Guest Contribution: “Charting This Crisis”

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments. He is the author of “EuroTragedy: A Drama in Nine Acts,” recently updated with a new afterword.


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Equity Wealth and Consumption

Figure 1: Household equity wealth, in billions dollars (blue, left log scale), and estimated based on Russell 5000 (blue triangle at 2020Q1), and consumption, in billions Ch.2012$ SAAR (red, right log scale). Source: Fed Flow of Funds, via FRED, BEA 2019Q4 2nd release, and author’s calculations.

Note that scales are in logs. The picture looks a lot worse in levels.

On the other hand, equities net worth is only about 18% of total net worth in 2019Q4.

The Deterioration in the Economic Outlook

Goldman Sachs reported out their forecast. Don’t be deceived by the “snapback” in growth rates…the levels look grim.

Figure 1: GDP (black), CBO January 2020 forecast (gray), Goldman Sachs March 4 forecast (pink), Goldman Sachs March 15 forecast, all in bn.Ch.2012$, SAAR. Source: BEA 2019Q4 2nd release, CBO Budget and Economic Outlook (January 2020), Goldman Sachs, and author’s calculations.

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CDC Estimates of the Covid-19 Toll

[Update – Figure added 3/14 1:30pm Central. Source: Torsten Slok, DB.]

From The Hill today:

One model from the Centers for Disease Control and Prevention (CDC) suggested that between 160 million and 210 million Americans could contract the disease over as long as a year. Based on mortality data and current hospital capacity, the number of deaths under the CDC’s scenarios ranged from 200,000 to as many as 1.7 million.

It found as many as 21 million people might need hospitalization, a daunting figure in a nation with just about 925,000 hospital beds.

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Incomprehensible Analyses of Macroeconomic Effects

A tweet:

I am fine with govt. helping people pay bills. But the idea that the spending will actually increase GDP is the Keynesian argument that I find very misguided.

So, here it is useful to have a model discipline one’s arguments (textbook I’m using this semester, here, includes Classical as well as New Keynesian models). Fiscal stimulus, particularly some that have proposed, involves transfers (SNAP, unemployment insurance payments). Helping people pay bills presumably makes aggregate demand higher (by virtue of enabling greater consumption) than it otherwise would be. If there is slack in the economy (which is likely if lots of people can’t pay their bills), then higher aggregate demand will lead to higher output.

If higher demand results in higher production, that means that income necessarily is higher than it otherwise would be, and likely disposable income. That would then mean consumption should be higher; but that would mean higher aggregate demand, and hence higher output, and higher income, leading to a repeat cycle – albeit at a lower rate.

In other words, we have the Keynesian multiplier process. In the presence of slack in the economy, output will rise. Of course, assume that output falls entirely because of reduced production capacity (not a single person reduces consumption because they aren’t being paid), then increased transfers won’t do anything.

How likely is that condition?

The capacity for some people to engage in internally inconsistent reasoning and writing is breathtaking.

More on multiplier estimates here.