Coronavirus Will Scar the Economy for Years

Coronavirus Will Scar the Economy for Years

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Plus - The decline of the IRS
Thursday, July 2, 2020
Unemployment Drops, but There's Trouble Ahead

The U.S. economy added 4.8 million jobs in June, the Department of Labor announced Thursday, marking the second month in a row with better than expected employment data. The jobless rate fell to 11.1%, down from 13.3% in May and 14.7% in April, as employers continued to reopen their businesses and call back furloughed workers.

President Trump was quick to celebrate the results. “It's all coming back. It's coming back faster, bigger and better than we ever thought possible,” Trump told reporters. “These are the numbers. These are not numbers made up by me. These are numbers.”

Andrew Chamberlain, the chief economist at Glassdoor, said the "positive jobs report does provide a powerful signal of how swiftly US job growth can bounce back and how rapidly businesses can reopen once the nation finally brings the coronavirus under control — a reason for optimism in coming months.”

About that virus.
Chamberlain’s comments highlight a serious and growing problem for the economy: the failure of large parts of the country to get the virus under control.

As plenty of economists pointed out Thursday, the monthly employment report is backward looking and provides a snapshot from several weeks ago. That’s particularly relevant now, given the recent spike in coronavirus cases in much of the South and West, which is forcing state officials to reconsider their approach.

“With more than 40 percent of the country now reversing or pausing its plans to reopen, the already struggling U.S. economy has begun to show signs of another shock,” said Politico.

The initial jobless claims report was also released Thursday, and it shows that layoffs are persisting at stubbornly high levels. About 1.4 million Americans applied for unemployment benefits last week, and more than 19.3 million continue to receive payments — a slight increase from last week.

Julia Pollak, an economist at ZipRecruiter, told Politico that hiring has appears to have slowed. “That likely reflects increasing awareness that we haven’t got this virus under control yet, that businesses may have to re-close,” Pollak said. “I think that is a very upsetting and worrying thing.”

A mighty big hole to fill. Even though job growth has exceeded expectations for the past two months, the number of unemployed in the U.S. remains at historic levels. There are 14.7 million fewer jobs than there were before the pandemic began, with total employment still down by nearly 10%.

Mark Zandi, chief economist at Moody’s Analytics, warned that the recovery is by no means complete, and progress is not assured. “It’s good news, but the pandemic pushed us into a very deep economic hole and we’re crawling out and it’s a long way to go,” he said. “We can certainly fall back.”

Ominously, the number of people who have permanently lost their jobs is growing. “The first thing I looked at was the number of people permanently laid off and that continues to climb, and I think that’s some cause of concern,” Moody’s Ryan Sweet told Bloomberg. “Even when this pandemic’s over those people are going to need to find work.”

What the Next Stimulus Package Could Look Like

While serious negotiations on the next possible coronavirus stimulus package won’t begin until Congress returns to Washington on July 20, some analysts think the strong June jobs report may make it easier for Republican lawmakers and the White House to limit its size and scope. Treasury Secretary Steven Mnuchin signaled that the White House recognizes that the recovery is not complete, saying “our work is not done” at Trump’s news conference. But White House adviser Stephen Moore told The Washington Post Thursday that the strong report makes it less likely that the administration will back a $2 trillion to $3 trillion stimulus package along the lines proposed by Democrats. Moore also said resistance to extending a big boost to unemployment benefits has also probably grown stronger.

Still, some kind of package is likely to move forward. Bloomberg has a rundown on what the package could include:

* More aid for business: Lawmakers are debating another extension for the Paycheck Protection Program, which provides forgivable loans to small businesses, or potentially reprogramming its unused funds – as much as $130 billion – for other kinds of assistance. Mnuchin has said that he would like to aid more clearly targeted at businesses that need help. And the administration continues to push for tax breaks to promote hiring and consumption.

* Unemployment benefits: Democrats want to extend the $600 per week boost to unemployment benefits, but Republicans say they want it to end as scheduled at the end of this month, charging that it motivates workers to stay unemployed. A compromise could be worked out, providing some kind of enhanced benefits at a lower level.

* Checks for households: Democrats have proposed another round of $1,200 per adult stimulus checks, and President Trump said this week that he would like to see an even larger amount. But Republican lawmakers are skeptical, and depending on the economic data, they could sink any effort to provide more direct aid to households.

* Employer liability: Senate Majority Leader Mitch McConnell (R-KY) wants to protect employers from lawsuits related to the coronavirus. “Any bill that passes the Senate will have liability protections in it,” McConnell said earlier this week. “This is liability protections for everyone … everybody who interacted with this pandemic. Unless you’re grossly negligent or intentionally engaged in misconduct, we’re going to see to it that you don’t get sued on top of everything else you’ve had to deal with in trying to get through this.” The White House has also said it wants to see formal limits on liability, but House Speaker Nancy Pelosi (D-CA) has said she would oppose any effort to provide broad immunity for employers.

* State and local aid: Democrats say that state and local governments need about $1 trillion in aid, likely far more than Republicans would consider. While the White House and GOP lawmakers say they are willing to consider some aid, any eventual compromise would likely well short of what governors and local leaders say they need.

Writing at the Washington Post Thursday, Catherine Rampell highlighted the potential importance of such aid. State and local governments are already cutting back on spending, creating more downward pressure on employment and economic growth. “Unless federal aid comes through soon, expect huge new public-sector layoffs and service cuts in the months ahead, followed by knock-on job losses in the private sector,” Rampell said. Thursday.

CBO Estimates Damage to US Economy

The coronavirus crisis will scar the U.S. economy for years to come, according to the updated 10-year outlook from the Congressional Budget Office, released Thursday.

“The economic outlook for 2020 to 2030 has deteriorated significantly since the agency last published its full baseline economic projections in January,” the report says. Here some details from the projections, which assume no further stimulus programs from the federal government:

  • The unemployment rate will stay above pre-Covid levels through 2030.
  • The average unemployment rate for the 2030 to 2030 period is estimated to be 6.2%, up from 4.2% in the pre-Covid estimates.
  • At the end of 2020, the unemployment rate is projected to be 10.5%. It is projected to fall to 7.6% by the end of 2021, and 6.9% by the end of 2022.
  • GDP growth will remain below its potential for years, with the output gap totaling more than $17 trillion by 2030 relative to the pre-Covid trend.

It’s not all bad news, though. The CBO projects rapid economic growth in the third quarter, and a 12.4% annualized growth rate in the second half of 2020. Unemployment is projected to peak this summer at 14%, before falling “quickly” at the end of 2020 and through 2021. And interest rates will remain low, making it easier to finance the trillions in relief spending that, according to the CBO, has helped prevent the economy from deteriorating further and boosted the recovery.

The Decline of the IRS

ProPublica has been documenting what it calls “the descent of the IRS” over the last decade as the agency struggles with budget cuts and hostility from lawmakers. In a report Thursday, the independent news organization says that the latest data from the IRS point to “historic lows for U.S. tax enforcement.”

Reviewing the IRS’s annual release of enforcement statistics, ProPublica highlights some interesting data points:

  • In 2019, the IRS reported “the lowest audit rate in generations.”
  • Revenues from audits fell to $11 billion in 2019 – down 61% from the $28 billion collected in 2010.
  • Expiring debt – payments owed to the IRS but not yet collected – totaled $6.7 billion in 2019, up from $564 million in 2010.
  • Enforcement staff has been cut by 36% since 2010.
  • Audit rates for the wealthy have fallen to 2.4%, down from 12.5% in 2011.

Sen. Ron Wyden (D-OR), who has opposed budget cuts at the IRS, said the data reaffirms the need to beef up the tax agency’s enforcement capabilities. “It’s a national scandal that the wealthy are stealing tens of billions from American taxpayers,” he told ProPublica. “Paying taxes has become increasingly voluntary for those at the top. … The IRS needs to tackle this challenge head on, and one of my top priorities if Democrats take control of the Senate will be to rebuild the IRS.”

For more details, see the ProPublica analysis here.

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