The Week in COVID-19 and Economic Diplomacy: 'Not So Fast'

Our weekly COVID-19 and Economic Diplomacy tracker looks at policies that impact the coordination of international governments and central banks, ongoing commentary and analysis, and asks what these turbulent times mean for economic diplomacy.

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The Highlights

• U.S. unemployment fell again in June, to 11.1% But it is still significantly higher than pre-crisis levels, and the new data likely does not yet reflect states shutting down businesses in response to recent COVID-19 growth.
   
• Federal Reserve officials discussed offering more concrete forward guidance, according to the latest Federal Open Market Committee meeting minutes, but remain concerned about the risks of implementing yield curve control.
   
• In Europe, where the virus has been more contained, negotiations continue over the 750 billion euro recovery fund.

U.S. Developments

U.S. unemployment fell again in June, but the latest numbers don’t reflect new closings due to renewed COVID-19 case growth. Treasury Secretary Steven Mnuchin and Federal Reserve chair Jerome Powell welcomed recent economic growth in testimony before Congress earlier this week, but warned of risks from an uptick in infections and discussed future policy options for ongoing stimulus. Analysts are also beginning to update their forecasts for the recovery, and ask how U.S. policies compare to Europe’s. State and local governments are laying off workers, as significant funding shortfalls in the wake of spending to fight the virus and lower tax revenues impact their budgets.

• Treasury Secretary Steven Mnuchin and Fed chair Jerome Powell testified before Congress earlier this week, but differed in their takes on the COVID economy. Secretary Mnuchin said he expected economic activity to rebound in the second half of the year, citing bipartisan legislation to “provide liquidity to workers and markets in record time.” Powell, meanwhile noted recently improving economic data but said it also “presents new challenges — notably, the need to keep the virus in check.” Mnuchin offered few details on the White House’s plans for another round of stimulus measures, other than saying they would need to be more targeted. Dr. Anthony Fauci, meanwhile, warned in separate testimony that U.S. infections could double to over 100,000 per day if the U.S. is unable to control recent surges in states including Texas and Arizona.
   
• Sarah Chaney at the Wall Street Journal reports on the latest unemployment numbers: U.S. unemployment fell to 11.1% in June, down from 13.3% in May. That’s still significantly higher than the pre-crisis 50-year low of 3.5%. The latest figures are based on mid-June data, meaning recent closures following the rise in infections in the U.S. aren’t yet reflected in the data. Those closings may significantly affect future jobless numbers, given that 40% of June’s 4.8 million job gains were in restaurants and bars.
   
• Greg Ip reports in the Wall Street Journal on a potential “reverse-square-root” recovery. Inserting a special symbol into the alphabet soup of recovery shapes, Ip cites growing concerns that after a sharp increase in economic activity, growth appears to now be flatlining at best — hence, a reverse square-root symbol (√). Government stimulus drove consumer spending during the first phase of quarantine, and reopening led to spending in restaurants and bars. But Ip cites data from J.P.Morgan showing that infection rates quickly followed renewed spending in states that were reopening. The question now, as states resume business closures, is whether the “reverse radical” morphs into a malformed “W.”
   
• Larry Summers, Harvard professor and co-director of the Economic Diplomacy initiative, and Anna Stansbury, Harvard PhD candidate, write in a Washington Post Op-Ed that their recent research shows rising inequality, reflected in the stark experiences of workers during COVID-19, is primarily attributed to the broad decline of labor power. More so even than globalization, technological advancement, and other explanations. The decline of union membership, now down to only 6% of workers, is one culprit; but so are other factors that limit the share of firm profits that flows to workers. That suggests the U.S. should pursue policies that increase worker power, not just policies that redistribute gains after the fact. (For more, see Stansbury’s helpful twitter thread on the paper.)
   
• In the Financial Times, Laura Noonan, Colby Smith and James Politi report on the limited uptake of the Fed’s $600 billion Main Street Lending Program, which aims to provide emergency funding to medium sized businesses. Banks say that the program, which launched two weeks ago, is “overly complicated,” and costs companies thousands to prepare application documentation and provide ongoing reporting. Most banks have seen less than 200 applicants each. Fed Chairman Powell testified to Congress that the program was “not getting a ton of interest,” but expects applications may pick up in the coming weeks and expressed the Fed’s willingness to tweak the program as needed.
   
• The Federal Reserve released the minutes from its Federal Open Market Committee meeting in early June, which showed a willingness to offer more concrete “forward guidance.” That policy would see the Fed clarify where it expects to set interest rates over the longer term. Officials remained divided over whether to anchor forward guidance to a specific date or a level of unemployment. Discussion also touched on yield-curve control — where the Fed commits to buying unlimited quantities of U.S. Treasury bonds to target longer-term rates — but officials saw risks and unknowns associated with the policy.
   
• Jérémie Cohen-Setton and Jean Pisani-Ferry, both of the Peterson Institute for International Economics, compare the United States’ COVID-19 economic response to France’s response. They find that U.S. measures focused on supporting households, including the Paycheck Protection Program, were both twice as large (in GDP terms) and less effective at curbing unemployment than French measures. That is partly because the emphasis France (and many European countries) placed on maintaining employment relationships, whereas the United States took layoffs more as a given and focused on supporting unemployed households. Similarly, France’s larger social safety net made American-style programs unnecessary.
   
• State and local governments have laid off 1.5 million workers as a result of COVID-19, writes Brooking’s Mark Muro. Over 700 cities have also pulled infrastructure plans, and many are considering tax increases to offset budget shortfalls. Muro also cites research showing lower local and state government spending slowed the recovery from the Great Financial Crisis. Research from Moody’s points to 4 million job losses from state layoffs in the coming years. All of this, Muro says, speaks to the need for funding for states and municipal governments on the order of $500 billion to $1 trillion.

European Developments

Ahead of a mid-July summit, member states continue to negotiate over the proposed 750 billion euro recovery fund. German Chancellor Angela Merkel offered concessions to the so-called Frugal Four, including promises of economic reform. Analysts are also working through the details of the program, and asking how effective it will be given Europe’s recent shift towards economic recovery and reopening.

• German Chancellor Angela Merkel again expressed confidence that E.U. member states would reach an agreement on a 750 billion euro recovery fund by the time the E.U. holds its summit meetings on July 17-18. In a concession to the “frugal four” nations — Sweden, the Netherlands, Denmark and Austria — she proposed E.U. countries should express willingness to undertake economic reform as part of receiving recovery funds. Under the current proposal, funds will be distributed primarily as grants; the Frugal Four want loans instead. Talks are set to continue ahead of the summit.
   
• In a critique of the current recovery proposal, Financial Times columnist Wolfgang Münchau writes that Europe is trying to do both investment and fiscal transfer policies at the same time. “They are hoping to get two instruments for the price of one,” writes Munchau. “It is more likely that they will get none for the price of two.” A rapid recovery, notably, could delay or derail the recovery fund entirely. Investment is clearly needed, Münchau argues, but in the case of a more rapid-recovery, transfers based on pre-crisis economic data might skew European economic growth. Managing the fund in a shaky but sustained recovery would “require the rarest of qualities in European policymakers: clear thinking and a readiness to solve problems,” Münchau writes.
   
• Claire Jones, at FT Alphaville, asks whether Europe’s recovery will resemble China’s return towards economic normalcy. Both Europe and China are export-dependent and highly interconnected, and China is further along in easing restrictions and curbing growth of infections. China’s recovery, however, has been “sluggish” according to economic data cited in a BIS report. But there are critical differences: Chinese manufacturing likely picked up quickly due to pent-up global demand, but Europe has a much more robust consumer economy, one that governments have been careful to cushion from the blows of layoffs that have afflicted much of the rest of the world. That may be good news for Europe as it enters the recovery phase.
   
• Financial Times reporters Arthur Beesley, Sam Fleming and Mehreen Khan profile the three candidates who have made pitches to lead the eurogroup of finance ministers. They include: Nadia Calviño, Spain’s economy minister; Paschal Donohoe, Ireland’s finance minister; and Pierre Gramegna, Luxembourg’s finance minister.

Odds and ends

• The Bank of International Settlements publishes its Annual Economic Report.
   
• Economists almost universally agree that temporary bans on visas for skilled workers will weaken U.S. leadership in STEM and R&D.
   
• WSJ: How Coronavirus Upended a Trillion-Dollar Corporate Borrowing Binge and Kicked Off a Wave of Bankruptcies.
   
• At VoxEU, Caitlin Brown, Martin Ravallion, Dominique van de Walle explore the challenges the world’s poor face in following WHO recommendations to limit the spread of COVID-19.