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“The Great Lockdown” Could Lead To a Second Great Depression

White House senior adviser Kevin Hassett said last week that the U.S. faces a Second Great-Depression due to the COVID-19 pandemic. Major business leaders say there is no way we will experience a substantial economic rebound before the fall.

“Make no mistake: It’s a really grave situation,” said White House senior adviser Kevin Hassett, a former chairman of the White House Council of Economic Advisers under President Trump. “We’re going to be looking at an unemployment rate that approaches rates that we saw during the Great Depression.”

More than 26 million Americans filed unemployment claims in the past five weeks, with Economic Policy Institute suggesting as many as an additional 15 million would have filed if the system had been easier to navigate. The 26 million number represents one-sixth of the U.S. workforce. During the Great Depression, the unemployment rate was about 25%.

Barry Diller, chairman of IAC and Expedia, says there won’t be a rebound. “To anyone who thinks that this economy is going to bounce, I mean, you’d have to have the idea of a rubber ball not in existence to think it’s going to bounce high. It can’t,” Mr. Diller said on CBS’s Face the Nation. “The damage that’s being done is catastrophic.”

Bank of America CEO Brian Moynihan said that the U.S. economy won’t bounce back this year. “This is a deep recession and then back out,” he said. “Our experts think it’s late next year when the economy gets back to the same size it was prior to this.”

Many of the Americans who filed for unemployment are now earning more money on unemployment than they were while they were actually working due to a provision in the CARES Act to give unemployed workers an extra $600 a week on top of any normal unemployment benefits. So, they might not want to get back to work in the first place. As USA Today wrote:

The CARES Act includes a $600-a-week bonus until July 31 for those registered as unemployed. The $600 is issued in addition to the standard unemployment benefit, which varies by state and by individuals’ record of previous earnings.

That’s the equivalent of $15 an hour based on a 40 hour work week. Republican members of congress were concerned about this.

Some Republican lawmakers warned about this unintended consequence of the relief bill when it was being drafted, noting that $600 a week amounts to $15 an hour, more than twice the federal minimum wage. That’s in addition to state unemployment benefits, which vary widely from a maximum of $235 per week in Mississippi to $795 per week in Massachusetts.

J.P Morgan Chief Investment Officer Bob Michele predicted it will take 10-12 years after the pandemic for U.S. employment to get return to pre-coronavirus levels.

“It’s going to take years, or longer to get back to where we are, or where we were,” Michele said on Bloomberg. “When you look at the congressional budget office forecast for the end of 2021, they have unemployment at 9 percent, so sure, materially better than where we’re going to peak in the high teens, but during the peak of the financial crisis, unemployment hit 10 percent.”

He added: “So even looking out a year and a half from now, we’re still going to be roughly where we were at the peak of the financial crisis.”

The Paycheck Protection Program (PPP) will run out, Michele noted, and, even when the economy reopens, U.S. citizens won’t spend like before, which could lead to more job losses.

“One of the things we did was to just predict a downdraft in the second quarter, somewhere around 10 percent, so call it 38 to 40 percent annualized, and say that’s the trough, and then start this journey back up to the longterm trend rate,” he added. “To catch up to the longterm trend rate that’s been in place, call it 1.5 percent, pre-crisis, to fill that output gap, we estimate it will take ten to twelve years.”