This steep decline in consumer spending will hasten mass business failure, the second factor weighing on the economy. The Paycheck Protection Program and other federal initiatives shoved an oxygen mask on many companies. But the PPP was scaled to help businesses through a short, intense disruption, though the economy is expected to remain sluggish for months and months. Moreover, the PPP did not include much aid for businesses with significant nonpayroll overhead costs, such as restaurants in high-cost cities. This means that many businesses will fail, if customers fail to return. Already, an estimated 100,000 small companies have shut permanently.
On top of that, numerous businesses—airlines, restaurants, live-events businesses, hotels, private schools, oil and gas companies—face severe and stubborn slumps. Students are not willing to pay as much for online learning as in-person instruction. Companies are not financing travel to conferences and sales meetings. Concerts and festivals are not expected to restart until scientists develop a coronavirus vaccine. Economists expect that 42 percent of people recently let go will not return to their former employers.
A third factor behind a possible second Great Depression is the budget crisis facing states and cities. The federal government does not have to balance its ledger year to year, and perpetually spends more than it takes in. Yet every state but Vermont and most cities and towns are required to remain in the black. Right now, sales taxes, real-estate-transfer taxes, income taxes, fines and fees—they are all collapsing, leaving local governments with a budget gap expected to total $1 trillion next year. Without help from Washington, this will necessarily mean massive service cuts and job losses: namely, an estimated 5.3 million job losses.
The shrinking of the government at the state and local level has already started, as Congress dithers on providing fiscal aid. Michigan is facing a $3 billion budget gap this year and a $4 billion one next year: It has instituted a work-share plan, asking two in three state employees to accept a partial furlough. In New Jersey, the government has asked 100,000 public workers to move to abbreviated schedules. Schools have already let go more workers than they did during the Great Recession, with nearly 500,000 positions lost.
A fiscal cliff for families. Rolling business failures. A budget crisis for state and local governments. Each is bad enough. Each might be a big-enough headwind to tip the economy into recession alone. But the last element is the true alpha and omega of our worst-case scenario: the catastrophe of the American government’s management of the novel-coronavirus pandemic.
Like many of its peer nations, the United States imposed shelter-in-place and social-distancing measures to curtail the spread of the virus. But it did so late, leading to the unnecessary deaths of tens of thousands of people. And it wasted the time these extreme measures bought, because the government failed to set up a strong test-and-trace regime. Countries including South Korea and New Zealand crushed the coronavirus. The United States merely patted it down. The country is reopening with the disease still spreading and maiming and killing, as several states experience a dramatic surge in caseloads.