Professor Alexander J. Field, the Michel and Mary Orradre Professor of Economics, has studied every major economic downturn in the United States. But neither he nor his colleagues have witnessed anything like the COVID-19 pandemic, its human tragedy, and the economic tsunami that has brought life in the United States to a grinding halt.
Field doesn’t know how long this will go on or how long it will take for our lives to bounce back. The answer depends critically on how successful Americans will be in flattening the curve and mitigating the spread of the virus.
We talked with Field about the current operation of the U.S. economy—and the political response to it—under such stress.
You’ve written extensively about the Great Depression and the Great Recession. How does this compare?
The big difference here is that the initiating factor is what economists call a negative supply shock: the policies that have required all but essential businesses to shut down or limit their operations.
The solutions to the 2008 financial crisis or the Great Depression included getting total spending back on track. That’s not the basic challenge here. Once you start shutting down the economy, you have rising unemployment because various service providers and manufacturers are not able to operate. This of course drives down income which drives down spending, but these declines and the resulting unemployment are the consequence of the mitigation strategies.
In a more typical recession, the initiating factor is a decline in spending, which leads to the drop in output and employment. We need first to contain the virus, so that we can gradually remove some of the mitigation policies. In the interim we need to do what we can to help people weather the pain of economic disruption.
President Donald Trump has talked about sending people back to work and restarting the economy earlier than healthcare experts advise, saying “we cannot let the cure be worse than the problem itself.” Disregarding the humanitarian angle, in that scenario, what would happen from an economic standpoint?
Oncologist and bioethicist Emmanuel Ezekiel wrote this week that if we proceed along the route towards which the President appears inclined, (economic) recovery may take more than a decade “with extraordinary levels of death and dislocation.”
It is highly unlikely sacrificing two million people—including many health workers, parents, and individuals with underlying conditions—will allow the economy and the stock market simply to return to how they were in February. It is certain, however, that such a policy will bring our hospitals and medical system to a standstill, and impair the operation of many other aspects of our economy for what might be a very long time.The suggested tradeoff is unconscionable, even from a strictly utilitarian standpoint.
The fallout on businesses, you say, will depend on what sector they are in.
If the airlines have to stop flying, that limits how long they can remain solvent. They have to pay interest on debt, and have other fixed costs. Some small businesses will do better than others. Restaurants will try to keep their customers by offering take-out; bars will have a harder time because it’s not just beer they offer, it’s a gathering place. For many businesses, there’s not an easy fix.
Just last month, the U.S. stock market posted its highest closing record of 29,551.42.
The stock market soared in part because the country was fully employed and Republicans had passed a massive tax cut. That legislation reduced corporate tax rates and so corporations were flush with cash which they used to buy back their shares. Reducing the number of outstanding shares pushed the share prices up. Top income groups had also received substantial tax cuts, so were also flush with cash. Earnings were good. People were optimistic. Looking forward to the next two quarters, corporate earnings overall are going to be terrible.
At the time the virus surfaced, you were concerned about other economic headwinds affecting the U.S. economy, like America’s tariff policy.
Some of Trump’s economic advisors advocate policy measures that most economists would not embrace. The idea that the United States will be better off imposing high tariffs and that other countries will pay them—most economists say that’s not exactly true. If you put tariffs on Korean and Chinese dishwashers and refrigerators, the overall effect is to raise the price of such goods for American consumers. It’s partly foreign producers who get hit, but so too do Americans.
How will the pandemic change that policy?
There may be increased pressures for tariffs to protect higher cost American producers of items critical to our national security—and I would include in that category supplies and equipment necessary to deal with a pandemic. Another solution would be for the government to maintain larger stockpiles of these goods (ventilators, masks, personal protective equipment, and key medicines). We stockpile oil, and the military stockpiles medical equipment and drugs, but this would be aimed more directly at protecting the civilian population. More of this has been done in the past, and we should have been better prepared.
Can you remind us about the economic instruments being applied to help the U.S. economy during this pandemic?
Both the Federal Reserve System and Congress are operating according to their standard playbook: The Fed has cut short-term interest rates to zero, and is attempting to hold long rates down through massive bond purchases, including private sector obligations (quantitative easing). Congress is trying to shore up businesses and households during the coming recession, and thus counteract the (temporary) economic damage of the mitigation efforts. The problem right now is we don’t have a good fix on how long these disruptions will stay in place.
Finally, what is your reaction to the new $2 trillion stimulation plan?
Such action is necessary and desirable, and there are many positive features. But although there is some targeted assistance for state and local governments, I have concerns about the absence of broader revenue sharing by the federal government to help states, which can’t run deficits. Such assistance was an important feature of the American Recovery and Reinvestment Act in 2009. It is also not yet clear ow much consideration has been given to the effects of the shutdowns on schools, universities, and other nonprofits.