Ask an Economist: What Economic Worries Keep You Up at Night?

Dan North Webinar Q&A | July 20, 2020

COVID-19 sent tremors throughout the world, and the devastating economic effects are palpable. As we continue to find our way through the uncertainty, questions about the current state of the economy and future recovery continue to linger.

In our webinar, “Find Your Way Forward: From Economic Crisis to Recovery,” North American Chief Economist Dan North offered his expert insights and commentary on the US economy at large as it pertains to the global health crisis.

Read more below to see how North answered questions webinar attendees asked about current and future economic health, and what recovery might look like.

Q: Any concerns on how increased government debt will impact long-term economic health?

A: “Our normal budget for the year is around $5 trillion. Then COVID-19 hit, and we had to enact the CARES Act, which was $2 trillion. With that stimulus package, we had to surpass our budget by $2 trillion—a huge increase in the deficit for one year. And when we look at it in terms of the debt to GDP ratio, we now have $20 trillion in debt, so we're at 100% of debt to GDP—which is quite high.

What's going to happen for the next 10 years, according to the congressional budget offices, is that the debt to GDP ratio is going to keep climbing, from 100% over to 110%, and so forth, because there is no plan to cut the debt level. However, that doesn’t mean it’s a disaster—it’s more of a tradeoff.

We can sustain high debt levels virtually indefinitely. Because we are the world's largest economy, we have the world's reserve currency. Other countries have much higher debt levels than we do. For instance, Japan has more than twice as much debt to GDP as we do, but its growth rate is about zero. So it's a tradeoff. We keep piling on government debt, it’s going to slow the growth of our economy. Not necessarily a disaster, but surely not the right way to go.”

Q: What worries about the economy keep you up at night?

A: “Before this crisis came along, economists used to forecast. For instance, with GDP growth rates, we don't have the historical experience to look back on to help forecast, which is challenging.

Since a lot of our forecasts are built on historical models, we have to get a handle on what's happening now. The data is kind of showing what we thought would happen, but we don't have any previous experience to ride on. And because this change happened so rapidly, it’s been a real headache.”

Q: What jobs could potentially suffer a permanent loss?

A: “It depends on how sharply things recover and what consumers are going to want to do after this. For instance, with airline travel, it bottomed out to almost zero. Although it’s coming back, I think airline travel is going to be significantly less than it was before. Same with other aspects of travel, like hotels. As reported, Hertz went bankrupt. Who would have thought of that last year at this time?

The other thing that’s peripherally related to COVID-19 is the energy sector, which has taken a hit. Not only because of a collapse in prices—that should recover to a certain extent—but because of global demand. Because of this, we could see a degree of job losses that are, more or less, permanent.

On the other hand, the manufacturing sector has a pretty bright outlook because there is a clear opinion now that there are benefits of having manufacturing at home. There’s less reliance on critical goods from other countries, higher quality in manufacturing, and so forth. So I do think that’s possible we’ll see a stronger rebound in manufacturing.”

Q: How do you see municipal budgets being impacted by the current situation?

A: “Well, a number of municipalities have been in trouble for a long time. And with less tax revenue, that will impair the ability to make construction projects.

However, the Federal Reserve has come into the municipal bond market and is offering support there. So that situation might not be quite as grim as we thought. There's basically kind of a bailout lending ability to be available from the Federal Reserve, which wasn't there before. And we may get to the point where municipalities may have to be bailed out one way or another by the taxpayer either explicitly or implicitly through higher interest rates.

So certainly, they're going to be impaired. The entire economy is going to be impaired. The only good part of it is we've got the Fed there now, but I wouldn't give it a whole lot of a really positive outlook there.”

Q: Is the US reserve currency status stable right now?

A: “I actually think it's stronger than it was. I believe we're going to recover sharply and remain the world's largest economy.

And given the global uncertainty, I think that our status for a few years as having a reserve currency is probably going to be stronger. We should note that there are actually several reserve currencies that are set up by one of the global institutions. So in other words, like the Euro as a reserve currency, the Japanese yen, won as a reserve currency and there's a basket of them as well. But, you know, we still are the reserve currency. And again, I think we're going to recover pretty well and being a little bit stronger position for that.”

To watch the entire webinar presentation and learn more about the economy and prepare for what recovery might look like, click here.

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