Uncertainty and Turbulence

Uncertainty and Turbulence

Published on June 22, 2020 / Leer en español

Sergio portrait
Policy Director
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Significant uncertainty. That was the phrase Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, used to describe the recovery of the United States economy in his testimony before the Senate Committee on Banking, Housing and Urban Affairs.

That uncertainty arises mainly from the health crisis caused by the SARS-CoV-2 virus. The speed with which this virus, which causes Covid-19, has spread around the world has been amazing, affecting more than eight million people in 188 countries or territories, causing the death of more than 400,000 human beings. Efforts to mitigate the ravages of the pandemic, in turn, have caused the deepest collapse in economic activity since 1945. According to World Bank data, the current recession is the fourth-worst since 1871, second only to the declines in economic activity during the two great wars of the 20th century and the Great Depression, and its analysts estimate that almost 90% of all countries are in recession, the highest share in 150 years.

In the United States, total net employment fell by 20 million jobs between February and May, and although the May employment report was unexpectedly positive (due to a technical error), the unemployment rate is estimated at 13.3%, almost four times the unemployment rate reported in February of this year. The workforce participation rate of 60.8% is the lowest since January 1973. While the ratio between total employment and the population over 16 years of age was 51.3% in April and 52.8% in May, the lowest readings in the history of this series, which began in 1948. Personal consumption expenditures and fixed capital investment, both adjusted for inflation, reported an annualized drop of 6.8% and 8%, respectively, during the first quarter of this year. Finally, the contraction of gross domestic product (“GDP”) for the second quarter of 2020 is expected to be the most severe on record, hovering around 30% in annualized terms.

The government response to this crisis has also been unprecedented. Congress has enacted four laws authorizing an aggregate expenditure of $2.4 trillion, while the Federal Reserve has increased its assets, through the purchase of various securities in the bond market, by another $3 trillion, for an equivalent combined fiscal and monetary stimulus of approximately 24% of the United States’ GDP. That expansionary economic policy has been emulated by the European Union, China, Japan, and other countries.

Despite this concerted economic stimulus, the World Bank estimates that the global economy in 2020 will contract by 5.2%. It is in 2021, however, when the uncertainty worsens. A lot will depend on what happens with the Covid-19 pandemic, specifically if another large outbreak occurs in the fall and how long it will take to find an effective and safe treatment or vaccine. If restrictions on the movement of people and economic activity have to be re-imposed or if the development of a treatment or vaccine is delayed, the economic recovery will take longer.

Each economy’s structure will also be an important factor. Economies that depend more for their growth, in relative terms, on the export of commodities, on their participation in global supply chains, or on tourism and related services, will take longer to recover. And so will those that rely primarily on services that require personal contact rather than on manufacturing and services that can be offered remotely.

Puerto Rico is not immune to these global trends, but the difference is that the uncertainty is intensified due to domestic factors. First, we are still dealing with the effects of the central government bankruptcy, the 2017 hurricanes, and the earthquakes. Second, the state’s ability to analyze, plan, and execute complex public policies has been eroded by years of austerity, corruption, and the politicization of the civil service. Third, Puerto Rico has never had control over its monetary policy or its international trade policy, while fiscal policy is currently preempted by the Financial Oversight and Management Board (FOMB). So, in terms of economic policy, we don’t have much room to maneuver. Finally, the public health system in Puerto Rico is deficient. We do not have the capacity to implement an effective surveillance and monitoring program to act in time in the event of a new Covid-19 outbreak.

Given all of the above, the short-term scenario for Puerto Rico is, like the works of El Greco, chiaroscuro. In terms of the pandemic, we can expect an increase in cases of Covid-19, which we will not detect until patients begin to accumulate in hospitals, due to the deficiencies of our public health system. The problem is that by the time there are hundreds of cases in the emergency room, it will be too late, because the virus transmission rate is exponential. Therefore, we probably already will have tens of thousands of people infected throughout the island.

Then we will have to shut down the economy again, paralyzing both the rebuilding of our infrastructure and the economic recovery. That would mean less economic activity, more unemployment, less revenue for the state, the delay of Title III cases, and an extension of the term of the FOMB. Given this scenario, emigration would increase, there would be less investment and the economic contraction would continue.

The pandemic is creating great economic and political turmoil. These are times of uncertainty and turbulence that threaten to overwhelm our ability to adapt to fundamental changes in our society. But precisely because we live in those times, the future is not set in stone. We have alternatives, even if they are limited. We must choose well.

The Spanish version of this column was originally published in El Nuevo Día on June 21, 2020.