Great Depression coming?
John Gong
Markets fall at the New York Stock Exchange, U.S., March 12, 2020. /AP

Markets fall at the New York Stock Exchange, U.S., March 12, 2020. /AP

Editor's note: John Gong is a professor at the University of International Business and Economics and a research fellow at the Academy of China Open Economy Studies at UIBE. The article reflects the author's opinions and not necessarily the views of CGTN.

The blow dealt by COVID-19 to the U.S. economy is horrendous. The country's GDP dropped by 4.8 percent in the first quarter of this year, and unemployment claims have shot up to 30 million so far. This has not even included those self-employed or semi-employed folks who are usually not covered by the Department of Labor's official figure. Unemployment rate officially stands at 14.7 percent in April, which is the highest level since the Great Depression.

The worst is clearly not over yet. Most of the lockdown or social distancing measures across many states started to be introduced in later March and early April. So the first quarter GDP figure hasn't really reflected the full economic slowdown yet. Besides, an economic slowdown tends to have a ripple effect, as the economy grinds to a screeching halt. Restaurant, travel and accommodation industries will be first affected, followed by other service sectors and eventually percolating down to manufacturing and the rest.

This pandemic could not have happened at a worse time. The U.S. economy was already starting to show signs of strain prior to the COVID-19 hit after a long stretch of boom time of over a decade. Industrial investments were already in the negative territory in the last two quarters of 2019, even though the GDP over the whole year squeezed out an anemic 2.3-percent growth.

To stem the spiraling decline, monetary and fiscal policies are usually the first things coming to mind of policymakers. But the federal government's monetary policy space is very limited though. Interest rate is already close to a historic low, as the prime rate among banks dropped to around three percent in April. Fiscal policy is precisely the kind of thing the government needs to do after a natural disaster of such a large scale. U.S. Treasury is already doing all it can to pump money into the economy while Congress rushed to authorize emergency stipends to help with American people.

The New York Stock Exchange, U.S., March 18, 2020. /AP

The New York Stock Exchange, U.S., March 18, 2020. /AP

But this type of handout-oriented fiscal policy is not likely to stimulate the economy in a sustainable way. It is true that those unemployed people do need a lot of help compared to the situation in China where households have a much higher savings rate, high housing ownership ratio and more importantly stronger family bonds. For many people in the U.S., two to three months of no income do have grave implications for keeping food on the table and having a shelter.

Nevertheless, let's face the fact. Fiscal policy in the form of subsidizing consumption is not going to be as effective as stimulating investment from a long-term sustainable perspective. In that regard, President Trump should immediately resurrect his botched initiative to make America infrastructure great again.

The Great Depression calls for thinking of greatness. Ninety years ago, Franklin Roosevelt's solution was the "new deal" where America invested in a great number of infrastructure build-outs. The highway system, the Hoover Dam and public housing across many cities were great examples of that. Civilian Conservation Corps was born during the "new deal" as a means for providing employment for those who were out of work while also creating many public works around the country.

When President Trump came to power in 2017, he preached the gospel of rebuilding America's infrastructure. "We will build gleaming new roads, bridges, highways, railways and waterways all across our land. And we will do it with American heart, American hands and American grit," he once said.

Yet, it is abundantly clear that Trump has done practically nothing on the infrastructure side during the last three and half years. When Gary Cohn was still the chief economic adviser, he did come out with a plan in February of 2018. But that plan has gone nowhere since his departure.

It is about time to resurrect that plan on the scale of what Roosevelt did during the Great Depression. It may be debatable or still too early to say whether the U.S. economy has entered into another Great Depression. But the "new deal" is not. It is time for President Trump to deliver his promise – to make America great again.

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