Richard Grossman, professor and chair of economics, is an expert in economic history as well as current policy issues in macroeconomics, banking, and finance. In this Q&A, we asked him about the economic fallout from the coronavirus pandemic, and how the government is responding in efforts to mitigate the damage.
Q: We’ve all seen the headlines about a coronavirus-induced recession. What is the current state of the economy, and what do you predict we’ll see over the coming months?
A: Prior to the virus outbreak, the American economy was doing well by conventional standards. The unemployment rate was 3.5% in March, down from a peak of 10% around a decade ago. According to the government’s most recent estimate (released on Feb. 27), real gross domestic product grew by 2.3% in 2019. Not stellar, but high relative to other developed economies. It is going to get substantially worse quite soon.
Q: What are the key economic indicators you are following, and why?
A: Indicators that are published frequently have more of a “real time” feel to them. For example, weekly jobless claims report came out this morning (March 19) and came in at 281,000—up 70,000 from last week. We can only expect this figure to go up. And the March employment situation report, which comes out on the first Friday of April, will no doubt show the beginnings of the impact on the labor market.
Q: What groups or parts of the economy are feeling the pain most acutely?
A: It might be easier to talk about what groups will not suffer. People who can work remotely and whose employers will continue to stay in business will be fine. Anyone who has to be physically present, or whose company can no longer afford to employ them, will suffer. Think about all the entertainment industries—sports, other live performances, movies—that are suspending operations. I don’t worry about highly paid professional athletes—but what about all the restaurants and vendors who provide services to people on their way to and from the theater or ballpark? The people who work selling popcorn and as ushers? And all the people working in the travel, hospitality, and retail industries? This is a major blow to them.
It is also clear that this is going to have the largest effect on those who can least afford it. People with savings will be able to meet their rent, mortgage, and auto loan payments. But those without adequate savings are going to have trouble with food, shelter, and transportation.
Q: You’re an economic historian. What can we learn from history?
A: As my teacher Barry Eichengreen pointed out in The New Yorker yesterday, during the Great Depression economic output fell by about a third, industrial output fell by about half, and the unemployment rate rose to nearly 25%—but all of this occurred over the span of three years. Now, we are going to see a very sharp decrease in a very short period of time.
There was a nine-day general strike in Britain from May 3 to May 12, 1926, during which a large portion of the labor force stayed home and disrupted virtually all facets of the economy, including food production and distribution. The situation was so dire that the government enlisted a naval destroyer to import a shipment of yeast from France. That strike lasted nine days. This disruption will be much longer.
Q: The government is working to mitigate the economic fallout from this disaster. Can you briefly tell us what’s been proposed/enacted, and what effect it’s likely to have?
A: The Federal Reserve moved quickly to lower short-term interest rates to near zero and to make sure that firms in need would have access to credit. This means that businesses having trouble paying their suppliers, creditors, and workers should be better able to get cash to pay their suppliers, make their payrolls, and keep their creditors paid.
After a slow start, the Treasury has come around to the notion that the crisis requires a vigorous response. On March 18, the Treasury released a blueprint for an approximately $1 trillion package, including $200 billion for loans to the airline and other affected industries, $300 billion for small business interruption loans, and $500 billion for direct payments to individual taxpayers.
Q: What parts of society are most likely to be helped by this package? Which are neglected?
A: It really depends on the details. Will payments to individuals be somehow targeted to those most affected by the crisis? Or will everyone get a check? On the loans to industry, will the loans be secured by collateral? That is, will the airlines have to put up their planes as security that they will repay the loans? Or will the loans be unsecured? This is all subject to negotiation between Congress and the administration.
Q: What advice would you give decision-makers in government about how best to respond to this crisis?
A: Rather than send everyone a check for $1,000, I’d like to see aid targeted at those most affected by the crisis—people who are unable to work and get paid. Perhaps Treasury payments could be targeted at taxpayers who receive the Earned Income Tax Credit, a tax credit given to low-to-moderate income workers, and those receiving unemployment compensation.