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COVID-19 and the Working Class

US politicians and media are reporting approximately 500 cases of the virus in the US as of March 8. The actual number is almost certainly much higher, however. Perhaps as much as 10-fold that number, according to some sources. Why?

There’s the problem of reporting only tested cases so far, and there’s still a lack of available tests even to test and to verify all those infected without symptoms.. And even those showing symptoms may have been determined initially as not infected by the tests, since reportedly many of the early test kits were defective. Meanwhile, those without symptoms or pre-symptomatic are not being tested at all.

The Fiction of Voluntary Quarantine

Then there’s the policy of voluntary quarantining those who have come into contact with someone who was tested and found infected. It’s not working very well. Those who have come in contact with carriers of the virus are asked simply to stay home. But do they? There’s no way to know, or even enforce that. The case example why voluntary quarantining doesn’t work well is Italy.

Most of the northern Lombardy region, including the financial center of Milan in that country, is in ‘lock down’ right now. But all that means is voluntary quarantining. People are asked not to leave their town, or the larger region. But is that stopping them traveling around their town in public places? Or within the larger region? And spreading the virus there? Apparently not. Reportedly, infection for those tested have risen in just two weeks to more than 6,000 in Northern Italy. CNBC reports that, in just one day this weekend, that number increased by 1200! So much for voluntary quarantines. There’s no way, no sufficient personnel, not even accepted procedures, with which to daily check on those (in Italy that means hundreds of thousands) in voluntary quarantine.

The Real Costs to Workers

Average working class folks cannot afford to voluntary quarantine themselves. Or to stay home from work for any reason. Even if they have symptoms. They will continue going to work. They have to, in order to economically survive.

Consider the typical scenario in the US: there are literally tens of millions of workers who have no more than $400 for an emergency. As many perhaps as half of the work force of 165 million. They live paycheck to paycheck. They can’t afford to miss any days of work. Millions of them have no paid sick leave. The US is the worst of all advanced economies in terms of providing paid sick leave. Even union workers with some paid sick leave in their contracts have, at best, only six days on average. If they stay home sick, they’ll be asked by their employer the reason for doing so in order to collect that paid sick leave. And even when they don’t have sick leave. Paid leave or not, many will be required to provide a doctor’s slip indicating the nature of the illness. But doctors are refusing to hold office visits for patients who may have the virus. They can’t do anything about it, so they don’t want them to come in and possibly contaminate others or themselves. So a worker sick has to go to the hospital emergency room.

That raises another problem. A trip to the emergency room costs on average at least a $1,000. More if special tests are done. If the worker has no health insurance (30 million still don’t), that’s an out of pocket cost he/she can’t afford. They know it. So they don’t go to the hospital emergency room, and they can’t get an appointment at the doctor’s office. Result: they don’t get tested, refuse to go get tested, and they continue to go to work. The virus spreads.

Even if they have health insurance coverage, the deductible today is usually $500 to $2000. Most don’t have that kind of savings to spend either. Not to mention copays. So even those insured take a pass on going to the hospital to get tested, even if they have symptoms.

The media doesn’t help here either. Reports are typically that those who are young, middle age, and in reasonable good health and without other complicating conditions don’t die. It’s the older folks, retirees with Medicare, or with serious other conditions, that typically die from the virus. Workers hear this and that supports their decision not to go to the hospital or get tested as well.

Then there’s the further complication concerning employment if they do go to the hospital. The hospital will (soon) test them. If found infected, they will send them home…for voluntary quarantine for 14 days! Now the financial crises really begins. The hospital will inform their employer. Staying at home for 14 days will result in financial disaster, since the employer has no obligation to continue to pay them their wages while not at work, unless they have some minimal paid sick leave which, as noted, the vast majority don’t have. Nor does the employer have any obligation legally to even keep them employed for 14 days (or even less) if the employer determines they are not likely to return to work after 14 days (or even less). They therefore get fired if they go to the hospital after it reports to the employer they have the virus. Just another good reason not to go to the hospital.

In other words, here’s all kind of major economic disincentives to keep an illness confidential, to go to work, not go to the hospital (and can’t go to the doctor). That risks passing on the highly contagion bug to others–which has been happening and will continue to happen.

Here’s another financial hit for the working class: child care. Schools are beginning to shut down. Even where no cases are yet confirmed. Stanford University just decided to discontinue all in class sessions and revert to all online education. But what about K-6 and pre-school? Or even Jr. high schools? When they shut down, kids must stay at home. But most working class parents can’t afford nannys or baby-sitters. Not everyone works in an occupation or company where they can ‘work from home’. Do they send the young kids to grandma’s and grandpa’s, who are more susceptible to the virus? With their kids required to stay home, they must miss work, and risk even losing their jobs. We’re talking about millions of families with 6 to 12 year olds. And who knows how long the schools will remain shut down.

In short, wages lost due to self-quarantining, forced voluntary quarantining after hospital testing, the cost of hospital emergency room visits (whether insured or not), the unknown cost of the tests themselves (the government says it will reimburse them but they don’t have the $1,000 or more cash out of pocket in the first place), the cost of paying for nannys or baby-sitters for young school age children when schools shut down–i.e. all result in a massive out of pocket expense for most workers that they don’t have.

Workers figure all these possibilities of financial disaster pretty quick and know that the virus will mean a big financial hit if they miss a day’s work, or even if they don’t. So they keep working, hoping they’ll recover on their own, refusing to get tested because of the potential loss of work, wages, and income, and crossing their fingers that their kids’ school districts don’t shut down.

Economic Contagion Channels: Supply Chains, Demand, Asset Deflation, Defaults & Credit Crunch

What this all means for the US economy is obvious. Household consumption was already weakening at the end of last year. Most of consumption was driven by accelerating stock valuations, which affect those in the top 10% who own stocks; or by taking on more credit–credit cards, which affects the middle class and below.

Over $1 trillion in credit card debt is what has been largely driving middle income and below consumption. Mainstream economists argue that defaults on credit card debt are only 3% or so, and thus not a problem. But that’s a gross average across all 130 million households. When this data are broken down, middle income and below family credit card debt is around 9%, a very high number more like 2007 when the last economic recession began.

Then there’s auto debt. As of 2018, reportedly 7 million turned in their keys on their auto loans. As in the case of credit cards, auto debt defaults will rise as well in 2020. Then there’s student debt, over $1.6 Trillion now. Defaults there are much higher than reported as well, since actual defaults (defined as failure to pay either principal or interest) have been redefined to something else other than actual default.

Add to all this the likelihood is very high that job layoffs will now begin by April, as the global supply chain crisis due to virus-related cuts in production and trade.  More job loss means less wage income and thus less household spending and more inability to deal with the costs of the virus for most working class families.

Let’s not also forget the price gouging for certain products that is beginning now to appear, both online and in stores. That reduces working class real incomes and thus consumption too. Meanwhile, certain industries are already taking a big hit and layoffs are looming in travel companies of all kinds (airlines, cruise ships, hotels, entertainment). In places where the virus effect is already large, a big decline in restaurant, sports and concerts, movies, etc. has also begun.

The two big economic contagion channels impacting employment thus far are supply chain production and distribution reductions, and local demand for certain services (travel, retail, hospitality, etc.).

But a third major channel has just begun to emerge: that’s financial asset deflation in stocks, oil & commodity futures, junk bonds & leveraged loans, and currency devaluations.

Stocks’ price collapse leads to business shelving investment and even cutting back production. That means more job loss, reduced wage incomes, less spending, and economic slowdown.

Oil and commodity prices now collapsing also lead to energy industry layoffs. More importantly, in turn that will lead to energy junk bond market collapse–potentially spreading to all junk bonds, leveraged loans, and even BBB grade corporate bonds (which are really redefined junk bonds not investment grade bonds).

In other words, the collapse of supply chains, production-distribution, and industry by industry demand in the US may become even worse should the financial markets price collapse can lead to a general credit crunch. And that translates into a general economic real contraction. That’s precisely what happened in 2008, in a similar chain reaction from financial crisis to real economic crisis.

Workers are aware of all this possibly leading to longer run economic stress. In the short run, they consider possible wages loss if they reveal or report they have the virus, or get tested: i.e. lost wage incomes: the cost of immediate medical care; the cost of child care, etc. Better to tough it through and continue to go to work is a typical, and rational, response.

This is already going on. Hundreds of thousands with, and without, symptoms are not being tested; nor will most of them volunteer to be. Except for those on cruise ships who are forced to be tested (and they’re mostly retirees and elderly), few workers can afford to allow themselves to be. The infection rate is thus already much higher and will continue to rise. Voluntary quarantining doesn’t work much (again just look at Italy, or even Germany, where in one week cases (tested) rose from 66 to more than 1000). So out of economic necessity and to avoid personal economic devastation, they continue to work. But that doesn’t have to be.

US Policy Response: No Help for Working Class

US policy has been, is, and will continue to be a disaster. Trump’s cuts to health and human services in the past seriously hampered the US initial response. Tests had to be sent to Atlanta and the CDC for processing. Early test kits often failed. Only now are they getting to the states–to late to have a positive initial effect on the spread. Those suspected of exposure to others confirmed infected were simply sent home for ‘voluntary quarantine’. Initial legislation of $8.3 billion just passed by Congress provides for ‘reimbursement’ for voluntary testing, with no clarification if that covers the $1,000 hospital visit as well or just the cost of the actual test!

There could be, however, a government response that financially supports workers and allows them to be properly tested and treated.

An Alternative Policy Response

Why doesn’t the government simply say ‘go get tested for free’ and the hospital will bill the government for the costs? Not the worker pay up front with money he/she likely doesn’t have. Why isn’t there emergency legislation by Congress or the states to require employers to provide at least 14 days of paid sick leave, like other countries? And law guaranteeing employers can’t fire a worker sick with the virus for any reason? Or tax credits to working class families for the full cost of child care–paid to a nanny or to the worker–if they have to stay home in the event of a school district shutdown?

While business-investor tax cuts will almost certainly be the official government response, few of the above measures for working class Americans are likely. In America working class folks always get the short end of the economic stick. Congress and presidents pass trillions of dollars in tax cut legislation ($15 trillion since 2001 to investors, businesses and the 1%), but have raised taxes on the working class. Companies with billions of dollars in annual profits pay nothing in taxes–and actually get a subsidy check from the government to boot. Just ask Amazon, IBM, many big banks, pharmaceutical companies and more!

It can be expected the virus will have a large negative impact the standard of living and wages of millions of working class families. They will have to bear the burden of the cost with little help from their government. Meanwhile, businesses and investors will get bailed out, ‘made whole’, once again. In the process Consumption spending–the only area holding up the economy in 2019–will take a big hit. That means recession starting next quarter is more than a 50-50 likelihood.

In fact, the investment bank, Goldman Sachs, has just forecast that the effect on the US economy in the coming second quarter of this year will be a collapse of GDP to 0% growth.

 

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Jack Rasmus is author of the recently published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

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