Virus Surge Could Wallop the Economy Again

By Yuval Rosenberg

Virus Surge Could Wallop the Economy
Again

Analysts at JPMorgan Chase are predicting an economic
contraction in the first quarter of 2021, driven by the fall surge
of Covid-19 and new restrictions on businesses imposed by state and
local governments.

The U.S. economy is projected to shrink by 1% in the first three
months of the new year, the analysts said, following estimated
growth of 2.8% in the fourth quarter of 2020 and recorded growth of
33.1% in the second quarter.

“While the economy powered through the July wave, at that time
the reopening of the economy provided a powerful tailwind to
growth,” the JPMorgan economists wrote. “The economy no longer has
that tailwind; instead it now faces the headwind of increasing
restrictions on activity. The holiday season — from Thanksgiving
through New Year’s — threatens a further increase in cases.”

Calling the outlook for the winter “grim,” the analysts said the
coronavirus will be an unavoidable factor for the economy in the
months ahead. “One thing that is unlikely to change between 2020
and 2021 is that the virus will continue to dominate the economic
outlook,” they wrote. “Case counts in the latest wave are easily
surpassing the March and July waves.”

Most Wall Street economists are still predicting modest growth
in the first quarter, although their outlooks may change as the
severity of the coronavirus surge becomes apparent. Dallas Fed
President Robert Kaplan highlighted the possibility of negative
growth Friday. “We’ll have to see what the fourth quarter looks
like,” Kaplan told Bloomberg News. “It is possible we could have
negative growth if this resurgence gets bad enough and mobility
falls off enough.”

Benefits cliff will be a factor: “The economy will be
operating without a safety net in January,” Bank of America
economist Joseph Song wrote in a note to clients Friday. As we’ve

told you previously, multiple emergency pandemic
assistance programs established by Congress in March will expire at
the end of the year, and Song says the sudden withdrawal of fiscal
support will be felt in the broader economy.

The loss of emergency unemployment benefits on December 26 could
knock 1.5 percentage points off of GDP growth, Song estimated. The
loss in aggregate income from the unemployment benefits cliff would
come to roughly $39 billion, while another $8 billion in income
could be lost as workers exhaust their state benefits during the
first quarter.

The termination of other relief programs – including the
moratorium on evictions and the suspension of student loan payments
– will add to the headwinds, Song said. Congress could eliminate
the drag, however, by passing another stimulus bill, and Song
expects to see a spending package worth between $500 billion and $1
trillion soon after Joe Biden is sworn in, setting the stage for
positive GDP growth in the second quarter.

White House insists on a rosier outlook: White House
chief economic adviser Larry Kudlow said Friday that the economy is
not slowing down in the face of a resurgent virus. “Housing is
booming, consumer spending is booming, automobiles are booming,
just booming,” Kudlow told Fox News. “It is a strong V-shaped
recovery ... there are pandemic risks, virus hotspot risks, I get
that. All I'm saying is what we know on jobs and housing and
retailing and cars and other areas, the economy is very hot.”

Treasury Secretary Steven Mnuchin was a bit less optimistic.
“What the economy needs is now more fiscal support,” he
told CNBC Friday, while pledging to work with
lawmakers to hammer out a targeted coronavirus relief bill now that
the election is over.

“I can tell you Mark Meadows and I will be speaking with Mitch
McConnell and Kevin McCarthy this morning,” Mnuchin said. “And we
are going to come up with a plan to sit down with Pelosi and
Schumer and try to get a targeted bill done for the people that
really need it. And hopefully the Democrats will work with us.”

Mnuchin Defends Decision to End Lending
Programs

Treasury Secretary Mnuchin on Friday defended his decision to
terminate more than $450 billion worth of emergency lending
programs that extended credit to businesses and local governments
amid the coronavirus crisis.

Mnuchin said that most of the money provided by Congress to the
Federal Reserve Bank had not been spent and with the programs
scheduled to cease operations at the end of the year, the money
should be used instead to support small businesses and the
unemployed.

“The people who really need this support right now are not the
rich corporations — it’s the small businesses; the people that are
unemployed. Those are the people we need to help the next few
months," Mnuchin said. “Let’s go use this money in parts of the
economy that need it.”

Senate Majority Leader Mitch McConnell (R-KY) echoed Mnuchin
Friday, saying that he supports the idea of repurposing various
unused emergency funds, the value of which he pegged at $580
billion. “Congress should repurpose this money toward the kinds of
urgent, important and targeted relief measures that Republicans
have been trying to pass for months, but which Democrats have
repeatedly blocked with all-or-nothing demands,” McConnell said in
a statement.

Repurposing the funds may not be easy, however, given the rules
of congressional budgeting. The Congressional Budget Office assumed
the money allocated by Congress to the Fed would be used for loans
that would be repaid, creating no net loss or gain. Using the funds
for other purposes could generate different results.

Critics pounce: The Fed issued a statement late Thursday
expressing its criticism of Mnuchin’s decision. “The Federal
Reserve would prefer that the full suite of emergency facilities
established during the coronavirus pandemic continue to serve their
important role as a backstop for our still-strained and vulnerable
economy,” the bank said.

Democrats also expressed their disapproval, charging Mnuchin
with undermining the incoming Biden administration. “Secretary
Mnuchin is removing critical support from a weak economy against
the Federal Reserve’s wishes. This is economic sabotage,” Oregon
Sen. Ron Wyden, the ranking Democrat on the Senate Finance
Committee, said in a statement. “Secretary Mnuchin is salting the
earth in an attempt to inflict political pain on President-elect
Biden.”

The Bloomberg editorial board
said the Fed programs are still needed and should
be extended, as expected: “When the programs were created, the
clear intent was to extend them as long as necessary, just as the
Fed did with its emergency lending facilities during the 2008
financial crisis. They remain necessary: With Covid-19 resurgent
across the country, the economic outlook darkening, and Congress
making no progress on added fiscal relief, it would be profoundly
irresponsible to remove the one remaining lifeline that companies
and municipalities have.”

Carl Weinberg, chief economist at High Frequency Economics,

told CNBC that Mnuchin’s decision was like
removing the lifeboats from the Titanic. “I don’t think there is a
good economic or public health or social reason to explain why they
want to cut these programs at this particular time, so it has kind
of got to be politics, doesn’t it?” Weinberg said. “These are the
lifeboats for the economy, these are the places for companies to go
when there is no place else to go, whether they are small business
or medium-sized businesses, not the big ones that can go to the
capital markets, but the little ones.”

Other critics expressed concern about the nature of the dispute.
“This is a significant and disturbing breach at a critical time for
the economy,” Tony Fratto, who worked at the Treasury and the White
House during the George W. Bush administration,
told Bloomberg. “We need all the arms of
government working together and instead we’re seeing a complete
breakdown.”

Trump and Pelosi Headed for Border Wall
Showdown?

President Donald Trump and House Speaker Nancy Pelosi (D-CA) are
headed for a “final showdown” over funding for the border wall, The
Hill’s Alexander Bolon
said Friday, a conflict reminiscent of the one
that resulted in a government shutdown two years ago.

Trump wants $2 billion to continue his wall-building project and
Senate Republicans included the funds in their 2021 spending
package, but Democrats aren’t offering any wall money in the House
appropriations bills – and have proposed taking back money
previously dedicated to the effort. They also included language
denying Trump the ability to reprogram funds from other
accounts.

House and Senate negotiators are expected to soon meet to hash
out the numbers for specific  programs, once both
sides agree on top-line numbers for the 2021 spending bills. But
many obsernvers expect the wall funding to be a source of
conflict.

Ford O’Connell, a GOP strategist, told The Hill that he thinks
Trump will fight for the wall-building money. “It’s extremely
critical, and I think he’s going to go to the mat on the border
wall”,” he said. “And I think a lot of Republicans are going to go
with him.”

President-elect Joe Biden has vowed to end all wall
construction, making the battle largely symbolic – but that won’t
necessarily reduce the intensity of the potential conflict. “My
sense is the president is going to try to insist on this kind of as
a goodbye present for Biden,” Mark Krikorian, an activist who
opposes most immigration, told The Hill. “I think it’s kind of a
last-ditch political effort.”

Op-Ed of the Day: The Case for Bailing Out Cities and
States

Richard Ravitch helped save New York City from bankruptcy
in the 1970s. He says there’s plenty of reason to now bail out
cities and states facing financial crises as a result of the
coronavirus pandemic, including New York — in fact, he writes in a

New York Times op-ed, there are millions of
reasons for the federal government to help:

“Imagine that cities and states were considered an
industrial sector, like automobiles or airlines. Collectively, they
employ about
23 million essential workers like teachers, police
officers and firefighters. They contribute over $3 trillion to the
nation’s gross domestic product.
“Now imagine that one of the most important industry
players was New York City, which employs about 325,000
workers. They, along with the city’s 3.5 million
private-sector workers in finance, entertainment, communications
and other industries, add $1 trillion annually to the country’s
gross domestic product.”

Only the federal government can help, Ravitch
writes, and without such aid cities will have to cut essential
workers, pile on debt that will strain their finances for years or,
in some cases, declare bankruptcy.

President-elect Joe Biden will have to act quickly since
President Trump and Senate Republicans have objected to providing
aid to what they describe as badly run Democratic-led states, even
as red states face plenty of financial pain as well. Senate
Majority Leader Mitch McConnell (R-KY) this week said that
Democratic demands for “a massive slush fund” for state and city
governments have blocked bipartisan action on a Covid relief
package.

Ravitch responds to such criticisms by arguing that New
York and other cities are in trouble “not because of overspending,
as Republicans imagine, but because of a badly managed pandemic.”
And if Congress can help important industries hit hard by the virus
outbreak, “it can also surely aid states and cities.”
 

Read the full op-ed, including Ravitch’s recommendations
for steps Biden should take, at
The New York Times.

Trump Announces New Drug Price Rules

The Trump administration on Friday announced new regulations
intended to reduce drug costs. The first rule creates a “most
favored nation” standard for some drugs covered by Medicare,
pegging the U.S. price to the lowest price paid by nations in the
Organization for Economic Co-operation and Development. The other
rule would require drugmakers to give Medicare participants certain
discounts that are currently provided to middlemen.

“Ironically,” the Associated Press
noted, “the legal authority for Trump’s action
comes from the Affordable Care Act, the Obama-era health care
overhaul he’s still trying to repeal.”

Irony aside, the viability of the new rules is uncertain. The
Pharmaceutical Research and Manufacturers of America said it would
consider “all options to stop this reckless attack on the companies
working around the clock to beat COVID-19,” while the U.S. Chamber
of Commerce said the “most favored nation” rule was “harmful” and
“flawed.” The Biden administration may seek to amend the rules, or
reverse them entirely.

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