CBEI Extra!: The Coronavirus

CBEI Extra!: The Coronavirus

CENTER FOR BUSINESS

AND ECONOMIC INSIGHT

THE CORONAVIRUS Why the

U.S. Economy Will Never be the Same by Kevin Bahr, Chief Analyst, CBEI

UWSP

CBEI Extra! The Coronavirus: Why the U.S. Economy Will Never be the Same The coronavirus has caused untold harm to the U.S. and world economies. In this special issue, our chief analyst Kevin Bahr describes the impact of the virus on the stock market, supply chains, the health care industry, and corporate debt levels. He also includes a detailed breakdown of the stimulus package and the likely implications of the virus for the federal deficit and national debt. His report calls for reforms of securities regulation of Congress. Kevin also gives tribute to the low wage employees of the service sector who continue to do so much for us in return for so little.

Please continue to follow Kevin’s blog page at http://bit.ly/uwspcbeiblog where he will post updates on the coronavirus as well as articles on other important business and economic topics. The health impacts of the coronavirus and the social distance responses to it have dramatically disrupted the ebb and flow of all our lives. The Center for Business and Economic Insight is no exception. The coronavirus forced us to cancel our May breakfast, for example. God willing, we will return in full force in the fall with our breakfast presentation and publication. In addition, we are looking to add a luncheon to the mix. It is too premature to announce specific times and locations. Please stay tuned!

Thank you for your support of the Center for Business and Economic Insight. Stay safe and healthy, friends!

Scott Wallace Director and Editor, CBEI

CBEI Mission

CBEI Staff

The UW-Stevens Point Center for Business and Economic Insight (CBEI) promotes regional economic and community development through the provision of business and economic knowledge to local business, governmental, and community leaders. The primary areas of focus are Portage, Marathon and Wood counties.

Scott Wallace.................................... Director and Editor, CBEI Kevin Bahr................................................... Chief Analyst, CBEI Landis Holdorf. .....................Senior Research Assistant, CBEI Emma Fisher.....................................Research Assistant, CBEI Eva Donohoo................................... Publication Designer, CPS

The Central for Business and Economic Insight is made possible thanks to support from the UW-Stevens Point School of Buinsess and Economics.

The UW-Stevens Point School of Business and Economics creates career-ready graduates and leaders through applied learning. We serve the businesses, economy and people of the greater Central Wisconsin region. We specialize in preparing students for success by providing professional development experiences, access to employers, and in-demand skills.

The Coronavirus – Why the U.S. Economy Will Never be the Same

Kevin M. Bahr Chief Analyst, Center for Business and Economic Insight Professor of Business, School of Business and Economics

Hopefully the coronavirus subsides quickly and never returns. However, the impacts of the virus on the economy will remain long after the virus subsides. This article will discuss some of those impacts, after initially reviewing the economic and financial market effects of the virus. What Happened: A Review of the Economic Impacts If there was any doubt about the severity of the Coronavirus impact on the U.S. economy, those doubts came to an abrupt halt in March. The Department of Labor announced initial jobless claims soared to a seasonally adjusted 3.28 million in the week ended March 21, up from the prior week claims of only 282,000. An incredible, record one-week jump. Speaking of records, the nearly 3.3 million of initial jobless claims smashed the old record – by far. The previous high was 695,000 claims filed in the week ended October 2, 1982. Although 3.3 million was a new record, unemployment claims doubled the following week to 6.65 million. Wisconsin wasn’t immune, with initial unemployment claims skyrocketing to over 51,000 for the week ended March 21 up from only 5,200 the prior week. The following week (March 28), there were over 115,000 claims according to the Wisconsin Department of Workforce Development. 1

With rare bipartisan support, most members of Congress realized that something had to be done – and quickly.

By the end of March, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. CARES was the largest fiscal stimulus in the history of the United States – a $2 trillion stimulus package that more than doubled the $800 billion stimulus package that was implemented in 2009 to overcome the financial crisis. Certainly, the bill was not perfect, but it created a vast array of programs with bipartisan support that would provide economic support to individuals and businesses. The funding would cover five general categories: 1) Small Business, 2) Distressed Companies, 3) Individuals, 4) Local governments, and 5) a Safety net for selected social programs. In a nutshell, the distribution of the funding:

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More detail regarding the funding provisions:

$377 billion loan program for small businesses The bulk of the program was $350 billion to provide eight weeks of cash-flow assistance to small businesses through 100 percent federally guaranteed loans to employers who maintain their payroll during the emergency. If employers maintain their payroll, the loans would be forgiven, which would help workers to remain employed and aid in the recovery of small businesses and the economy after the crisis. $10 billion will be for the Small Business Administration (SBA) emergency grants of up to $10,000 to provide immediate relief for small business operating costs; $17 billion will be for SBA to cover 6 months of payments for small businesses with existing SBA loans. $500 billion lending fund for distressed businesses The provision increases the U.S. Treasury Department’s Exchange Stabilization Fund with $500 billion to aid large distressed firms, which the Federal Reserve can then leverage to inject approximately $4 trillion back into the marketplace in secured loans. An independent Inspector General and Congressional Oversight Panel will be established to oversee Treasury loans and investments – the loans must eventually be paid back following the coronavirus pandemic. Individuals (approx. $560 billion) Each qualifying adult will receive up to $1,200 in the form of a one-time rebate check. The full amount is available for individuals with incomes up to $75,000 per year ($150,000 for married couples) before phasing out and ending altogether for those earning more than $99,000 ($198,000 for joint filers with no children). Families will receive an additional $500 per child. Included in the $560 billion is $260 billion for expanded unemployment insurance. An additional $600 per week payment to each recipient of unemployment insurance for up to four months. Funding will be provided to pay the cost of the first week of unemployment benefits through December 31, 2020 for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits. Finally, the expansion of unemployment insurance will provide an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available. Public Health $153.5 billion – provisions include: • Hospitals: $100 billion for hospitals responding to the coronavirus. • Community health centers: $1.32 billion in funding for community centers that provide health care services • Drug access: $11 billion for diagnostics, treatments and vaccines. • Centers for Disease Control and Prevention: $4.3 billion for CDC programs and response efforts • Veterans’ health care: $20 billion • Medicine and supplies: $16 billion for the Strategic National Stockpile to increase availability of equipment, including ventilators and masks. State and Local Governments $339.8 billion Included is $274 billion to help states fight COVID-19, with $150 billion in direct aid for those state and local governments that are running out of cash. Also included is $5 billion for Community Development Block Grants, $13 billion for K-12 schools, $14 billion for higher education and $5.3 billion for programs for children and families, including immediate assistance to child-care centers. Safety net $26 billion This includes $8.8 billion school meals, $450 million for food banks, and $15.5 billion for the Supplemental Food Nutrition Program (SNAP), in other words, food stamps. Student Loans • The Department of Education will automatically suspend payments on Direct student loans without penalty through Sep. 30, 2020. • Employers can provide up to $5,250 in tax-free student loan repayment benefits. That means an employer could contribute to loan payments and workers wouldn’t have to include that money as income.

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The CARES Act was Phase III of a fiscal response to the coronavirus. In dollar amount, Phase III dwarfed the previous measures. Previous Phase I legislation included $8.3 billion in aid to help contain and treat the virus, including diagnostic testing and human vaccine clinical trials. Phase II (the Families First Coronavirus Response Act) legislation guaranteed free coronavirus testing, provided paid emergency leave, enhanced unemployment insurance, strengthened food security initiatives, and increased Federal Medicaid funding to states. The bill required governments and private businesses with fewer than 500 employees to provide up to two weeks of paid sick leave for those who miss work due to the coronavirus or for those who have to take care of family members affected by the pandemic. If needed, workers could take another 10 weeks off at two-thirds of their pay. A refundable tax credit is available to businesses and self-employed workers to cover the expense. The U.S. Labor Department could exempt companies with fewer than 50 workers if they risk going out of business. The fiscal policy stimulus reflects the challenges of a service sector economy when consumer spending is declining. According to the U.S. Bureau of Labor Statistics, nonfarm payrolls in the private sector consisted of 128 million jobs as of February 2020. Out of those jobs, approximately 107.2 million (about 83 percent) were in the service sector, approximately 20.8 million (about 17 percent) were in the goods-producing sector. Many service sector jobs are in transportation, retail trade, restaurants, real estate, movie theaters – industries that depend on personal visits and service. Many of those jobs are within small businesses. The Phase III fiscal policy also comes on the heels of the use of monetary policy by the Federal Reserve to bolster the sinking economy. Programs of the Federal Reserve included: • Purchase at least $500 billion of Treasury securities • Purchase at least $200 billion of mortgage-backed securities (including commercial) • Creation of two credit facilities that support large employers through making loans and bond financing more accessible • Additional credit facilities were created to help facilitate the flow of credit to consumers, small business, and municipalities In April, the Federal Reserve announced additional actions to provide up to $2.3 trillion in loans to support the economy. The $2.3 trillion loan program would supply increased liquidity to financial institutions and access to credit for individuals, businesses, and local governments. Working with financial institutions and the U.S. Treasury, the Federal Reserve established specific loan programs targeted at households, employers of all sizes, and state and local governments to help weather the economic storm caused by the coronavirus. Collectively, the programs of the Federal Reserve were meant to increase access to credit and borrowing by consumers, business, and municipalities. The programs were in tandem with the Federal Reserve cutting the fed funds rate to 0.00 – 0.25% in early March. Unfortunately, the fiscal and monetary policy actions were reactionary. Would they be enough to bail-out the economy? Probably not, but no one really knew. The ultimate impact of the coronavirus on the economy and financial markets would be a function of how much it would spread, and how long it would last. With mounting unemployment, it quickly became clear in April that the Phase 3 stimulus was not enough. In late April, another $484 billion (also known as the Phase 3.5 stimulus) was passed by Congress and primarily aimed at small businesses. The legislation includes another $320 billion to help small businesses keep workers on the payroll. The initial program established by the CARES Act, referred to as the Paycheck Protection Program (PPP), ran out of money due to heavy demand. The program provides forgivable loans to small businesses that keep employees on the payroll. The initial program also ran into difficulties because funding was often difficult to obtain by small businesses that did not have established banking relationships. Approximately $60 billion of this additional PPP funding is aimed at businesses that do not have established banking relationships, including rural and minority- owned businesses. An additional $75 billion in funding is provided for hospitals and $25 billion for corid-19 testing. The Small Business Administration’s disaster relief fund is also increased by $60 billion.

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A future phase 4 package may also materialize. Many states face financial struggles and huge deficits resulting from the economic slowdown. Whether phase 4 includes any funding for states remains to be seen. Senator Mitch McConnell suggested that states file for bankruptcy rather that having the federal government provide any funding. That would have significant, detrimental impacts to states and the municipal bond market. It could cut funding for first responders, health care, education, and other essential state programs. In addition, it also creates questions as to why large corporations should be bailed out with states left on their own. Any state or local government defaulting on bond obligations would also have a major detrimental impact on the municipal bond market, with investors losing money. According to a report by the Rockefeller Institute of Government, forty-two states had a positive balance of payments with the federal government for 2018, meaning those states received more money from the federal government that what they remitted in federal taxes and other federal revenues. McConnell’s Kentucky enjoyed being number three – Kentucky provided only $32 billion in federal tax revenue yet received $77 billion in federal expenditures. New York, the hardest hit by the coronavirus, subsidizes Kentucky. New York ranked 50th, meaning the federal taxes paid by New Yorkers exceeded federal expenditures by a greater amount than any other state. New York provided $247 billion in federal tax revenue yet received only $225 in federal expenditures. Wisconsin ranked 29th, generating $53 billion in federal revenues and receiving $57 billion in federal expenditures.

For further information on the CARES Act: 1. From the Tax Foundation: Tax Foundation - CARES Act 2. From NPR: NPR - CARES Act 3. Federal Reserve actions:

Federal Reserve March Federal Reserve April 4. Federal Receipts and Disbursements by State: Rockefeller Institute - State Balance of payments with Federal Gov.

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What Happened: A Review of the Stock Market The stock market is not the economy. However, the stock market reflects what is expected to happen to the economy. Although some political leaders doubted the impact of the coronavirus on the United States, a growing uncertainty was becoming evident in U.S. financial markets. As the coronavirus worked its way through China, South Korea, and Italy, U.S. stocks became increasingly volatile and returns became negative. According to Morningstar, the return of the S&P 500 was -0.16% in January and -8.24% in February. Clearly, the markets were reflecting the increasing concern of the economic impact of the virus on the world and the United States. The coronavirus created great uncertainty – in terms of both healthcare and the economy. And it wasn’t just the United States, it was global. The year-to-date returns through February were down significantly for most stock markets around the world. Stock market declines in the first two months of 2020 included: Canada -5%, Mexico -7%, Germany -11%, France -12%, Japan -9%, and China -7%. The global economic and healthcare crisis was clearly reflected in financial markets around the world. March began with another week of stock market turmoil. 7%, 13%, and 20% - those are the magic drops in the S&P 500 that trigger “circuit breakers” for the New York Stock Exchange (NYSE). Circuit breakers are when stock market trading is halted to give investors and traders a breather to assess what is going on and avoid panic selling. A decline of 7% triggers a 15-minute halt in stock trading; a 13% decline triggers another 15-minute halt. If the S&P 500 declines by 20% on a given day stock trading is stopped for the day. On Monday morning March 9, the S&P 500

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declined by over 7% and trading on the NYSE was temporarily halted. The growing uncertainty and impact of the coronavirus on global economies was evident once again. The S&P 500 finished the month with a -12.51% return. Consumer spending accounts for approximately two-thirds of U.S. GDP growth and growth in consumer spending fueled the recent economic expansion. Any event that reduced that spending would derail the economic growth. The coronavirus would change consumer spending quickly and significantly. As the virus spread in March and stay- at-home orders became all too familiar, a service-sector economy would be significantly impacted and quickly. That’s pretty much what the financial markets were forecasting; and that is exactly what happened when the U.S. Department of Labor announced that initial jobless claims exploded to a seasonally adjusted 3.28 million in the week ended March 21 up from the prior week claims of only 282,000. Unemployment claims doubled the following week to 6.65 million. While some leaders may have doubted the economic and healthcare impact of the coronavirus, the financial markets said otherwise. The stock markets reflected the growing concern and expected economic impact on corporate profits around the world. The U.S. stock market was a precursor to what would happen in the U.S. labor market.

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What Will Change: Supply Chains

The U.S.-China Economic and Security Review Commission was created by the United States Congress in October 2000 with the legislative mandate to monitor and report to Congress on the national security implications of the bilateral trade and economic relationship between the United States and China. In 2019 the U.S.-China Economic and Security Review Commission held a hearing on the growing reliance of the United States on China’s pharmaceutical products. Important points from that hearing were summarized by the Council on Foreign Relations, an independent nonpartisan think tank that analyzes foreign policy issues. Key points included: • Chinese pharmaceutical firms have captured 97 percent of the U.S. market for antibiotics. • More than 90 percent of the market for vitamin C is imported from China. • In 2018, 95 percent of ibuprofen, 91 percent of hydrocortisone, 70 percent of acetaminophen, and 40–45 percent of heparin used in the U.S. came from China, according to the U.S. Commerce Department. • In addition, many over the counter and other generic drugs sold in the U.S. are sourced from China, including antidepressants, HIV/AIDS medications, birth control pills, chemotherapy treatments, and medicines for Alzheimer’s disease, diabetes, epilepsy, and Parkinson’s disease. • Key drug imports from India include antibiotics, painkillers, hormones, antiviral drugs, and vitamins B1, B6 and B12. Speaking of sourcing from China, ventilators were needed and in short supply as the coronavirus took hold in the United States. China became increasingly important as a supply source for ventilators. China is also the world’s largest producer of medical face masks. According to the BBC, normally China produces around twenty million masks each day, which is estimated to be around half of all masks made globally. Going forward, the supply chain of medical products and pharmaceuticals will likely (and should) change as a result of the coronavirus. The extreme dependence on China for antibiotics, select drugs, and medical products can be problematic on multiple fronts. First, heavy reliance on sourcing from a single country, no matter which country, is problematic if that supply chain is broken due to a pandemic or natural disaster. Second, heavy reliance on sourcing from a country which has been the focus of a trade war with the United States can create problems, particularly when products sourced are needed medicines and medical supplies. That being said, there are reasons why the supply chains were established the way they were. Usually cost plays a big factor. Changing the supply chains to include more U.S. and near-shore sourcing could impact costs – and consequently prices. Nonetheless, sourcing needs to and likely will change. Multiple options for product sourcing and multiple country options for sourcing can lessen the probability that disruptions to supply chains will occur, no matter where the next pandemic or natural disaster originates. It would also provide a quicker response to any national

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emergency where additional medical supplies were needed.

For further information: 1. From the U.S.-China Economic and Security Review Commission Exploring the Growing U.S. Reliance on China’s Biotech and Pharmaceutical Products 2. From the Council on Foreign Relations Council on Foreign Relations - Coronavirus Could Disrupt U.S. Drug Supply

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Yes, the economy and stock market have been strong; but significant challenges remain.

What Will Change: Healthcare

Never again. Shortages of PPE (personal protective equipment), medical testing, and medical supplies such as ventilators occurred across the country. While the U.S. spends more on healthcare than any other nation, inappropriate (or lack of) planning and vulnerable global supply chains left the U.S. without the equipment necessary to protect healthcare workers, first-responders, and its citizens from the coronavirus. Pick a state – it is not too hard to find a governor, local government official, healthcare worker, or news story describing a shortage of masks, gowns, testing, ventilators, and/or medications. By late March, governors reported states “bidding against each other” to get ventilators because of a lack of coordinated federal response. Congress reacted to the coronavirus economic impacts with needed fiscal response measures in March. Those measures were reactionary to the coronavirus economic impacts; unfortunately, the federal government failed in planning for the healthcare impacts of the coronavirus. Before the arrival of COVID-19 in the United States, the potential impact of the virus on healthcare systems and economies had already played out in China, South Korea, and Italy. As previously indicated, the U.S. stock market in January already began to show the potential impact of the virus on the U.S. economy. Despite being in the midst of the longest economic expansion on record, the S&P 500 declined -0.16% in January. The market was in full reverse mode in February with a drop of -8.24%. The eventual arrival and impacts of the virus on the United States should not have been a surprise. It was becoming clear in January that the United States would not be immune to the impact of the virus. In 2015, Bill Gates had already spoke of the United States being inadequately prepared to handle a pandemic. According to the Centers for Disease Control, there was 1 COVID-19 case in the United States in January. COVID-19 had arrived. By the end of March, over 186,000 cases. It should also be pointed out that due to the lack of available COVID-19 testing, the numbers likely understate the actual amount of COVID-19 cases in the United States. The healthcare system and its workers faced challenges that they should have never faced. No healthcare worker, including doctors, nurses, social workers, materials attendants or any other worker in a healthcare facility should ever be without PPE. Not only do they need it but having healthcare workers without appropriate PPE isn’t the greatest thing for patients either. At the very least , the federal government should have started planning in January for the shortfall in PPE and other medical equipment that would occur due to the virus. The impact of the virus was already playing out in other parts of the world, and even the U.S. financial markets were beginning to show the signs of the economic impact of the pandemic. Unfortunately, there was a lack of federal government planning for a coordinated nationwide response to the coming pandemic. In addition, the July 2019 hearing of the U.S.-China Economic and Security Review Commission clearly revealed the heavy U.S. dependence on China for key PPE, medical supplies, and pharmaceuticals. That certainly indicated the U.S. supply chain was vulnerable, especially since China was at the center of the pandemic by late 2019. A focus on shifting that reliance and ramping up U.S. production of key supplies could have occurred by late 2019. Invoking the Defense Production Act could have required U.S. companies to produce those needed supplies.

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Insufficient PPE and medical equipment to deal with any pandemic, a vulnerable supply chain, and a lack of appropriate federal government planning. That combination resulted in healthcare workers and first-responders dealing with unthinkable circumstances in the country that spends more on healthcare than any other country in the world. Going forward – never again. Healthcare workers and first-responders should never be put in this position again. Another issue that arose in the pandemic – access to healthcare, That issue will likely stay a focus even after the pandemic winds down in the U.S. Access to testing, access to needed medical services, the ability to pay unexpected healthcare bills – particularly if being furloughed or becoming unemployed, the ability to get health insurance, the potential of needing (and paying for) health insurance with a preexisting condition, all these issues will likely be topics of discussion as the country moves forward after the pandemic. Planning for the next pandemic should begin now. For further information: 1. Health care spending by country from the Organisation for Economic Co-operation and Development (OECD) https://>Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16

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