A Half-Speed Economy Will Be the New Normal, Says Bruce Mehlman

by FS

Bruce Mehlman walked FS Insider listeners through his new slide deck, After COVID: Policy and Politics in the Age of Pandemic. He shares why the coronavirus wasn’t a black swan event but rather a white swan event we knew was coming. He also breaks down the response of Congress and the great reopening debate sweeping across America. Read below for excerpts from his interview with FS Insider. If you’re not already a subscriber, click here.

For audio, see Bruce Mehlman on Politics and Policy in the Age of Pandemic.

The last time you were on the show, we discussed potential black swan events of 2020 and of the coming decade, but this was before COVID-19 hit. Now you have a new slide deck, let’s start there.

So, the last presentation I produced was looking at black swans, likely in the decade. What’s interesting is when I was creating the slide analysis of black swans, I had a slide drafted showing pandemics. My first thought was, ‘I know that’s technically what a black swan is, but I’m not going to put in crazy asteroid hitting the earth sort of stuff.’ I concluded that wasn’t a black swan anyway—it’s a white swan.

The fourth infographic I have in the presentation shows a series of Time magazine covers. One from 2003 is the truth about SARS. Another from 2004 has to do with bird flu. One from 2007 covering H1N1 and another in 2009 about wearing masks again. In 2017 there’s one that says, ‘We are not ready for the next pandemic.’ We also can’t forget about Bill Gates’s 2015 TED talk.

Every year there has been work by national security experts, health experts, government experts and some market experts, noting that we’re not really ready for a pandemic. Well guess what? We weren’t ready for a pandemic, but the reality of that doesn’t have to surprise anybody because that’s what folks have been noticing every year with great regularity.

Source: Bruce Mehlman’s After Covid: Politics and Policy in the Age of Pandemic

So this was a predictable disaster. Did people tune it out, thinking this could happen in third world countries, but not in the U.S.?

I’m not sure it was so many warnings that people stopped paying attention, so much as all the near misses did give a false sense of complacency. When these things would pop up in the past, the government would figure out what they need to do. You could test and you could quarantine. You know, you saw with some frequency governments responding effectively.

What’s really interesting to me is that the most successful government on the planet at this is either South Korea or Taiwan. Interestingly, South Korea failed in 2015 with the MERS epidemic. They weren’t good at testing and they were slow at rolling it out. They were not good at contact tracing. They weren’t good at quarantining at-risk populations and people who might be spreaders. They failed in 2015. And the great thing about failure, of course, is that you can learn from it.

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The systemic risk from weak banks that defined the 2009 financial collapse is not present here. In fact, banks are unbelievably strong and resilient heading into this thing. Now, obviously, it’s a hell of a big wave coming. But part of that’s because we learned the lessons, we made some adjustments and we were much better prepared. And with the coronavirus, South Korea was better prepared.

The U.S. and South Korea both had our first COVID-19 cases on January 20. Today, in South Korea people are shopping at an Apple store which reopened and they’re going to restaurants. There is a change in some of what operates but there isn’t a debate about reopening— they reopened. Even though we both had this first case on the same day, and even though they’re far closer to where this all started in China, it’s because they learned the failures of MERS. The U.S. hadn’t survived something like that. Ebola was a scare, but never made its way here aside from a few people. We didn’t have the chance to learn from failures. We will now.

What do you see ahead for Congress, post-COVID-19?

I don’t remember Congress ever reacting to disasters to get more money on the street in more bipartisan fashion, ever. It’s faster than the relief for Katrina. It’s faster than post- 9/11. It’s faster than in the Great Recession. They voted again and it was overwhelmingly bipartisan. Now, it’s sausage making, so it’s ugly on TV.

Congress is taking an approach that’s really three phases. The first is how do you stabilize? So that’s what the proverbial helicopter money is. That’s just give money to people and give money to businesses. The government forced everybody to shut down and so to help people make their mortgages, to help businesses keep their payrolls to the maximum extent possible, they’re dropping trillions right now.

Phase two is going to be focusing on recovery. It depends a little bit how V-shaped the recovery is. I fear, it’s not going to be V shaped, it’s more of an L or a checkmark with a with a slow rising slope. The more post reopening pain, the more they’re going to want to have jobs, bills, maybe including things such as infrastructure. I think the new normal is going to be a half speed economy. I expect Congress is going to want to try to supplement some of the missing demand and otherwise help the effort to have things heal.

The last phase will be reform. There were a lot of gaps, some we should have known. We didn’t have adequate pandemic readiness. We didn’t have adequate education, preparation, telehealth, or social safety nets. We were Swiss cheese in so many ways that are now kind of obvious. And I think Congress over some number of years, is going to have to reassess questions.

This is the third time you’ve had a once in 100-year event in this century, if you count 9/11, the great financial collapse and now this pandemic. The best analogy at the moment is probably WWII, where when you’re at war you spend what it takes because losing is worse than not losing. And as we saw post WWII, the goal thereafter is how do you grow your way out of it?

Source: Bruce Mehlman’s After Covid: Politics and Policy in the Age of Pandemic

Now you’re typically going to need to figure out how to gain more revenue and how to spend less money once you’re out of the war, and they did that in late 40s and 50s. The key to America overcoming the amount of debt we had during WWII was growth. We’re looking for sure at what is going to be the highest deficit as a share of U.S. GDP since 1945. It’s going to be 18.7%, according to the Committee for a Responsible Federal Budget— the highest since WWII deficit as a share of U.S. GDP. And it’s not adjusted for inflation.

If you take the absolute dollars, as opposed to the present value, the absolute dollar spent by every American Congress in the first 200 years of American history, it was $8.7 trillion. And again, a dollar in 1789 goes further than a dollar today. I think the current Congress will spend about the exact same amount if not a little bit more in 2020, as they did in those first 200 years, which kind of blows my mind.

Tell us about the great debate we’re having right now over when and how to reopen.

There’s the operational economic way it will play out and then there’s the political way it is playing out. The operational reality feels like it’s a half speed economy. You’re going to need temperature checks and a lot of people are going to be wearing masks. You’re going to have regional flare ups and lock downs. They’re going to have to redesign some public spaces.

Even for those who say reopen tomorrow, most rational folks know we’ll need obvious measures taken to protect older people and we’ll need to wear masks and have more physical distancing. That’s not the economy we’re used to. And so that will be slower growth with new challenges and for a lot of businesses. You have to worry whether it’s liability if you have an open office plan. You have to worry about whether you’ve got wipes and if the space is adequately cleaned. That’s the operational reality. It’s why growth can’t be back to the way it was for at least a year or so at least until there’s ubiquitous vaccine.

Source: Bruce Mehlman’s After Covid: Politics and Policy in the Age of Pandemic

The flip side of that, though, is the politics. COVID-19 is the new climate change. It is ground zero for the 2020 culture war. It’s Fox watchers versus CNN, people who believe that scientists are always the answer and right, versus those who are wary of what they would consider elite consensus, when they would say that the elite consensus often has gotten things wrong. The American debate for 200 years is frequently collective responsibility versus individual freedom.

That’s true in the Second Amendment. That’s true about my ability, in my mind, to do business but emit carbon and your belief that my emitting carbon is bad for the whole planet and let alone the country. It’s that same debate that is now being fought about when and how we should reopen.

Click here to listen to this full interview with Bruce Mehlman and to get his take on how the coronavirus will impact the 2020 election, voting and investment implications. If you’re not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe on all things economics, finance and markets…