The suffering among severed families will be immense, but there will also be significant damage to the economy as a whole. How extensive will this damage be? I did the math and it’s terrifying.
Unlike well-off Americans, the mostly low-wage workers whose benefits just ended cannot mitigate the impact by tapping into savings or borrowing against assets. Thus, their expenses will decrease a lot. Data on the initial effects of emergency aid suggests that the end of the benefits will lead to a drop of more than 4% in overall consumer spending – the main driver of the economy.
In addition, evidence from the austerity policies of a decade ago suggests a substantial “multiplier” effect, as spending cuts lead to lower incomes, leading to further spending cuts.
All of this together and the expiration of emergency aid could lead to a drop of 4 to 5% of GDP. But wait, there is more. States and cities are in dire straits and are already planning severe spending cuts; but Republicans refuse to provide aid, with Trump falsely insisting that local budget crises have nothing to do with Covid-19.
Keep in mind that the coronavirus itself – a shock that came out of nowhere, although the United States mismanaged it – reduced GDP by “only” around 10%. What we see now may be another shock, a sort of second economic wave, almost as severe in monetary terms as the first. And unlike the pandemic, that shock will be entirely self-generated, brought on by the insanity of President Trump and – let’s give credit to it – Mitch McConnell, the Senate Majority Leader.
The question is, how can this happen? The 2008 financial crisis and the slow recovery that followed weren’t that far off, and they taught us valuable lessons directly relevant to our current situation. Above all, the experience of this crisis has shown both that economic depressions are not the time to obsess over debt and that cutting spending in the face of mass unemployment is a terrible mistake.