The causes and symptoms of the 2020 pandemic driven recession are different than the economic crisis of 1980. But there is a common element. Government-imposed restrictions to contain a “contagious” virus in both periods led to a sharp drop in economic activity and a rapid rise in joblessness.
The current crisis involves a deadly medical virus (COVID), whereas in 1980 it was a disruptive economic virus (inflation). The script from the 1980 crisis tells me that the economic, financial, and political fallout from the pandemic is far from over.
Failure to break the transmission of the virus increases the risk of more business disruption and layoffs. Also, the crisis should play a role in the November elections as it also did in 1980. Many of the same issues, crisis management, leadership, and the economy top the list of voter issues again in 2020. The 1980 elections proved to a watershed in American politics. Could the 2020 elections be as well?
2020 vs. 1980
Lessons from the 1980 crisis helped me conclude early on that the economic fallout from the pandemic would be substantial. Yet, even with the benefit of hindsight, the 34.3% annualized decline in Q2 Nominal GDP reported by the Bureau of Economic Analysis was more than twice my most dire forecast.
2020’s record economic decline was a direct result of the government restrictions that impeded the flow of commerce. Workplaces fell idle, schools closed, travel stopped and social, recreational, and business events and functions of all types were canceled or postponed.
The US economy is mainly a service economy, and the restrictions hit the service sector hard. According to the Q2 GDP report, the output of the private services sector declined 43% annualized, one-fourth more than the overall economy.
In 1980 the government placed limits on the use of credit, impacting how people paid for things. Business slowed sharply as restrictions scared people from shopping. Yet, as bad as the economic decline of Q2 1980 proved to be it was less than one-fifth of the collapse in Q2 2020.
In both periods, large economic costs but small visible benefits forced the federal government to remove restrictions very early. The federal restrictions announced in March lasted only 6 weeks and not all states even followed them that long. In 1980, nationwide government-imposed limits on credit use were in place for about 3 months.
Medical experts in 2020, like the economic experts of 40 years ago, have warned policymakers the quick fix or the band-aid approach won't work. That’s because if the “chain of the transmission” of the virus were not severed, it would reappear. It did in 1980 and it has again in 2020.
New COVID cases have been averaging 65,000 a day for the past few weeks. That's three times the number of cases when the federal government initially imposed restrictions in mid-March. The second wave of COVID cases is more intense and widespread than the first wave.
The second wave of inflation proved to be more intense than the initial wave, triggering a harsher policy response. That resulted in an economic slump that ran from the middle of 1981 until the end of 1982, almost three years from the time when the federal government initially imposed credit restrictions.
It is impossible to predict the duration of the COVID crisis. The pandemic runs on its own timeline, immune from government stimulus program, but sensitive to the re-opening of the economy. The COVID crisis need not run as long the 1980 crisis to create more economic chaos and loss. It has already triggered the largest economic decline in our lifetime.
With each passing day, the record number of new COVID cases increases the odds of a new leg down in the economy. And without additional federal stimulus, the odds, in my view, would almost jump as high as 100%.
Crisis & Elections
In 1980, the economic crisis played a major role in the elections. Crisis management, leadership, and the economy were cited as key issues when voters went to the polls in November and appear on the top of almost everyone's list in 2020.
Political polls have had varied success in predicting winners. For example, Ronald Reagan won the 1980 presidential election in a landslide despite trailing Jimmy Carter in public opinion polls two weeks earlier.
Polls can't be trusted to predict winners. But this one caught my attention. The Gallop Poll has been conducting presidential approval ratings since 1937. According to Gallup, President Trump's average approval rating since his time in office is 40%. That's 5 percentage points below former President Jimmy Carter.
It is very hard to see how any incumbent can win re-election when people don't like you. Approval ratings for members of Congress are even lower. The decision by the Senate to adjourn for the weekend when millions of people lost emergency unemployment compensation and could be evicted from the homes or apartments has to be one of the "dumbest" political decisions in modern times. If voters remember in November an earthquake of change in the face of politics is in store.
Lessons from that 1980 crisis proved one thing; that is, not until the transmission of the virus is severed can there be any confidence that the crisis and the economic decline is over. The high number of COVID cases makes it far too early to claim any victory. And if 2020 follows the 1980 script the economic losses and financial disruptions emanating from the COVID crisis have a long way to run. Probable changes in politics also make for an uncertain and volatile investment environment.
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