The Economics Behind Trump’s “Rocket Ship” V Shaped Recovery
“And now we’re opening and we’re opening with a bang” 45th President Donald Trump stated in a June 5th press conference concerning the state of the economy upon state’s reopening, following month long closures due to the covid-19 outbreak. “This is better than a V” he continues, “this is a rocket ship, this is far better than a V” as he draws the shape of a V in the air with his finger. This statement came along with the pleasant surprise of reports revealing the national unemployment rate for the month of May had fallen to 13.3% from April’s 14.7%, a statistic economists worried would take much longer to return to any sort of normalcy. While it is certainly still much higher than February's rate of 3.5% before coronavirus was a household name, the 2.5 million jobs gained is certainly a step in the right direction.
How did we get to this point though? Is America’s unemployment rate actually on the road to recovery or was this month a lucky break? Is this the result of Trump administration policy or just a fluke? Months from now, will job hunting feel as if the virus never existed or will the uncertainty of millions still be on the mind of this nation’s people? To find the answers to these questions, and why Trump is talking about rocket ships, we must take a step into the world of economics and understand how and why economic rebounds, V shaped in particular, come about.
Growth Dynamics: The Myth of Economic Recovery, an article published to the American Economic Review in March 2008 by economists Valerie Cerra and Sweta Chaman Saxena attempted to define how recoveries come about and if the loss of outputs incurred from political and financial shocks can be fully recovered. It was found that, following financial and political crises, such as a currency crisis or banking crisis, “the magnitude of persistent output loss ranges from around 4 percent to 16 percent for the various shocks”. In all scenarios, aside from the civil war, it was found that these types of shocks on such a massive scale left economies with an output less than that of which they had before the shock. While the situations considered in this study are not parallel to our current one as a global pandemic was not a scenario tested, the results are still interesting and may be a peek into what’s in store for our economy.
However, this may not be the case. With Trump’s decision to reopen earlier than expected in an attempt to charter on what is expected to be a long road normalcy, at least in terms of the economy, the repercussions of the pandemic may not be as severe as people had worried. While it may turn out that this rocket ship of a V-shaped recovery that the President spoke about in his press conference is a reality after all, without an understanding of what exactly that is, it is hard for the average American to get excited about it. A V-shaped recovery from economic recession is defined as involving a sharp rise back to a previous peak after a sharp decline in its metrics. The key takeaway from a V-shaped recovery is that, due its fast pace, with the speed of a rocket ship, if you will, and its return to previous status without much, if any, significant repercussion, it is often considered the best case scenario following an economic recession. This is part of the reason that economists were so hesitant to predict the potential of its occurrence as recent as a few weeks ago. If things stay on the track, as Trump hopes they do, and we do see a full V shaped recovery, it is hard to say exactly what type of output we would have lost, but it is likely that it would be significantly lower than Cerra and Saxenas’ findings from other types of extreme economic stressors. In my opinion, this is simply because the pandemic is a very peculiar scenario that we haven’t witnessed before.
Unlike other large economic shockers, the coronavirus may more likely result in a V shaped rebound because many of the jobs that led to the skyrocketing unemployment rate were paused for state shutdowns, but likely will need to be refilled upon reopenings. During the shutdown, some companies laid off employees allowing them to collect unemployment, knowing and even informing the newly unemployed that their positions would be regranted upon ability to reopen. Sadly, this is obviously not the case with every job that stacked up to the monstrous 14.7% unemployment rate that we saw this past April, and certainly some will remain unemployed despite companies bringing people back into the offices. This makes it tougher to estimate the true economic carnage that the pandemic will have on the nation, as these promised temporary layoffs will allow the unemployment rate to rebound quicker than scenarios with a more permanent loss of positions.
As is true with everything, we will have to wait and see. While it is impossible to say that Trump’s bold claims of a recovery faster than a V shape are true, the surprising drop in unemployment with states that are still not even fully open is a step in that direction. While financial crises usually leave us in a worse place than where we started, the irregularities in the cause of this widespread unemployment makes it tough to say whether this will be the case. Hopefully President Trump is right with his assumption and the inkling of support that this drop in unemployment gives his claim will continue to grow as states continue to open up and those temporarily laid off return to work.
