The United States has built an economy based on global demand for advanced goods, consumer demand for frills, and ever-growing household and business debts. This economy was in many ways prosperous, and it provided jobs and incomes to many millions. Yet it was a house of cards, and COVID-19 has blown it down.
AUSTIN – As protests roil the United States, the country’s center-left economists gaze brightly into their crystal balls. Harvard’s Jason Furman, formerly chair of US President Barack Obama’s Council of Economic Advisers, has warned Democrats – eager to defeat President Donald Trump in the November election – that “the best economic data ... in the history of this country” will emerge just before voters head to the polls. Paul Krugman is likewise predicting a “fast recovery.” The non-partisan Congressional Budget Office agrees. The stock market seems equally optimistic.
The arithmetic behind this thinking is simple. The CBO expects real GDP to shrink by 12% in the second quarter, and by 40% in annual terms. But it forecasts a third-quarter rebound of 5.4% – resulting in spectacular annual growth of 23.5%.
That is certainly possible: already in May, unemployment figures took a favorable turn, and it is looking like the second-quarter slump may not be as bad as projected. But, even if the CBO is right on both counts, GDP at election time would be seven percentage points below its first-quarter level, and unemployment would be above – possibly far above – 10%.
Let’s assume that the optimists are right about the third quarter. What happens next? Will the economy continue merrily along, with incomes and jobs bouncing back? Or will it stay in depression, requiring a new revolution – or, more precisely, a new New Deal – to save it?
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