We don’t yet know the toll that COVID-19 will have on lives and health, but it is frightening. And so is the economic impact of the coronavirus pandemic.
Yesterday, it was reported 6.6 million Americans filed unemployment claims for the week ending March 28, doubling the previous record set the week before when 3.28 million people, including over 186,000 in California, filed initial unemployment claims in the week that ended March 21. Before those two weeks, the record number for weekly unemployment claims was 695,000 in 1982.
Even before the unprecedented unemployment figures, the White House and Congress were already agreeing to spend $2.3 trillion on a stimulus package intended to boost the economy and talking about another potential stimulus bill to come.
We don’t know if the economy will quickly bounce back when stay-at-home orders are lifted or if this is the start of a recession, but we know the economic consequences we’re experiencing are a result of many policy choices and individual financial decisions. The economic shock from COVID-19 is like the straw that breaks the camel’s back — the camel was already overloaded before the last piece brought it down.
For the last decade, America, and California, enjoyed steady economic growth and a bull market. We all acted like nothing bad would ever happen. But, of course, something bad—like a war, a banking crisis, or a pandemic — inevitably happens. We did not do the responsible thing and plan for that inevitable thing. Now we will pay, with interest.
At the federal level, President Trump came into office with a good economy and promised to eliminate the national debt entirely over eight years. He said the then-$19 trillion debt would be gone “fairly quickly.” Today, the national debt is over $23 trillion and the federal government is set to add another $3 trillion in debt this year alone.
Meanwhile, many state and local governments used the economic boom to go on spending sprees. Consider the growth in California’s spending. In 2014, the Legislative Analyst’s Office wrote, “The 2014–15 budget package assumes total state spending of $152.3 billion.” For the 2019-20 budget, LAO said “the budget assumed total state spending of $208.9 billion.”
So, sure, in some ways California actually did far better than many other states. Thanks in part to its high tax rates, the state paid down some of its so-called Wall of Debt, which includes unfunded pension liabilities, and the state’s governors set aside $20 billion in the rainy day fund. But the massive growth in state spending highlights how minuscule the rainy day fund looks in the grand scheme of things.
And now, the coronavirus is going to force the state to make some hard choices. Gov. Gavin Newsom’s budget director already sent a letter to state agencies warning they “should have no expectation of full funding for either new or existing proposals.”
Unfortunately, the private sector was just as irresponsible as governments. Zombie companies—those with so much debt that they don’t generate enough money to even pay the interest they owe—are in a death spiral. In the 1990s, globally, only two percent of private companies were zombies. Now, 12 percent of companies are zombies globally. In the US, it’s even worse — 16 percent of companies are zombies, according to the Bank of International Settlements.
So it should be no surprise, though it’s still maddening, that after a couple of weeks of decreases in air travel, airlines were begging for taxpayer-funded bailouts. Airlines spent the past 10 years buying back stock and making other short-term plays. Few airlines built reserves to smooth out operations as the economy dipped. Yet, Congress handed the airlines another bailout — $25 billion in grants plus $25 billion in loans.
To be fair, it’s not just the airlines. Industry after industry demonstrated little ability to weather this economic shock. At all levels, this nation spent a decade being fiscally irresponsible. We pretended the economy would never experience another shock, downturn or recession.
From individual Americans to CEOs to governors to presidents — we all knew that economic downturns eventually happen and should be planned for. Yet that pesky thought was pushed out of our collective heads. Instead, we merrily spent, spent, spent. As we now confront the COVID-19 pandemic, a faltering economy and a mountain of debt — we have met the problem, and it is us.