A serious personality disorder

In a moment of frustration, an old friend (a consultant in organizational development) blurted out: “in order to be CEO of a major corporation in America, one has to have a serious personality disorder and broadcast it widely.”  We were in my office and, after we had a few laughs about it, I replied, “Truth is… everyone has a serious personality disorder.  It’s just that, when you’re a CEO, it’s broadcast widely.”  I might have added, “even more so if you’re a political leader.”

Whether in politics or corporate life, the chief executive is rarely the expert on what to do.  However, he or she must be the expert on how to communicate what to do.  The absence of clear, credible communication leaves people in a state of fear which, in turn, leads to panic and the spread of misinformation.  People need to believe what their leaders are saying in order act responsibly and hang together as a community. 

Clear communication means being honest about what is known and what is not.  It means being open about what’s being done to find the answers and achieve the best outcomes.  And, the pronouncements from on high must match the ground level reality.  It does not reassure the public to say we can test everyone for coronavirus when everyone knows that’s not true.  Indeed, it makes matters worse.  It’s a breach of trust that leads to people not trusting anyone. 

There is not a clear path to containing coronavirus, keeping the public safe or balancing the risk of disease against the need to keep the economy moving.  In matters as complex as the pandemic, our leaders should encourage us to shed our tendency toward binary choices: extreme action versus fiddling while Rome burns.  In such times, it’s important to be guided by principles and values.  Despite our differences on fairness and the role of government, we share common values.  We believe in the sanctity of human life; the reciprocal obligations within our communities; and, respect for the rights, differences and dignity of others. 

So, what must be communicated?  In a word – Hope!  Hope makes our current situation more bearable.  Hope provides motivation to contribute our efforts to our community.  Hope links our current difficulties to a better future.  During this pandemic, what we hold dear is what is most challenged.  Our economic future is challenged; the health of our families is challenged; and, our psychological well-being is challenged.  A message for a hopeful

future must connect our current situation to a brighter future by being honest about what’s happening; communicating our plans to restore our communities; and, assuring the public of a consistent effort that marshals all our resources.

All of that can be communicated and should be communicated in spite of our personality disorders. 

WHO WILL LEAD? 

Coronanomics Revisited

OUCH!

I recall lining up for polio shots when I was in school.  The vaccine provided at no cost by the federal government eliminated polio from the United States over the course of two decades according to the CDC, the organization on the front lines of the battle against COVID-19.  That’s what it will take before I personally feel safe again -- safe enough to resume normal life or whatever passes for normal on the other side of this.  Best case – two years!  Am I overreacting?  Maybe.  A preliminary study of Santa Clara County, California suggests the mortality rate of COVID-19 is no worse than seasonal flu.  So, I might be at the extreme end of a spectrum whose opposite is defined by those protesting the shutdown of the economy (the Walking Dead?).  You might be somewhere in between.  

A panel of experts from the American Association for the Advancement of Science has modeled the impact over the next five years.  They assume that, like the flu, immunity may not last forever.  Vaccinations might be an annual requirement.  Further, their model assumes there will be new waves of outbreaks as we begin to reopen the economy.  History provides examples.  In the Spanish Flu pandemic of 1918, cities that reopened quickly – Denver and Philadelphia -- dealt with a second wave that decimated their workforce and disabled their local economies.  

Despite the absence of anything resembling leadership from the president, a task force has laid out a three-phase plan to reopen the economy based upon some broad and easily understood criteria.  It wisely leaves the implementation to governors and local government officials.  But it’s clear that there must be federal support for it to work.  The governors can decide when to open up businesses and scale back stay-at-home orders.  However, there are serious resource constraints on what the task force describes as “Core State Preparedness Responsibilities.”  Left on their own, the states would be competing with one another for supplies of test kits, vaccines and protective gear.  And, of course, the states lack the funds to follow through.  The New York Times has reported on a Harvard University study calling for testing at triple the current as a prerequisite for reopening the economy.  As it stands today, we have no national plan or infrastructure to support testing on that scale.  Nor can we perform contract tracing to ensure proper treatment in a more open economy.  Both are part of the strategy outlined by the presidential task force.  But a strategy without a plan is just a wish.   So, for now, we are sticking with medieval rules: isolation or risk death.  

So, what happens to the economy? Well, for starters, we’ve got a thirteen-figure hole to fill.  That’s just my back of the envelope calculation.  But I figure that a 20% unemployment rate will amount to a $3 trillion dollar drop in annual GDP.  Add the budget gap in the states most affected and the need to shore up hospitals and you’ve got another trillion or two.  The $2 trillion CARES Act won’t be enough.  

A few weeks ago, I predicted a short-term drop-in GDP or a V-Shaped recovery.  I also said, the real long-term risk was a supply disruption.  Well, that’s what we have.  There are those who suggest that weak businesses should be allowed to fail.  Corporations have loaded up on low-interest debt over the last decade.  Now, they should pay the price.  Only the stronger firms should be allowed to thrive.  In most circumstances, I would agree.  However, much like federal response to the banking crisis of the last decade, allowing global businesses to fail may be too much for the economy to bear. 

To some degree, our prosperity relies upon the efficiency of supply chains that run from raw materials to manufacture to distribution to retail to consumers. Too much disruption will result in massive unemployment that will not resolve itself when we’re all permitted to go back to work.  Products won’t get to market; companies will shut down; and, people won’t be earning paychecks.  

The one economic bright spot in all of this has been the response of the Board of Governors of the U.S. Federal Reserve System.  Having learned the hard lessons of the 2008/09 financial crisis, they have focused on ensuring liquidity not just domestically but also globally, opening lines of credit for foreign central banks.  These actions will serve us not only in the near term but also in the long term as sovereign governments as well as foreign investors continue to see U.S. Treasury Bonds as the safest of safe havens in times of crisis.

After all, how else can we fund those multi-trillion-dollar fiscal deficits?  

WHO WILL LEAD? 

The Aftermath: the future is now

We left on a two-month vacation the day after Presidents Day – February 18.  At the time, there were only 25 cases of Coronavirus reported in the U.S.  Like most of you, we were caught flatfooted by the pandemic and its astounding spread.  A graphic in the online New York Times tells the tale.  China’s delay in recognizing the disease and its effects led to millions of people leaving Hubei province, many carrying the virus, over two months.  Nine hundred per month were destined for New York now the epicenter of the crisis in the U.S. 

As I write this, the Senate has approved a $2 trillion stimulus package to keep the economy on track during the Coronavirus crisis.  In a post last week, I suggested now is not the time to worry about fiscal deficits.  Let’s focus on keeping people healthy first.  But the virus and our response to it will have some long-lasting effects – some good, some bad, some ugly. 

The Good

The future is now!  Trends predicted to take shape over the next decade or two have taken root overnight.  We are telecommuting and teleconferencing at work.  Similarly, universities have moved coursework online, shedding expensive infrastructure and adopting a model I predicted in 2015.  Will there be a snap back to the old model, or will there be a shift to a new way of working and learning? 

Traffic is lighter just about everywhere.  Demand for fuel has dropped dramatically (I paid $1.99/gallon the other day).  That means reduced emissions and stress on our infrastructure.  Will work at home become a lasting effect of the crisis?  

No one will be denied healthcare because of a lack of insurance during this crisis.  Bernie Sanders points to the need to nationalize healthcare like, you know, Italy… um, maybe not a good idea.  And, Republicans are unlikely let go of their objections to any solution.  It is perhaps Joe Biden’s incremental approach to reforming Obamacare that might lead to the best outcome.  Will that lead to universal coverage?

Crisis response has necessitated that government regulations pretending to protect us have been set aside to, well, protect us.  FDA has eased up on guidelines for testing drugs and manufacturing ventilators, and companies are repurposing without the obstacle of licensing rules.  Will the crisis cause us to question the need for all those regulations? 

 

New York Governor Andrew Cuomo

Governors are stepping up to respond according to the needs of their individual states. Wyoming doesn’t need what New York needs. So, there is a renewed focus on the effectiveness of regional and local response.  States have powers not afforded to the federal government according to Constitutional experts.  Only states have police power to enforce quarantines or compel vaccinations, for example.  Will governors finally press the point and take back authority they have abdicated to Washington? 

The Bad

In the last twenty years, we have consistently been failed by our institutions of government. The 9/11 attacks revealed a weakness in national intelligence, particularly the CIA.  Hurricane Katrina placed the failures of FEMA at center stage.  The Great Recession was caused primarily by banking regulators not doing their jobs.  And, now there’s COVID-19 which has revealed the soft underbelly of our ability to protect our citizens from a pandemic.  Meanwhile, congressional politicians can’t seem to set aside their dysfunctional behavior for the sake of the nation.  

The era of free trade, that was nailed into place by China’s entry into the World Trade Organization, has restructured supply chains so that we no longer have the manufacturing capacity to make critical supplies.  Meanwhile, China is providing Europe with masks, gloves and other medical supplies.  It sounds like an echo of the Marshall Plan. It’s another way in which we have abdicated our role in global leadership. 

The Ugly

This ain’t the 1950’s, a time when the nation was led by a war hero whose minimalist approach to governance resulted in the paydown of war debt while maintaining a balanced federal budget, the construction of the interstate highway system and the inception of NASA.  No, Democrats, we aren’t going to raise marginal tax rates to 90%.  And, no, Republicans, we aren’t going to shrink government to balance the budget.  Bipartisanship in the 21^st Century means more government spending and debt not less.  That’s how the coronavirus stimulus went from $1 trillion to $2 trillion in the course of a week.  

A former business partner suggested a scenario I deem likely.  Likely because of the way in which the nation’s institutions responded to the financial crisis a decade ago.  The first round of QE or Quantitative Easing by the U.S. Federal Reserve Bank in 2009 was viewed as a positive step toward getting investors to invest and get the economy moving again.  In this process, the Fed purchased U.S. Treasury bonds and mortgage-backed securities to keep interest rates low and encourage the acquisition of assets.  Low interest rates help those who can invest in stocks and real estate but they penalize savers and retirees.  

Back to my former partner’s prediction:  the Fed will not only purchase the additional U.S. Treasury debt but also will write it off, he says.  In other words, since the Fed can create as much money as it wishes, they can also reduce the government’s debt with the stroke of a pen.  

Two years ago, the election of Rep. Anastasia Ocasio-Cortez made a big splash in the national news.  Among her more controversial suggestions was that the nation’s economy could be managed by Modern Monetary Theory (MMT) – the creation of money out of thin air.  There was a minor uproar in business and economic circles.  Now, under the cover of a pandemic, MMT may become the government’s tool of choice to feed our addiction to debt.  

Conservatives warn this approach will result  in hyperinflation, citing Post-WWI Germany as the relevant example.  Liberals, led by Nobel economist Paul Krugman, have pointed out that we’ve been pursuing MMT for the last ten years and inflation is low.  They’re both looking in the wrong place.  Hyperinflation hasn’t occurred in consumer prices.  It has occurred in asset prices – stocks, bonds and real estate – enriching those with the capital to invest at the expense of everyone else.  

Once the crisis has passed, we’ll applaud those who have crafted and voted for the $2 trillion package and reelect them in the Fall.  And, there will be no one to stop this juggernaut. 

WHO WILL LEAD?  

Coronavirus and the Economy

It’s hard to imagine all the economic impacts of the current Coronavirus crisis.  A recession – official or unofficial – seems likely.  (An official recession is defined as two consecutive quarters of declining GDP.)  If the crisis lasts for only three months, there will be a “Newtonian” surge (an equal and opposite reaction) in demand in the third quarter that will even out the economy for the year.  

Government can and should play a role in managing the economic crisis.  But what is that role and how should they play it? 

Generally speaking, there are two kinds of shocks the economy can experience: a demand shock and a supply shock.  The first occurs when consumers develop some fear – rational or irrational – about their near-term economic future.  In that case, they hold back on purchases, first of durable items like cars and appliances and then more routine purchases like clothing and eating out.  A supply shock occurs when there is some disruption in the supply of essential goods and services driving prices up dramatically.  The Arab oil embargo of the 1970’s is a good example.  

A demand shock often can be effectively dealt with by the Federal Reserve lowering interest rates thereby lowering the cost of purchasing durable goods.  Supply shocks are tougher to deal with as they may be caused by factors outside the government’s control.  Again, the Arab oil embargo serves as a good example.  

The US economy was stable at the beginning of the year.  When demand and supply are balanced, the economy is said to be at potential real output.  But the coronavirus response may cause both a demand and a supply shock simultaneously.  Demand is down because people are staying indoors affecting large purchases like cars and homes as well as routine small purchases.  A supply shock might occur if supply chains providing essential products are disrupted -- if, for example, workers cannot go to work in domestic factories.  In the case of a supply disruption prices will rise at a time when many Americans are out of work.  It is not straightforward to recover from a recession clobbered from both sides. This is the worst possible case because neither Fed action (monetary) nor Congressional action (fiscal) can maintain a supply chain or get people back to work.  So, the Fed can react or do nothing.  Lowering interest rates keeps unemployment low but raises prices causing inflation.  Doing nothing keeps inflation low at the expense of higher unemployment. So, the best government can do is try to lay some foam on the runway to ensure a soft landing.  

Many government and health officials have been praised for their candor, decisive action and leadership in this crisis.  We need the same degree of honesty about the economy.  There will be an economic disruption lasting three to six months.  We should not overreact.  Inflation and deficit spending will increase, and we shouldn’t be too worried about it in the short term.  Remember: borrowing is cheap right now.  So, let’s do what we need to do without too much handwringing. 

The Fed is doing the right thing by lowering borrowing costs for government and businesses.  Congress and the President are doing the right thing by providing stimulus for the near term.  The stimulus should be targeted to those who really need it: low income families and small businesses who don’t have the cash reserves to survive a sustained drop in demand.  

I have seen more than a few memes suggesting buying gift cards from local businesses and over tipping service staff.  These are all good measures we can take as citizens to flatten the economic curve during this crisis.  Let’s hope that government action can also flatten the curve of the health crisis.  

WHO WILL LEAD?