the length, the depth, and the damage that is surely to come.
To answer this question, we need first to understand that this economic crisis is different from all previous modern recessions, or dare I say the word depressions.
The most recent economic crisis in 2008-2010 was the result of speculation in financial markets (collateralized mortgage obligations), abuse by banks and mortgage brokers of low- and moderate-income home borrowers who were directed into loans they could not afford or understand, and regulators who looked the other way at these and other abuses in real time.
This recession while occurring at a time of great fragility in markets, largely related to the age of the expansion from 2010 to 2019, is the result of a health crisis that has revealed additional weaknesses in our social and political infrastructure that serves as the foundation for our economy.
Historically, the biggest improvements in the health of populations have come from investments in clean water, waste systems, clean air, widespread immunizations and vaccinations, food safety, auto safety, work safety, and regulations controlling the quality of housing.
Without these fundamental investments in social infrastructure, innovations in medicine and pharmaceuticals would be irrelevant and ineffective.
While the comparison is not entirely fair, the Centers for Disease Control and Prevention’s budget was $11.1 billion compared to more than $725 billion for the Department of Defense.
And according to the industry trade group, PhRMA, in 2017, the top pharmaceutical companies invested more than $71 billion in research and development.
Our private and public investments have all but ignored public health. I guess there is no money to be made there.
But the problem now is a problem of leadership. The stock market has lost confidence in the Trump administration’s ability to effectively deal with the crisis. Trump from the very beginning of the crisis viewed and acted as if it was a political crisis and not a health crisis. His overriding concern has been and continues to be personal and not on the needs of the nation at large.
The market now sees that his behavior is inconsistent with economic growth and stability. You might be able to create an alternative reality around domestic or global political issues, but viruses pay no mind to jawboning by presidents, particularly when those comments are not based on science.
The appropriate response to the current health crisis is to deploy all available resources to combat the virus. The initial $8 billion investment while more than triple what the president asked for last week is wholly inadequate to fight the virus, or to support the American people.
In terms of the economy, the bold actions that need to be taken at the federal level should be to increase dramatically paid sick leave to every American worker. Congress recently did that, which is a good thing.
If we want workers to stay home when they or members of their households are sick, we should pay them to stay home. And when this crisis is over, this is a benefit that should remain.
The administration’s policy recommendation to reduce payroll taxes assumes you are still on the payroll. Small and large businesses will have little choice but to start laying off workers as social distancing becomes a reality.
I visited two malls last week, both in higher income suburban Connecticut communities in Fairfield County and Hartford County. Both malls were nearly empty. Workers need to be supported with expanded unemployment insurance so that when they are laid off, they still have income to support their families.
The president announced that he would authorize the Small Business Administration to make up to $50 billion in new loans to small businesses impacted by the crisis. This is in general a good thing, but it fails to realize that it is not new loans that small businesses need, it is relief from existing debt during this period of reduced cash flow.
This is particularly important in Connecticut where 90 percent of all businesses in the state are small businesses. A better approach would be for banks and small business owners to renegotiate their loans to accommodate this new reality.
These are all short-term measures. Long term, corporations will respond to this crisis by having a more robust supply chain that is less dependent on China.
The president and Congress will re-balance the federal budget to reflect what is likely to be recurring public health threats. American investors need to reassess their time horizons for when they will need their wealth and for what purposes. In terms of the Dow Jones Industrial Average , I suspect that this crisis has the potential to knock more off the averages before things bottom out. The reduction in wealth that has already occurred will have a significant impact on the overall market and contribute to further declines.
Unlike past recessions that started in specific industries, for example oil and gas in the 1970s, savings and loans in the 1980s, housing in 2008, this crisis has and will impact every industry, every business, and every consumer. We need to get focused – fast.
Fred McKinney is the Carlton Highsmith Chair for Innovation and Entrepreneurship and Director People’s United Center for Innovation and Entrepreneurship at Quinnipiac University.
