The coronavirus pandemic has hammered the world economy in a manner not seen since the Great Depression. And in a very short period of time due to travel restrictions, trade disruptions, and government lockdown orders effectively closing most businesses. The psychological effect has also made consumers more cautious about spending on discretionary and luxury goods. Instead, they panic bought basic necessities, disinfectants, and toilet paper. While government stimulus payments, increased unemployment benefits, and low-interest loans have softened the blow, they may only end up stopping the bleeding temporarily until the virus is controlled. But once the coronavirus is controlled, how will the economy recover? Or will it?
Last week, I looked at whether the government lockdown laws in response to the coronavirus were constitutional. For the most part, they are although some courts have held that some accommodations have to be given to people wishing to practice their religion. Also, some courts may also scrutinize laws that impose quarantine requirements for people coming from outside the state.
Despite the depressing news about new outbreaks and the number of deaths daily, most predict that eventually the coronavirus will be controlled, either through a vaccine or permanent lifestyle changes and government restrictions. Or governments and health officials may decide to place more attention to those who are most vulnerable to the effects of COVID-19, such as senior citizens and those with serious health conditions. Once that decision is made, businesses will be allowed to reopen with varying rules depending on the risk of infecting their customers. As businesses reopen, the economy will eventually recover. So today, I want to look at the most likely scenarios on how the economy recovers and how subsequent virus outbreaks can affect the recovery.
The best scenario is the “V-shaped” recovery, where the economy hits a brief low before quickly recovering to previous levels. Others see a “swoosh-shaped” or “checkmark-shaped” where the recovery gradually recovers over time. Finally, the Debbie Downers predict an “L-shaped” recession recovery where the economy has been damaged permanently or will not begin to recover for at least several years.
In my opinion, for a V-shaped recovery to happen, the coronavirus has to be controlled quickly and all business sectors must be allowed to reopen with minimal restrictions immediately afterward. Not only that, almost all businesses must be able to restore the status quo ante. This means that all businesses must have the same employment head count, ideally with the same employees. This was the main goal of the popular Paycheck Protection Program (PPP). But PPP did not completely succeed because some of the money was used for nonpayroll purposes. Also, some employees did not want to return to work because unemployment paid them more money to do nothing.
If the virus is controlled quickly, there will be no future outbreaks. Or at least new cases will be manageable and can be contained.
To incentivize businesses to restore the status quo, it may be a good idea to introduce a second — but smaller and stricter — PPP stimulus. While I won’t go into details, the basic idea is that the applicant will get additional funding, although a smaller amount than what they would qualify for under the original PPP. If the applicant business can show that they have rehired all of their original employees before the coronavirus and pay them 90% of what they were paid then and is able to do so for a set period, the new loan will be forgiven.
Unlike the original PPP, this program should be available to all businesses, including the large ones that may not need it. However, the larger businesses will be last in line in order to avoid the feeding frenzy that initially plagued the first PPP. In addition, businesses requesting more than $1 million must be required to rehire 95% or more of their previous employees at their full pay or higher and must maintain this employment level for at least one year. Also, the money must be used exclusively for paying pure employees. Not owner-employees. The money cannot be used for business operational expenses.
On the other hand, the longer it takes to control the coronavirus, the more likely the economic recovery will be swoosh-shaped. And there are likely to be bumps along the way because future outbreaks could result in new shutdown orders.
Under a swoosh-shaped recovery, the economy will return to previous levels but more slowly and differently. People will earn as much as they did before the virus but they will be working for a different firm or doing something completely different.
A swoosh-shaped recovery is the most likely scenario if the government has not yet found a way to control the virus. Or if they cannot do so because some people are unknowingly transmitting the virus while others are knowingly being selfish pricks. Or despite the government’s best efforts at trying to copy the success of Taiwan and South Korea, they did not reduce the number of new cases and fatalities. Despite this, businesses have adapted through the use of new technologies, sanitary best practices, or an innovative business model. Consumers have also slowly and cautiously adjusted to the new reality.
One possible benefit of a swoosh-shaped recovery is the introduction of more-efficient business models and technologies. However, I don’t see this happening in the legal profession as existing small-firm lawyers are likely to make a greater effort to reach out to the working class who may have been the victims of the collateral effects of the coronavirus such as landlord/tenant or insurance company disputes.
Personally, I think the best thing for the government to do is nothing to influence the economy. Let Adam Smith’s invisible hand do its magic. However, the government should flex its criminal enforcement muscles in order to deter aspiring con-artists from starting another Theranos.
During a swoosh-shaped recovery, future outbreaks are likely. To minimize the impact, governments will have to impose rules to minimize the chances of transmitting the virus.
Finally, a pessimistic L-shaped recovery is possible. Like the swoosh-shaped recovery, future outbreaks can slow the recovery or make things worse depending on its severity.
Some industries (such as restaurants) have been crippled and cannot operate at full capacity due to social distancing rules. Some major companies have filed for bankruptcy. And existing companies will take this opportunity to permanently remove unnecessary positions.
Some of the people who lost their jobs will not be able to get the same jobs they once did. Others may leave the workforce altogether. Or they may decide to go to law school –- to these people, listen to Jordan Rothman first.
An L-shaped recovery is likely if the government cannot control the virus for a prolonged period. But instead of businesses adapting, they are relying on government subsidies, and they will want a second or third round of government stimulus funding. Unemployment will remain high. The government and the public will have to find a way to live with this virus until a vaccine is found, if ever.
The government will try one or two more rounds of stimulus spending. After that, they will probably get tired of throwing good money after bad. Then, they will spend more resources on finding a vaccine. In the meantime, they may reluctantly resort to harsh enforcement measures to control the spread of the virus. Law enforcement will strictly enforce stay at home orders. For those of you who think the government is infringing your civil rights now, you haven’t seen nothing yet. The public may also take it upon themselves to enforce the rules instead of making snide comments on internet comment forums.
So there are the three likely economic recovery scenarios. There are others. It seems like the deciding factor on how the economy recovers will be how fast this country and the world can control the coronavirus and prevent a second wave. Otherwise, subsequent waves will slow the economic recovery. The U.S. should figure out its own way to control the coronavirus instead of trying to copy other countries. On the other hand, there may be some who do not want the coronavirus controlled just yet as this may be the one chance to influence the U.S. elections and the global status quo. More on that in my next column.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.