My name is Jonathan Wright.
I'm a professor in the Economics department.
I teach and research macroeconomics, finance
and econometrics and I'm very happy to be
at Hopkins at Home talking about the macroeconomics
of the coronavirus.
You can submit questions through the Q&A bar
and I will take some of them as we go and
then there will be lots of time for questions
at the end.
So, we have had recessions caused by the Fed
trying to bring inflation down, by oil price
shocks, by financial crises.
The global recession that is clearly already
underway is unlike anything seen in a century.
The closest analog is the recession in late
1918 and early 1919 at the time of the Spanish
flu, but there were other things going on
then and the public health response was much
less intense and we didn't have the same kind
of economic data at that point.
It is important to remember that a recession
is almost the deliberate aim of the public
health response to the crisis.
It obviously isn't that anyone actually wants
a recession, but the shut-down of the economy
implies that goods and services are not being
produced, and so economic activity falls.
The objective of policy is to shut off the
normal mechanisms that slow recovery, [inaudible]
matching workers to jobs, that it's easier
to close a firm than to build it up.
In other words, to turn what would be an L
shape recovery into something more like a
V shape recovery.
In this respect it helps that there is little
moral hazard concern.
Unlike in the financial crisis, it is not
like the coronavirus was caused by foolish
decisions by U.S. firms.
I'm going to talk about economic forecasting
in this environment, then I will talk about
Federal Government spending, the fiscal response,
the Federal Reserve's monetary policy response,
and have some conclusions.
So normally in forecasting we like to have
models that we estimate on 50 years of data
and they spit out a prediction.
That approach may be overrated in normal times,
but it is out the window under these circumstances
because there is no real precedence for what
we are going through.
If we are talking about near-term economic
forecasting, it is about bean-counting and
detective work, not estimating macroeconomic
models.
There is an interesting recent paper that
looked at public health crises in a lot of
countries over the years and found that on
average GDP fell by 3% in the year of the
outbreak and was 3% below its previous trend
five years later.
Now, coronavirus is so different from any
other health event that I don’t think we
can use this evidence for quantitative purposes,
but it is suggestive that the economic effects
are big and long-lasting.
I want to suggest three ways of trying to
tackle the question of what has happened to
output as it were today, relative to what
it was before the crisis.
So the first method looks at the most timely,
important macroeconomic data in jobless claims,
which comes out every week.
26 million people have lost their jobs and
the labor force is about 160 million.
Some people lost their jobs, but aren't eligible
for unemployment insurance.
Some people are eligible but because the state
systems are overwhelmed, they haven't actually
been able to file.
Taking all this into account, it would seem
that 15 -20% of the labor force have lost
their jobs and the remainder have lower hours
and presumably lower productivity.
So this kind of calculation would point to
economic activity, to output running about
20-25% below where it was before.
The second method that I can think of is electricity
output.
In past business cycles, electricity demand
has moved roughly one for one with GDP.
And electricity demand is something that can
be measured day by day and it has dropped
by about 10% relative to where it should be
given the weather and the time of year.
So, that would point to about a 10% drop in
output.
The third method is to look at the sectors
that have been nearly completely shut down.
Sectors like air travel and restaurants; they
are not completely, but they are 50-100% shut
down, and count their share in consumption.
And if you do that calculation, that would
end up pointing to a 20-25% loss in real GDP
and output.
In forecasting, Nate Silver likes to talk
about two kind of forecasts: The hedgehog
and the fox.
Hedgehog is one principle.
The fox puts together lots of different kinds
of information.
The fox ends up doing better forecasts, putting
a lot of information together.
I think combining these and other indicators,
a reasonable ballpark is if I take output
today, April 23rd, that is running at a pace
that is 20% slower than it was before the
crisis.
The unemployment rate is something we like
to talk about, and it is a particularly difficult
thing to forecast and maybe it is not the
right focus in this environment.
The thing is, the unemployment rate is the
number who say they don't have work but are
actively looking for work divided by the labor
force, which is those who are working and
those who are not, but actively looking for
work.
If you are in this environment, laid off from
a job, are you actively looking for work?
In which case, you would be counted as unemployed,
or not in the labor force.
That is going to make a big difference to
the unemployment calculation, the way the
government reports it.
The unemployment rate might not go up as much
as it otherwise would because some people
will reply in the survey that they are just
not in the labor force.
For practical purposes, I would think of anyone
who has been laid off as unemployed.
So, the focuses that I would prefer to have,
would be on the employment to population ratio.
That gets out from under the question of,
are you actively looking for work or not?
Or output, economic activity.
Back to my running example of, let's suppose
that the pace of output has fallen by 20%.
Then, we could imagine a hypothetical path
for economic activity that was going on before
the shutdown, and then it rapidly dropped
to 20% below its previous level.
Now, if we are talking about what to predict
going forward, it has everything to do with
the virus and the public health response to
the virus.
That is not really an economics question.
But if we imagine, if we suppose, that we
stay in this current shutdown for another
couple of months and then begin a very gradual
reopening, the hypothetical path for economic
activity might look something like that.
Here, I am imagining a daily economic activity
variable.
But the way the government counts economic
activity, it is not by day, it is by quarter.
So we've got to superimpose on that picture
the first quarter, the second quarter, the
third quarter, and the fourth quarter of the
year and then turn that path for putative
economic activity into GDP growth.
An important thing to remember is the way
that we report GDP growth, it is reported
at an annualized rate.
If output drops from one quarter to the second
by 1%, that would be called a 4% in growth
because it is done at an annualized rate.
Taking all of that into account and having
that as the underlying path of activity, you
get something like this for annualized GDP
growth rates.
The first quarter, where we will actually
get data next week, if this path were right,
should be relatively small and negative, minus
four or minus five percent.
That is still a very bad quarter but relative
to what's coming, it is mild.
The second quarter, if we are talking about
GDP growth at annualized rate, with this kind
of exercise, would come in at worse than minus
50%.
Some of the numbers that I’ve heard people
talk about are more like minus 30%.
The jobless claims data and other factors
would make me think that while that's perfectly
possible, and uncertainty is huge here, that
would be minus 30 at an annualized rate, would
actually be a good outcome, amazingly.
In one sense, there is less uncertainty than
normal, in that this is the first time there
is a recession where you know that the recession
has begun within weeks of it beginning.
In other respects, in knowing what the likely
output growth is for the second quarter, the
uncertainty has to be huge.
I've come up with a way of getting a number
like minus 50, but in any event, it is going
to be a big negative number.
With the trajectory I penciled in, you get
a little bit of a rebound in the second half
of the year.
But this kind of calculation assumes that
you can restart the economy seamlessly.
And what we have learned from past business
cycles is that you cannot do that.
It is very hard to restart the economy.
There are job matches; somebody is a match
to a job that is lost and it is hard to make
again.
Firms go out of business.
Firms and households have less savings and
more debt than they want, so they want to
deleverage and want to do that for years afterwards,
so they don't want to spend, and that weakens
the recovery.
Firms end research and development spending,
so that makes productivity grow more slowly.
So I think that there may be quite a strong
rebound in the second half of 2020, but the
recovery in the second half of 2020, and especially
in 2021 and beyond, will be slower than you
get from the mechanical calculation.
That is inevitable.
The economic policy response is trying to
mitigate that, but there will be headwinds
facing the economy and it will be a long,
long recovery.
In fact, I do not see the economy back on
its old trend line within five years.
To underscore this, a lot of analysis has
shown that recessions have big scarring effects.
People who graduated in the 1981-1982 recession,
they find that their income is lower decades
later than those who graduated just before
or just after.
The Great Depression had huge effects on people's
savings rates and participation in stocks.
So I see this as having very long run effects,
which are sometimes called hysteresis effects,
and the goal of policy is to mitigate those
hysteresis effects.
Now, the thing that helps, for now, is many
of the unemployed are temporarily laid off
from firms that still exist.
But the longer the shutdown goes on, the harder
that is going to be.
And the less true that will be.
So we come to the responses to this.
The first type of response I want to talk
about is fiscal policy responses.
The first fiscal policy response is automatic
stabilizers, the fact that tax revenue goes
down, the government pays more in initial
jobless claims and all of that happens without
Congress having to do anything.
That amounts to about 5% of GDP.
Then there are some packages, some deliberate
actions by Congress, that have taken the form
of stimulus checks and financing to firms,
and so far that has amounted to a bigger amount,
about 12% of GDP, and more fiscal stimulus
is likely to be coming soon.
A way that we like to think about this as
economists is to ask, what is the change in
output per percentage point change in government
spending, the fiscal multiplier.
That is going to be a different animal in
this environment.
It is likely to be different, at short horizons
and medium horizons.
If you give money to a restaurant to keep
it from going out of business, that’s not
going to get it to produce any meals in the
near term but, it will keep it functioning
a year down the road.
It could be that the multipliers are bigger
at a one-year horizon than at a one quarter
horizon.
It is more dependent than usual on the type
of stimulus.
The most effective proposals are ones that
come in place quickly and prevent bankruptcies
and layoffs to short circuit this kind of
hysteresis effect.
Many of the proposals that have been put out
there are weak or bad on this criteria.
The worst one I have seen is deducting meals
expenses for corporate tax.
In the near term, nobody is going out for
meals, so that is not going to help at all.
A better one, is a payroll tax holiday, but
that doesn't do anything to help people who
lose their jobs, and it would give a larger
tax cut to people who would have a higher
margin to save; it will do less for consumption.
Another one that might be good for other purposes,
but doesn't meet the come in place really
quickly criteria, is infrastructure spending.
Many European countries, most European countries,
have adopted programs for covering the wages,
up to some limit, on the condition of no layoffs.
That is an effective measure.
It is one that can be brought in place relatively
quickly and it prevents, almost by construction,
layoffs and bankruptcies.
It is already in the place in the U.S. for
small businesses, but it is something that
might be added in the future on a broader
basis.
I'm happy to take any questions.
I should note to the organizers, I'm not seeing
any questions come through.
I'll just carry on.
There are other possibilities that might be
quite effective, including expanded aid to
states.
State governments are going to be in big trouble
and cutting back on their spending, and funding
for testing programs is a natural one in this
unusual environment.
Now, to the monetary policy response.
The Fed response was very quick.
They did more in the space of three or four
weeks than they did in the entire global financial
crisis.
They cut short-term interest rates to zero,
they announced unlimited purchases of Treasury
securities, and they introduced a number of
funding facilities.
Legally, the Fed is only allowed to buy Treasury
securities and mortgage backed securities
that are created by agencies.
But, they are able to lend against sufficient
collateral, what they see as sufficient collateral
to avoid risk of not being paid back.
These can be nonrecourse loans.
They can lend money to a dealer to buy commercial
paper, and if the commercial paper defaults,
then the dealer does not have to pay them
back.
So, in all practical purposes this amounts
economically to the Fed buying the commercial
paper, but it is important that legally it
is structured as a loan.
And the Treasury has agreed to take the first
loss on these loans.
$450 billion in funding from the Treasury
can be leveraged into $4.5 trillion in loans.
These loans have been made to buy commercial
paper, long-term corporate bonds, municipal
short-term credit, that's an important one
that might get expanded, and small business
loans.
The scope of the funding facilities of the
Fed is bigger than it was, much bigger than
it was during the global financial crisis.
I see a question here from Chris.
“What are the specifics of additional wage
relief and how long does it take to show up
in terms of effects?”
The European program on this is that 80% of
the wages are going to be covered up to a
limit, that is, it varies by country, but,
it is meant to be a bit above average wage
levels.
But the firm has to agree to no layoffs for
the government to pay 80 or 90% of wages.
The nice thing about that, is it will never
even show up in jobless claims and it is about
the quickest that you could possibly get.
So, the Fed's response was very quick.
They cut short rates to zero.
The size of the balance sheet, the Fed's balance
sheet in all of this, it used to be under
$1 trillion.
It rose during the financial crisis and it
shot up in the last couple of weeks.
It is now over $6 trillion.
The goal of the Fed response has been market
functioning and crisis management.
Market functioning was very poor.
Treasury markets had bigger [inaudible] spreads.
Even markets that normally function extremely
well were not working.
I think over time, the nature of the response
will shift into macroeconomics stimulus.
The size of the Fed's balance sheet is going
to something like $10 to $15 trillion.
It is still a smaller share of GDP than the
bank of Japan has.
I don't think of this as a constraint or a
big limit and much of this increase will reverse
when financial markets recover.
Now, an important question is of the fiscal
space here.
The Treasury marketable debt to GDP ratio
was 80% at the end of 2019.
And between automatic stabilizers, stimulus
in place already and what is likely imminent,
that is going to go to something like 120%
by the end of 2022.
Numbers like this were once seen by some as
apocalyptic.
Those of you expressed that 90% of GDP was
a tipping point and there was a lot of concern
after the Great Recession, after the global
financial crisis, that the debt to GDP ratio
was a big problem.
I think these concerns were overblown.
I think a lot of macroeconomists at Hopkins,
like my colleagues like Larry Ball and Chris
Carroll, thought, and I did, that these were
very much overblown, but in any case we are
going to see.
We are going to have a debt to GDP ratio of
120%, even with just the stimulus that is
in place or likely to come soon, and I don't
see this as a problem.
Rich countries have the privilege of being
able to do this.
There is a question from Steven.
“What history tells us about the relationship
between the scale of the federal stimulus
and the speed of the recovery?”
It is very hard to tell because this is a
type of recession that is all of its own kind.
There are no real analogs to this.
Large fiscal stimuluses have tended to produce
relatively quick recoveries.
The mistake that some have made, in most cases,
in doing too little and [inaudible] the hysteresis
effects to build and making the recovery slower,
but it is very hard to get much in the way
of historical track record on that question.
On my statement that there is plenty of fiscal
space, I would add two caveats to that.
One is, if there cannot be some move to a
targeted reopening with testing over the summer,
then the costs will balloon quickly and get
much bigger than even the 120% of GDP that
I am talking about.
The second is a point that before the coronavirus
crisis, both ends of the political spectrum
had concluded that deficits don't matter.
I think that in the long run once we get through
all of this, once the recovery has taken root,
either end of the political spectrum is going
to find themselves more hamstrung.
Wherever the limit to debt to GDP ratios is,
we are going to be close to it.
Another picture I can look at here is stock
prices.
Stock price movements have been somewhat notable
and surprising.
This is a picture that shows the S&P 500 over
the last year and a half.
It plunged in what is by many metrics the
steepest bear market in history.
It is back already halfway to where, halfway
to the previous peak.
It is trading on a price to earnings ratio
of 24 using last year’s earnings.
That would be a high price to earnings ratio
historically.
Of course it is with a low level of interest
rate, but a high price to earnings ratio historically,
and that is before you factor in the enormous
effects that it is going to have on earnings.
The Great Recession, which was a deep, but
not as deep and as sharp a drop, produced
a 50% decline in the earnings just for calibration.
I am surprised, actually, at the mildness
of the stock market response.
It could be that investors over the years
have developed the approach that you can always
buy on dips and they are so tuned into that
that they aren't worried, aren’t sufficiently
worried or too sanguine about this.
It could be, I got a question from Brian asking,
“if the monetary response could result in
asset inflation or consumer inflation or both,
and when?”
I don't think it will result in consumer inflation.
I think we have very strong deflationary forces.
We see that in energy prices.
Over time, or perhaps even now, it could result
in some asset price inflation.
That tended to be what has happened from monetary
policy stimulus.
Of course, it is not to say that the monetary
stimulus is not the thing to do, but I see
asset price inflation as a more likely concern
than consumer price inflation.
In conclusion, in the near term, both public
health and economic considerations argue for
fairly extreme social distancing.
I don't think there is really a particular
trade-off there.
There is work that was done looking at the
1918-1919 pandemic.
Some cities like Philadelphia had minimal
public health responses, they continued running
parades.
Others like St. Louis had sharper public health
responses and the economic outcomes ended
up being better in St. Louis, and cities like
that, than in Philadelphia.
That would say that there isn't that much
of a trade-off at least in the near term,
though it should be remembered that the kind
of public health response that we are getting
into there was much less intense than what
we are talking about today.
The challenge, and I think this is one of
the things that economists can bring to the
table, is the recognition that the economy
is not something that can be restarted from
its current medically induced coma.
Policy should aim to do what it can to minimize
long-term damage and that indeed is largely
what policy is doing.
But, the longer this kind of complete lockdown
continues, the harder it is going to be to
do.
The timeline for a vaccine being mass produced,
as I understand it, is one to two years off.
Staying in our current state of lockdown for
that length of time is not an option.
The costs are far beyond those that we are
currently envisioning and you are going to
get into things like disruptions in food supply.
It is easy to make statements like human life
is priceless, but individuals and public officials
are always making trade-offs between cost
and safety.
We make these trade-offs when we drive cars,
get in planes, and when we don't spend 100%
of GDP on healthcare.
You can you can make those tradeoffs implicitly
or explicitly but doing it explicitly will
make for better and more consistent decision
making.
In the context of highway safety, a ballpark
number that has been in place for a long time
is $9 million per life.
I don't know that that is the right number.
But there are public health economics trade-offs
like that, which are going to have to be made.
I am not talking about going back to the way
things were in February, but some kind of
partial reopening with lots of testing and
with vulnerable people being protected passes,
I think, any reasonable cost-benefit analysis.
That concludes my remarks.
I want to look at some of the other questions
that I have got.
One of them from Henry is, “if the big businesses
were quicker to apply for government support
than the small businesses and the money ran
out, how do we prevent this from continuing?”
It is very hard to prevent that from continuing.
There is one thing, that some of the big businesses
have been shamed into returning their funding.
It was meant for small businesses.
The amount of funding has already been increased
and will probably have to be increased more.
The difficult thing is that you have to design
these responses extremely quickly.
And if you are too concerned with making sure
that “undeserving or those who are not in
so much need” are getting it or don't get
it, that slows and delays the response.
So that is the trade-off that policymakers
face.
I think that there are lots of sectors of
the economy that you might wonder if you want
to give them funding, like an example is the
fracking industry.
Is that one that you want to give funding
to?
But, the delays that are going to come into
the process by picking winners and losers
and adding in constraints are hard.
So, it is necessary that the public response
is to give this relief in quite a broad way,
which means it is difficult to prevent big
businesses from sucking up all of the government
support that was meant to be for the Small
Business Administration.
From Veronica, the question of “how will
all these government stimulus programs and
other interventions be financed, especially
with tax revenue dropping?
What will be the impact of that deficit?
What about the states?”
This is getting into the question of the debt
to GDP ratio.
The stimulus is being fully debt financed.
It is not being tax financed at all.
It is debt financed.
That is the right thing to do under these
circumstances.
The deficit was already at a high level.
It was at about 5% of GDP and it is going
up to something over 20% of GDP.
I think that for the U.S. and indeed for other
rich countries there isn't any particular
imminent constraint in the ability of the
government to borrow.
It is important not to worry too much about
fiscal sustainability, at least not in this
kind of crisis environment.
And indeed, if you sit back and do nothing,
you are going to have a worse debt to GDP
ratio, if not because debt goes up, but because
GDP goes down.
There are lots of cases of countries, rich
countries having debt to GDP ratios that are
above 100%.
One of my favorite examples is that the United
Kingdom for most of the 19th century had a
debt to GDP ratio well above 100 %. That was
actually a pretty good century for the U.K.
It will be financed by debt and in the near
to medium term that is not a problem, although
it will hamstring the political process further
down the road.
Now, the question of the states is a very
urgent one.
The states are not in the same kind of position
to borrow.
And they are sharply cutting spending, which
is adding to the downturn.
And for now it seems that Congress is relatively
unwilling to do much to help the states.
So it could well be that the Federal Reserve
ends up using more of its special lending
facility, which it already has a short-term
municipal funding facility, it might expand
that and make it available to more local governments.
But that is a very important thing to do.
I see a question from Fritz.
“Which countries do you see doing the best
job of dealing with the economic ramifications
of COVID-19?”
Well, a lot of countries have taken somewhat
different approaches.
I think one that I would single out is the
European approach of tying the stimulus to
the jobs rather than to unemployment insurance.
I think that is probably more effective from
a perspective of minimizing the hysteresis
effects.
That said, it is also true to say that this
is something that European countries have
done in the past.
They have the infrastructure well set up to
do that.
The U.S. has taken the philosophy that you
don't want to save the firm, you want to just
give the assistance to the workers.
And, in a normal downturn, that probably seems
the right thing to do, it probably is not
the thing to do in this one because it is
so unique and there are many firms out there
that will not survive, but are viable in the
longer run.
I don't know if it is really an option for
the U.S. to do it quite as seamlessly as it
was done in Europe.
I think within the U.S. the Federal Reserve
has done a remarkably good job in dealing
with the economic ramifications of this.
So have other central banks, they have all
done this and in many ways, the Great Recession
was something of a dry run for this.
They developed tools in the Great Recession
and they have pulled all of these out, and
others, and done it all within a matter of
weeks.
They have certainly taken the lesson from
the Great Recession that you want to front
load what you are doing, which they have done
in a big way.
From Chris, “what are the most likely impediments
that could derail or slow the recovery?”
There are so many things able to do that.
I think I will split them into the nearer
term things and the longer run ones.
Nearer term ones would be greater uncertainty.
The funds themselves going insolvent.
People having lost their jobs, having to search
for new jobs.
A longer run thing is that corporate debt
was already very high and corporations are
going to get more indebted.
That is going to slow the recovery as they
are trying to de-lever, that is something
that will play out over the years.
We saw things like happening after the last
few recessions, but it is going to be a bigger
thing here.
I see the loss of productivity from firms
not being able to continue with R&D investment
as being something that is a long run drag.
So I think the recovery might have two phases
to it.
An early relatively sharp rebound followed
by a very, very slow climb back, but with
the economy being notably weaker than it otherwise
would have been for years and years to come.
I don't think there is any question of a literal
V shape recovery.
From Saul there is a question.
“Which structural problems economically
have already been revealed by this pandemic?”
I referred briefly to one of them.
I think that the U.S. oil industry, the fracking
industry, was on very shaky ground even before
this.
And it is not clear that they are going to
be able to produce profitably in the long
run at the kind of prices on oil that you
are getting, given what Saudi Arabia and Russia
are doing.
That was questionable going into this.
And it is suddenly being revealed, and many
of them have already gone bankrupt and more
will go bankrupt in the future.
There are sectors of the economy that were
weak before this and will probably be killed
off to a large extent.
Another one is department stores.
I think department stores were weak and their
demise is going to be accelerated by this.
Normally economists like to think of there
being a cleansing effect in recessions.
Recessions identify structural problems in
the economy.
But I don't think we should be excited about
cleansing effects in this recession because
the big disruption is that many firms that
are viable in the long run are going to be
in great pressure unless they are financed
by fiscal monetary stimulus.
From Jeff there is a question.
“If policymakers announced state lock downs
would end on December 1st, much further than
we hope or expect, would that be better or
worse from a macroeconomic perspective than
the current state of uncertainty about the
end?”
That is a hard one to know.
There is certainly a big element of uncertainty.
But I think that we are now thinking of at
least beginning targeted reopenings, careful
targeted reopenings over the summer.
European countries which had the virus a bit
earlier are already moving into that phase.
The costs of keeping the lockdown in its current
place through December 1st seem massive to
me.
And I don't think that that is going to pass
reasonable cost-benefit analysis to go that
long.
Now, you say that that would reduce uncertainty,
and it might in some way.
But the other thing to remember is that while
the shutdown can stop economic activity, just
announcing that the shutdown is over doesn't
necessarily bring it back.
Right now if the government were to announce
that restaurants were free to open again,
very few restaurants would actually open.
So in a large sense the shutdown is the endogenous
response to the virus, not something that
is created by policy.
There is a question from an anonymous listener,
“how do you think about the long-term consequence
on income distribution of the crisis?
I'm worried that it may increase the division
of the country further.”
That's a very fair point.
One of the questions was about what are the
structural weaknesses that this crisis has
highlighted.
One of them I should have mentioned really
was inequality.
That inequality is likely to worsen in the
near term in response to this.
Some of the policies have been geared very
specifically at trying to cushion the bottom
end.
So it is not that policymakers are blind to
this.
One thing that I would highlight is the unemployment
insurance program has been tweaked to, for
the near term, give a replacement ratio.
That is the ratio of benefits to previous
wages, of around 100%.
And in normal circumstances, you don't want
to do that because you’d think that would
have disincentive effects on work.
In this environment I don't think the incentive
effects are first order.
The distributional effects are and this has
had very big distributional effects.
This shock is going to hurt the poorest elements
of society the most.
Of course that is true in economic terms and
it is also true in public health terms.
The poorest people are those who find it hardest
to socially distance.
So inequality is something that is a big understory
to this coronavirus question.
From Andy there is a question.
“There doesn't appear to be a coordinated
global response.
Is coordination important to full recovery,
or can countries continue to go it alone and
be successful?”
I think if you are talking about the response
of central banks, monetary policy response,
that is to some extent coordinated.
One of the ways in which there can be a problem
from this kind of crisis is that assets are
denominated globally in dollars and in the
financial crisis there would be foreign investors
who would have to sell their U.S. assets at
fire sale prices.
The central banks have coordinated to have
facilities where they can borrow dollars,
European Central Bank, Bank of England, Bank
of Japan, can borrow dollars from the Feds.
That is a case of international policy coordination.
In other things like the lending policies
of central banks, there isn't much coordination,
but I don't know that there is that much that
needs to be done for coordinating it.
Fiscal policy is much harder to coordinate.
We are just not in a place in the political
system where the U.S. and Europe can coordinate
on fiscal policy.
Indeed, even within Europe they are having
a very hard time coordinating on fiscal policies.
The old concerns of the northern states worried
about bailing out southern states in Europe
continue to be there.
The question from Julie, “what do I see
as the long-term effect of the current state
of the oil market, both here in the U.S. and
overseas?”
So the oil market has behaved in a very unusual
way.
In fact, future prices for oil were negative
earlier in the week, which has never happened
before.
So this means that you are entering into a
contract where you deliver a barrel of oil
and you give the person who is buying it $40
to take it away.
Which is kind of eye-popping.
The reason is that between the supply of oil
and the greatly reduced demand for oil, there
is a huge glut of oil out there.
There is far more oil than anyone can do anything
with and the most profitable business in the
world right now is pumping it into storage
facilities and into tankers.
There comes a limit very quickly to how much
you can do that.
So the way I think of negative oil prices
is that the oil producer is paying somebody
to dispose of this product that they have
just too much of.
Now, oil prices have rebounded a little bit
today.
I don't think we are seeing negative oil prices
as any kind of new normal.
But oil prices are going to be much lower
for quite some time.
And I wonder indeed what Saudi Arabia is thinking.
It may be that they are thinking that the
long-term sustainability of oil isn't that
great and that it is in their interests to
pump what they can pump out now very cheaply
and get something for it, rather than rely
on what demand for oil is going to be 20 or
30 years down the road.
So I think it is a big question.
The other thing for the U.S. as I said a couple
of times is, I think that this is going to
greatly weaken, almost eliminate the domestic
oil industry.
Question from Veronica.
“The European approach seems to have limited
application in LMICs.
Where there might be much larger informal
workforces.”
I'm not sure what LMIC is, probably referring
to emerging markets.
Emerging markets are in a much weaker position.
They don't have fiscal space.
They can't just run up debt the way the U.S.
and Europe can do.
They cannot borrow in foreign currency and
so they are not going to be able to finance
the same kind of response that you can get
in the advanced economies.
So unfortunately, if the public health crisis
continues to worsen in many of these countries
where social distancing is so hard, I think
they have sadly no option but to effectively
go for herd immunity.
They don't have the luxury of being able to
do what the U.S. can do.
From Franklin, there is a question.
“How would the forecast be affected if as
some scientists are predicting the virus returns
in the fall and the recovery path is interrupted
later this year or earlier next year?”
The trajectory I put out was not a forecast,
it was just an illustration of the trajectory.
It was talking about bringing things back
online at a steady pace.
But in reality, it probably isn't going to
be a steady pace of reopening.
There will be partial reopenings and then
maybe a second wave.
So, to that extent it might be something more
of a saw tooth pattern than what would be
there in the simple benchmark I put in.
Exactly how big that second dip is, is all
driven by the virus, it is not economics,
it is driven by the virus and the public health
response.
But the idea of a rebound in the second half
is really predicated on there not being a
major second wave which I realize is a big
risk to the forecast.
The question, “what uncertainty comes from
repeated lockdowns over the next one to two
years until we have the vaccine?
Do you think that is likely?”
So lockdowns to some degree, I think, are
likely until we get the vaccine.
I have no idea when or even if we are getting
the vaccine.
That is a question for the epidemiologists.
The uncertainty, I don't see it really as
coming from the lockdowns.
The lockdowns are [inaudible] but as long
as this virus is out there, economic activity
is going to be badly affected whether we have
lockdowns or not.
Nobody is getting back on planes.
Nobody which is going out to restaurants even
if they are told they are allowed to do so,
or at least many people are not.
That is certainly giving a lot of uncertainty.
It is not a time that firms are going to want
to make long-term investments even if they
had the capacity to do so because of that
uncertainty.
But a bigger thing is not just the uncertainty.
It is the direct effect of the virus and the
lock downs collectively on economic activity.
There was a question from Robert.
“What might be some of the effects on commercial
real estate and commercial mortgage-backed
securities over the next six months and the
next two years?”
Commercial, both residential and commercial
real estate are, of course, very, very badly
affected by this.
And commercial and residential rates have
been very hard hit.
One of the important things is that unlike
in the Great Recession, the Fed is actually
buying or funding commercial mortgage-backed
securities.
That is designed to boost that market a little
bit.
But I think that the commercial real estate
market is going to be extremely, extremely
depressed for quite a while.
From Veronica, “what will be the effect
of a high deficit on inflation?
And of high debt on consumption given that
people will expect high taxes down the road?”
So there is this idea of Ricardian equivalence,
that people's consumption takes effect of
the likelihood of taxes at some point in the
future.
Empirically there is not a lot of practical
evidence for consumers behaving a lot in that
way.
I can see lots of reasons that consumption
is likely to be depressed.
I can see it being depressed as people build
up their savings and pay down their debt.
I don't really see it as they are anticipating
higher taxes.
It will have to come at some point but not
in the near term.
The empirical evidence for Ricardian equivalence
even though I get the logic for it, just isn't
out there.
There is potential for the high deficit that
could cause inflation.
I worry much less about inflation than about
an economic depression.
And in the short to medium term, while I can
recognize some potential for this to cause
inflation, I think at least if we are talking
about consumer prices I see disinflation being
a much bigger risk.
I think that if we are talking about broad
Consumer Price Indexes, it is likely to fall
from its already low level.
And so I would be worried about continued
low inflation or outright deflation, not inflation.
A question from P. “How would you ideally
restructure the reopening?
Which businesses or sectors should go first?”
So that is largely a question that is a public
health question.
Although from an economic point of view it
is important that the sectors that are part
of the supply chain have some priority.
Of course, healthcare sector above all.
The sectors of the supply chain have particular
precedence in trying to reopen the economy.
So one thing that I noticed that is quite
alarming is that the meat processing industry
is being shut down in some places by this.
And that kind of process could cause supply
disruptions.
And that is something that there would be
worrisome.
What I'm saying is that we should have some
systematic way of making the rather difficult
public health economics trade-offs because
it is so costly to continue this lockdown
in the current form for the rest of the year.
And it may well be that keeping some people
isolated, like elderly people isolated and
those who are immunocompromised, while letting
others go back to work under very tightly
controlled conditions and lots of testing,
would work wonders for the economic costs
while having limited public health costs.
I do worry that sometimes the public health
people treat the economic costs as a bit of
a footnote.
And it is not.
It is not even a footnote if you are talking
only about lives because the severe recessions
have tended to produce increases in what Angus
Deaton and Anne Case called deaths of despair:
Opioids, suicides, alcoholism.
I think we have to factor in concerns about
these long-term economic dislocations after
we've got past this immediate first wave.
There is a question from Eric.
“How did governments respond to the 1918
flu epidemic?
Were the regional disparities like we see
in the current economic crisis?”
I did mention this earlier.
Some cities had very active responses to this.
And others had less so.
I should say relative to the standards of
1918.
So some cities continued to have selling war
bonds for the First World War and others closed
down movie theaters and sports events and
parades and that kind of thing.
And the regions that took the stronger approach
ended up having a faster recovery from it.
But the calibration of what they were doing
back in 1918 is a much less intense kind of
public health response than we've got today.
There is a question.
“Will new or reinvigorated industries related
to could COVID make any impact on the economic
recovery?”
There are certainly industries doing very
well but in the macroeconomic sense these
are dwarfed by the industries that are either
shown to be nonviable or more importantly
are viable in the long run but are so weakened
by the collapse in demand coming from the
coronavirus.
There is a question from Sharon.
“Could reshoring bring about an economic
boost to the economy?”
I take that as meaning more domestic production.
Could that be a significant boost to the economy?
I don't really think so.
Because so much of what is imported from China
is something that is not made and for which
there is not the capacity here.
There is a supply chain in China for producing
iPhones and it is not possible to seamlessly
bring that back to the U.S.
If it is not imported, it just won't be consumed
and supply chains will be disrupted from that.
A question, “homeowners have been given
leeway by various policy provisions but renters
seem to have been left out in the cold.
After the moratorium on evictions is stopped
do you see ramifications?”
There are some short-term reliefs which have
been given to renters in the sense of moratoriums
on evictions, which is I suppose similar to
the forbearance that is given to homeowners.
But yes, renters who are in the position of
having very little in the way of assets to
start with are likely to be particularly hard
hit.
This is coming back to the danger of this
crisis exacerbating inequality even more.
From Fritz, “what would you recommend to
the administration regarding tariff policies?
Any reason to maintain any tariffs except
for political signaling reasons?”
I, like all economists, if economists were
running the world, there wouldn't be tariffs.
There wouldn't be much in the way of that.
And the tariff war that was put in place with
China before the coronavirus got going, I
see that has having been a news situation.
It was bad for U.S. consumers and U.S. firms
which were part of the supply chains and depended
on goods from China that were not going to
be seamlessly relocated to the U.S.
Like I think 99% of economists, I would like
to see the higher levels of tariffs taken
away and I see that as being something political,
not motivated by economic concerns.
The question from Chifarli: How will financial
institutions be affected by the fiscal and
monetary policy response?
So financial institutions are obviously benefiting
a lot from this response, otherwise they would
be in a lot of trouble, but they are going
to be kept solvent.
They are benefiting from both the fiscal policy
response and from the lending facilities of
the Fed.
And from the Fed buying up Treasuries and
mortgage-backed securities.
This is where it helps a lot that you can't
say that the financial institutions were in
any way culpable for causing this coronavirus.
In the Great Recession I think it caused a
lot of political problems that the institutions
that were being “bailed out” were those
that had caused the crisis in the first place.
I certainly very much understand the concerns
about moral hazard over that.
That is not the case here.
This was a public health crisis that we have
to avoid spilling over into financial institutions
getting into trouble.
I think that will largely be successful, though
there are sectors, particularly sectors that
are nonbanks which surface and originate mortgages.
Even the help that has been given may not
be enough for all of those.
So I think that was the last question.
I am not seeing any other questions coming
in.
I very much enjoyed talking with you about
this.
These were very interesting questions.
It is something that economists are going
to be studying for decades to come.
And it is fascinating to look at economic,
macroeconomic analysis of this crisis.
Thank you.
