One of the things I love about economics is the way to describes reality in numerical terms. This allows me to get an idea of what’s happening and whether or not something is better or worse than a previous result. For example, you can watch the price of gold to get an idea of the level of fear or concern in the economy. If consumer confidence is increasing, it’s likely that retail sales will as well; if business confidence is high, investment should be higher as well. And I love watching market data because it acts as an amalgamation of the country’s economic id.
But due to the coronavirus pandemic, the data won’t make any sense — at least not in a typical manner. Take, for example, today’s jobless claims data:
In the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000, an increase of 3,001,000 from the previous week's revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high was 695,000 in October of 1982. The previous week's level was revised up by 1,000 from 281,000 to 282,000. The 4-week moving average was 998,250, an increase of 765,750 from the previous week's revised average.The previous week's average was revised up by 250 from 232,250 to 232,500.
The chart really shows how incredibly different this is:
That level of increase just doesn’t happen. Normally, jobless claims ramp up. Here’s a long-term view of the 4-week moving average of initial unemployment claims:
Normally, claims ramp higher. While today’s numbers are no less real in their implications, they also are far removed from our standard method of understanding data.
And that’s where the policy brief Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period from St. Louis Fed President James Bullard comes in. Bullard provides us with a conceptual framework through which to view the current economic situation.
Bullard begins:
The coronavirus has the potential to create catastrophic health outcomes in the U.S.2 In order to mitigate this, public health officials have recommended a variety of social-distancing policies to slow the spread of the virus. In addition, social interaction has declined dramatically due to voluntary withdrawal by individuals, corporate work-from-home policies and government restrictions.
These actions and policies have had the effect of engineering a controlled, partial and temporary shutdown of certain sectors of the U.S. economy. The productive capacity of the U.S. economy is fundamentally strong and resilient—nevertheless, this organized “throttling down” radically changes the way we need to think about and gauge the health of the U.S. economy in the near term.3 The U.S. economy will, by design, behave very differently than what is conventionally assumed in ordinary times—so differently, in fact, that ordinary business cycle analysis will be ineffective and cease to make sense. The goals of macroeconomic policy will need to be very different, in some ways the opposite of what we would normally try to accomplish.
Bullard argues that we call this period NPAP — the National Pandemic Adjustment Period, during which time the US’ policy orientation is preserving public health. As a result, the country has no choice but to decrease economic activity. During this time the economy will act very differently. And -- most importantly — the way we normally look at and understand the economy doesn’t work. This leads to these two key observations (emphasis added):
It would be inappropriate to characterize that outcome as a recession because it is undertaken intentionally to meet public health objectives. In particular, it is inappropriate to argue for “economic stimulus” intending to ramp up production or create new demand in this situation, as that would work at cross-purposes with the goal of reducing the level of economic activity in order to meet public health objectives. A better concept is that we should strive to “keep everybody whole” during the NPAP, as described in more detail below
The “stimulus package” is really a giant bridge loan for the US economy to get us through this throttling down of economic activity. As a result, normal business cycle economic analysis doesn’t work.
Bullard proposes three policy responses:
1.) Reducing economic activity
2.) Keeping people and businesses whole
3.) Paying for this.
Bullard proposes July 1 as a time when we should reevaluate this policy.
Unprecedented times call for a different analysis. St. Louis Fed President Bullard has proposed a well-conceived framework for this analysis. I hope it helps you understand this situation for what it is — a period which is out of economic time.
