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Sunday, October 25, 2020
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  • MUNCIE – The COVID pandemic continues to affect commerce and government in what is clearly the worst year for the economy since the Great Depression. We don’t yet know how deep this will be, but there is growing evidence of an increasingly delayed recovery. There is some good news. The official unemployment rate has dropped significantly and commerce is clearly recovering in many places. Still, in October 2020, the risk of COVID remains significant and depresses consumer spending and business investment. The most alarming piece of data is the growing number of permanently unemployed workers. The COVID spike in those reporting permanent job losses returned us to 2013 levels. The economic absorption of permanent job losses is a major factor in the duration of recovery. If the re-employment of permanent job losers is twice as fast as it was after the Great Recession, it will take close to four years to recover.  I know of no economist predicting a labor market miracle in the wake of COVID. COVID will continue to cause permanent job disruptions until a vaccine is widely available. It is easy to build a plausible scenario where permanent job losses weigh on the U.S. economy well through the 2020s. Worse still, the administrative data on job losses report more than twice the rates of job losses than do the survey data used to calculate the official jobless rate.
  • MUNCIE  — A background to the coming election will be the growing rural-urban divide in America, and how it affects political prospects on the coming decades. Some of the handwringing will be overwrought, but there are a few critical points to consider in the years ahead. Let me try to address some of the issues that will certainly influence economic policy towards city and rural communities in the decades ahead. I begin by dispelling some myths. Rural places are culturally and ethnically very diverse. They differ profoundly in types of economic activity, the ethnic origin and religion of inhabitants, and the political tendencies of voters. West Texas ranches are vastly different from Vermont farms or inland California almond farms, which differ greatly from Nebraska row crops, Florida orange groves or Washington vineyards. Looking beyond agriculture, we see that manufacturing, mining and tourism mean the industry structure of rural places are also very different. These places are populated by different people, from different places, and are as diverse and full of cultural variation and wonder as any great city. 
  • MUNCIE  — Most every chat I have about the U.S. economy inevitably turns to the size of the national debt. Of course, this used to be an issue that mattered to those who called themselves conservatives, but that was in an earlier, more innocent time. Before I lament the recent dissolution of reason on this issue, it’s important to explain how the debt does and does not matter. The most dishonest argument about the debt compares government to a business or household. The argument, most famously made by Ross Perot, is both silly and dangerous. It is silly because families and businesses borrow money. Indeed, many financial advisors will say it is wise to borrow money to buy a home that is worth between 2.5 and 3.0 times your family’s annual income. The U.S. has a debt that is about equal to one year of GDP.  The comparison of government debt to family or household debt is dangerous because it fails to recognize the special role of government. Government provides goods and services that should outlast every household and business.
  • MUNCIE  — The economic statistics that aid us in understanding the current state of the economy are in the midst of an unusual, if not unprecedented, upheaval. Combined with the equally unparalleled oscillations of the economy through the early months of COVID, economy watchers are naturally confused. Add to this the tendency towards dissembling that accompanies elections, and we are poised for a couple of months of economic confusion. This column is aimed at relieving some of that confusion. The staff of the U.S. Bureau of Labor Statistics, Bureau of Economic Analysis and Census survey teams are responsible for compiling and reporting data on employment, GDP and other economic data. They are, by far, the best economic statistical services ever devised. Governments have been at this for more than a millennium, and the work done today is first rate and thus far immune from political shenanigans. Americans should be pleased with the economists, statisticians and data scientists doing this work. They are not perfect. 
  • MUNCIE  — The recession that began formally in February continues to weaken the economy. While the early burst of lay-offs has passed, a more permanent loss of jobs and businesses is settling into a record pace. The call-back of those temporary lay-offs is welcomed, but it masks the fact that continuing job losses remain at a pace not seen since the Great Depression. Despite the cheerful claims of the Trump Administration and its supporters, just last week we lost jobs at twice the rate of the worst period of the Great Recession. The pandemic continues to exert a historic effect on our economy, and we must confront it with honesty, facts and determination. The uneven experiences of many families during this downturn may prove a more lasting effect of this downturn. Over the past six months, cumulative job losses tell a stark story of this recession. Cumulative employment for college graduates is down 1.7%. This is horrendous and is more than twice the cumulative loss of jobs for college-educated workers we experienced during the 2007-2009 downturn. Despite this, they are the lucky ones. 
  • MUNCIE – Almost every casual conversation I have about the economy turns to the stunning recovery of the stock market. From investment professional to anxious observer, few can reconcile a Great Depression level of unemployment and GDP declines with the resurrection of stock markets that took place since the crash of March 2020. Now, I don’t wish to pretend I can forecast stocks or fully explain why they’ve recovered. If I could predict the stock market 60% of the time, I’d be among the richest men in the world in just a few weeks. What I can do is offer some reasonable causes for the wild swings and nearly full recovery we’ve experienced over the past six months. To begin, I’ll have to share some too infrequently spoken truths about stock markets. The first is simply that stock markets exist to match household savings with investment opportunities. This is what all financial services do, and stock markets are especially good at it. For all the convenient critiques of Wall Street as a place for rich people, most American families own stock. If you have any retirement fund, at any time in your life, you are a Wall Street investor. You may pick stocks yourself or, like my family, let a fund manager pick them. Either way, you are a capitalist. In fact, we are nearly all capitalists now. That is news to celebrate, because the future will require the economic growth that only capitalism can deliver. The stock market is important for other reasons. 
  • MUNCIE – As I pen this column, Congress is debating a follow-up to the CARES Act, aimed at mitigating the effects of a worsening economic downturn. There are many points of contention between the parties. Among the most important disagreements is that of economic support for state and local governments. Several prominent members of Indiana’s congressional delegation have spoken out against this proposal, decrying it as a bail-out for fiscally imprudent states. They are right to be wary of this. Federal taxpayers should not bailout irresponsible cities and states. If that were the case, I would support that position. However, the economy is worse than generally believed, and the depth of fiscal distress felt by state and local governments much worse than generally understood. In fact, Indiana’s experience demonstrates why the nation needs a very large state and local tax support payment. Indiana’s economy has thus far been less affected by COVID-19 than most states. We are manufacturing-intensive, so a fair share of joblessness in the state was temporary. That is reflected in the large reductions of unemployment reported over the last two months. However, while many businesses are able to adapt, the underlying loss of permanent jobs is alarming.
  • MUNCIE - Economic data releases this past week painted a darkening view of the U.S. economy as it starts its third quarter of contraction. Declines in economic activity from February through June were stark. I pen this column before the release of Second Quarter GDP growth, but there is little doubt it will be the worst single quarter of growth in U.S. history. The consensus is that it will be somewhere between twice and three times as bad as the sharp drop in 1958 that accompanied the flu pandemic of that year.  More ominously, nearly every other indicator suggests a deepening economic downturn. Consumer confidence continues to plummet, rates of return on capital drop and we see an uptick in initial jobless claims. I could use the entirety of this column to describe the cascades of bad economic news. Instead, I will discuss the single piece of good news, and explain why it is a mirage. The spike in unemployment that took place from March through May is receding. Many workers faced temporary lay-offs due to interruptions in supply chains and initial reactions to government shutdowns. Those whose businesses remain are returning to work at a rapid pace, providing the illusion of a quick recovery in the monthly job reports. This disguises two other indicators of a weak economy.  The first is that a large share of workers who now report temporary job losses are mistaken. Business surveys suggest maybe half those currently unemployed face permanent job losses. These workers will not go back to their old jobs. The second problem is that we’ve stopped counting the 7 million or so workers who have exited the labor force since February.
  • MUNCIE – America’s colleges and universities are in the midst of reopening in what is sure to be a reckoning for many. My oldest already began her senior year, and my college sophomore heads back in early August. Both face strict rules on mask wearing and social distancing. They return to a combination of online and in-person instruction, with a schedule fraught with uncertainty. Right now, about a third of schools have announced this hybrid model, with more than half planning for in-person classes. A few have elected to be online only, but this raises real challenges to colleges. I have written about the economic effects of the K-12 decisions before us, but there are economic effects to reopening colleges as well. Some of the costs of COVID-19 on U.S. colleges are already emerging. International enrollment will drop, perhaps profoundly, as few students can travel to the U.S. to start school. Some will take online courses, but many will opt to delay a year or substitute a Canadian or U.K. university for a pandemic-stricken American school. This loss of out-of-state tuition will be enormous for some schools, and it is combined with a drop in other revenues.  Nearly every U.S. state has announced or implemented budget reductions for higher education. For those with endowments, stock volatility augers little good news for financial returns in the year ahead. Research dollars are likely to be down this year, and extra revenue from summer programs and athletic events face epic declines. Nearly every American college or university is downsizing staff. 
  • MUNCIE – With some reluctance I write about the decisions that grip some 30,000 school districts across the country. I am hesitant because I don’t wish to be prescriptive about the most contentious issue of in-person versus remote learning. In our republic, decisions of this nature are inherently local. As both a parent and keen observer of schools, this suggests to me that school districts are trying to address issues as completely and thoughtfully as possible. What I wish to do with this column is outline the very high stakes of this decision and walk through how the rest of us might make that decision simpler. Both the decision to hold in-person classes and the decision to go online have enormous costs. The landscape for decision making is tough.  Indiana has about 1.1 million kids in grades K-12 spread across almost 300 school corporations. Of these, about 7% or more have no internet at home, and many more have intermittent service or slow download speed. All told, somewhere between one third and one half of Hoosier kids face real learning obstacles with online instruction. It should be obvious that the school closing in March was most damaging to those students who were already the most vulnerable. It is likely the learning gap between the poorest and most affluent students grew more last year than at any time in American history. This is a strong argument for opening schools, but there is more. If schools do not re-open, we will extend the single worst labor supply shock in U.S. history. By my count, 7% to 10% of workers are either single parents or one partner of a dual income couple with children age 5 to 12 years. Many, perhaps most, of these workers will be unable to work if schools don’t re-open. The loss of this many workers alone is enough to push us right to the brink of a depression. 
  • MUNCIE  — After facing three weeks of withering criticism about new visa restrictions, the Trump Administration took the opportunity this week to further damage the U.S. economy. This time, the damage may be far more immediate and widespread, affecting hundreds of American cities, more than a million foreign college students and millions of U.S. workers. With every American college and university considering fully online courses this fall, the Trump Administration announced it would revoke the visa of any foreign student enrolled in a school that will be doing online-only classes. As best I can tell, well over 90 percent of U.S. college students will take one or more online courses this fall. Nearly every American university will be a hybrid of online and in-person classes.  Should the disease spread, as it is now doing across much of the nation, many schools will drop in-person classes. This puts more than a million foreign college students and their families at risk of deportation. Here’s what that would do to the American economy. Foreign college students are one of our largest export sectors. If this rule is actually enforced, even for a quarter of students, it would be the single worst loss of American exports since World War II. 
  • MUNCIE  — The past several months ushered in unprecedented changes in economic activity. By the end of May, roughly one in four workers was unemployed and many sectors of American commerce ground to a virtual stop. The previous high of unemployment was registered at 25.5% in the summer of 1933, the depths of the Great Depression. While our data may soon eclipse that level, our economic conditions are far better. After adjusting for inflation, we are six times more affluent than we were during the Great Depression. This fact manifests itself in our economic worries. Today, we concern ourselves with internet access for students, economic security for gig workers and other matters an epochal distance from the worries of the Dustbowl. Our affluence permits us the ability to replace lost income and subsidize healthcare. In terms of human suffering, our economy today is not comparable to the Great Depression. Still, current economic conditions may well grow bad enough to destabilize the Republic. No democracy with an unemployment rate of 25% has failed to face significant challenges to its liberty. In 1932, the communist and socialist parties received nearly a million votes in the U.S. presidential elections.
  • MUNCIE  — If the media buzz is true, the Trump Administration will use the solemn occasion of Memorial Day weekend to further expand the disastrous trade war with China. This time, he will use the global pandemic as an excuse to restrict imports of medicine and medical devices. This is a bad policy that will raise health care costs on Americans while doing nothing to boost U.S. jobs. It is nothing more than a cynical ploy to divert attention from an erratic and unfocused response to this pandemic. Before explaining why this is such an imprudent turn of events, I must report some truths about China’s government that the Trump administration is unwilling to say out loud. The People’s Republic of China is a deeply evil enterprise. Right now, they have more people in concentration camps than did Hitler at the height of his powers. Their government scoffs at the value of the individual, and they export a malicious presence across Asia and Africa. If we lived in a moderately just world, tens of thousands of Chinese government officials would face Nuremburg-type trials for crimes against humanity. 
  • MUNCIE  — Along with many states, Indiana is moving slowly away from some restrictions in the stay-at-home or shelter-in-place orders implemented in late March. Over that six-week period, more Hoosiers died of COVID-19 than died in the Vietnam War. The state’s economy experienced unprecedented damage. The next jobs report will be the worst since the Great Depression, even though it will understate the actual share of unemployed by 5% or more. State tax revenues were more than $1 billion beneath the expected level in April. While part of this reflects payment delays, we clearly face the bleakest government budgets in a lifetime.  In previous columns, I argued that Indiana’s response to COVID-19 saved lives and was clearly justifiable on economic grounds. As evidence continues to mount, my analysis looks even more right than it did three weeks ago. But, as we move away from the most restrictive shelter in place rules, evaluating the efficacy of those reductions proves more difficult. Both the economics and the epidemiology of the disease are now more complex. With this comes greater uncertainty.  It is clear Indiana flattened the curve, and so the challenge now is determining what restrictions to loosen or tighten over time. 
  • MUNCIE — Precautionary steps to stop the spread of coronavirus have obviously affected the world’s economy. I use the term “affected” instead of “hurt” because this is a policy choice between two bad options. I think it is clear we chose the least damaging option. Over the past few weeks, the center in which I work, as well as others around the nation, have attempted to model the economic, fiscal and labor market effects of this less painful option. As with any economic analysis, there is uncertainty about the depth and persistence of the path we have chosen. The source of some of this uncertainty is obvious, but much is not. As we look forward to more normal economic times, it is helpful to think about what we cannot yet know, and what this means for our projections about the economy. The first and most obvious source of uncertainty is just how long this first onslaught of the coronavirus might be. Right now, the economic shutdown most states have ordered is designed to preserve lives. However, even if we manage to keep the death toll down to an astonishing 100,000 this spring, it is pretty clear the economy will not magically rebound back to the pre-COVID-19 levels. 
  • MUNCIE  — The nation’s monthly jobs report published earlier this week was jarring. I write before its publication, but expect the unemployment rate to more than double. Monthly job losses are sure to crush the previous record of September 1945. Despite this, it is worth noting that September 1945 was surely the most welcomed month in all of human history, marking the end of World War II. We would be wise to view the unemployment rate and other short-term economic data as imperfect measures of human flourishing. Last week, Dr. Tony Fauci, a man who no longer requires introduction, predicted 100,000 to 200,000 deaths from COVID-19. This eye-popping figure accounts for the extreme measures now being taken in many parts of the nation. Business as usual would’ve likely resulted in a tenfold loss of life. Faced with these large numbers, we need to place a more personal context on this tragedy, and muse upon the potential change this will lead to in our economic lives.  At the top range, Dr. Fauci’s estimates are more than five times the annual American deaths from automobile accidents. This means that by late April, nearly every adult will know someone who has died of COVID-19, and someone in every neighborhood, school and place of work will have been sick with it. Such suffering cannot fail to have broad effect on the structure of our economy. 
  • MUNCIE — No individual human life is possessed of infinite value. At least, none of us actually behave as if it does. No matter how fully each of us wish to live, we inevitably take risks. We ride in automobiles, eat food prepared by unknown hands, trust in medicines and home appliances tested by scientists. At some point, nearly all of us take some risks to save another, care for or comfort a loved one, or volunteer for some public service that risks injury or death.  Economists have long worked to place a dollar value on individual human life. We do this so that we can better understand how rational people value their own lives and those of others. Some of that calculation is readily tractable. It is straightforward to estimate lifetime earnings or the contributions someone can make to their care of their family. Estimating the value that others place upon a life is harder. We acknowledge that companionship has value but is much harder to calculate than lifetime earnings. Of course, people don’t do mental mathematics this way anymore than a teenage gymnast on the uneven parallel bars solves differential equations in her head. Instead, we have social norms that help guide us. 
  • MUNCIE  — This is the third column I’ve written this week. The first two were overcome by fast changing events. So, I will surrender to the deadline and pen a few words about how to think about COVID-19 over the longer term. This should help us formulate and accept the challenges of the coming months.  We are in recession which will be very deep one. Before today, the single largest increase in unemployment came in September 1945, right after V-J Day.  That month we lost 1.9 million jobs. As of March 1, the U.S. had 2.66 million waiters and waitresses. Nearly all of them are now unemployed. The U.S. unemployment rate will double in two weeks, and rise to double digits by May. By June the unemployment rate will be higher than at any point since the Great Depression. From that point forward, things might get worse. It depends mostly on the path of this disease, and how we respond.  Some believe we are overreacting to the coronavirus. They may be right, but for the past several weeks, many epidemiologists across the globe have produced startling research about this disease. These aren’t people who read casually about it, but the men and women in university laboratories who will write the book on this disease. If you argue that we are over reacting, the world wants to see your epidemiological projections and cost estimates. If you don’t have any, follow Abraham Lincoln’s advice and remain silent.  

  • MUNCIE  — The unfolding response to the Covid-19 disease is helpful in clarifying both the limits to government and the wisdom of our federal system. What most of us are now learning is that our most useful governments are local. The farther away government gets from us, the less useful it becomes in matters that directly affect our lives. This is not only a good lesson, but a fine fact of governance. Many of us look to the federal government for guidance in all matters of policy. In reality, the federal government is responsible for very little of the public sector’s influence on our lives. The events of the day should make it clear that this is a fortunate truth. While it is true there is a Center for Disease Control, most of the world’s experts on communicable diseases work in universities around the country. There are economists in the federal government who can help design policy responses, but most of the new ideas come from universities and think tanks dispersed around the nation. Our expertise on these critical issues is broad and diffuse. 
  • MUNCIE  — This week’s volatility in capital markets captures some of the growing concern over Covid-19, or coronavirus. Stock markets are very poor guides to the overall economy, but that does not mean they are wrong this time. In fact, I think they are late to the game. Much of the global economy has been slowing in recent months, and Covid-19 strikes directly at supply chains for the already struggling U.S. manufacturing industry. At the very least, the next few months will see much of the globe enter recession. With those prospects, it is useful to think about the effects of viral pandemic on our economy. Large-scale disease has long been with us, but few Americans under 70 have meaningful memory of them. Before the polio vaccine of 1955, summer polio outbreaks closed pools and fairs and delayed school openings. Americans younger than roughly age 53 don’t have smallpox vaccine scars, and mostly dodged the mumps and chicken pox, which nearly all of us older that 55 endured. We have seasonal flu, sometimes very bad strains, but the last large-scale viral disease pandemic was the 1918-1919 Flu, which killed 685,000 Americans out of a population less than a third of the current size. The unfortunately named Spanish Flu killed four times as many Americans as did World War I, which ended in 1918. To place that experience in context, the 1918 Flu killed more Americans in one year than all the cumulative U.S. deaths from HIV/AIDS. I understand the mathematics of epidemiology, but not the biology of the disease. There is much we don’t know about Covid-19. We don’t know how many people are infected but show no symptoms, or whether some populations will enjoy some immunity. This also means we don’t know what share of infections lead to disease or death. However, there are some aspects of this disease that may magnify its economic effect. 
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  • Beau Bayh makes campaign debut
    “The first home I went home to in Indianapolis was the Governor’s Mansion, which is proof that Democrats can win in Indiana.” - Beau Bayh, campaigning on behalf of Democrat gubernatorial nominee Woody Myers. He is the son of former governor and senator Evan Bayh. In October 1984, a young Evan Bayh barnstormed the state with underdog gubernatorial hopeful Wayne Townsend ("Go get 'em, Wayne"). When the pair appeared at the Elkhart Truth, reporter (and future Bayh) staffer Phil Schermerhorn asked Bayh, "Evan, what are you running for?"). In 1986, Evan Bayh won the secretary of state's office, then ended the GOP's 20-year gubernatorial dynasty two years later. With Hoosier Democrats barely above the Libertarians in the party pecking order (Donald Rainwater is running TV and radio ads; Myers isn't), the young Bayh's appearance will stoke up speculation that it may take a third-generation Bayh to restore Indiana Democrats to major party status.
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  • Trump nominates Judge Barrett for SCOTUS
    "The flag of the United States is still flying at half-staff in memory of Justice Ruth Bader Ginsburg to mark the end of a great American life. Justice Ginsburg began her career at a time when women were not welcome in the legal profession. But she not only broke glass ceilings, she smashed them. Justices Scalia and Ginsburg disagreed fiercely in print without rancor in person. In both my personal and professional relationships, I strive to meet that standard. Judges are not policy makers and they must be resolute in setting aside any policy views they might hold." - 7th Circuit Judge Amy Coney Barrett, President Trump's U.S. Supreme Court nominee, on the friendly relationship between the late Associate Justices Antonin Scalia and Ruth Bader Ginsburg, who she hopes to replace. President Trump said, "She is a woman of unparalleled achievement, towering intellect, sterling credentials and unyielding loyalty to the Constitution." The South Bend resident and former Notre Dame Law professor will appear in the Senate for her first confirmation hearing on Oct. 12. Republicans hope to have her confirmed prior to the Nov. 3 election. If confirmed, she would become the second Hoosier to serve on the U.S. Supreme Court, joining Associate Justice Sherman Minton, who served from 1949 to 1956. Chief Justice John G. Roberts is a native of Long Beach.
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