The Economic Impact of COVID-19

given where we are in the cycle. But it's also not too soon, I think, to start talking about the economic consequences of what's happening and what's likely to happen. And that's particularly pressing because Congress and the President have agreed on a relief plan to address coronavirus one that is intended to take a stab at slowing down the harms economically that people might be facing in real time, and also perhaps at softening the blow of recession that

seems to be headed our way. In order to make some sense of what economists think about the set of problems and how they can be solved, I knew I wanted to talk to Professor Stephanie Stuntsheva of the Harvard Economics Department. Fress or Stuntcheva is what economists call technically a hot shot. She's extraordinary scholar, tenured pretty much right away upon joining the Harvard University faculty on the French

Council of Economic Advisors. She's French, as you'll hear in a moment from her accent, and all around one of the most brilliant young economists in the United States by common consensus. Also someone who's done work in the long run on the consequences and effects of major government interventions in the real world of economic reality. Stephanie, thank you so much for agreeing to speak to me as we watch Congress passing bipartisan legislation for relief in the context

of the coronavirus. I knew right away that you were the person I wanted to talk to try to understand how this is going to work and if it's going to work. Because a lot of economists study macroeconomics and the big picture, a lot study microeconomics and the individual decision, but you're one of the people who does what everyone else in the world things economists do, which is study

the relationship between the micro and the macro. So I'm really thrilled that you're willing to do this, and I want to start by just asking, how is this economic crisis or shock different from the kinds of shocks that were used to seeing. Yeah, thank you Noah for having me on the show, and in this case, first to preface it, it's obviously a huge human tragedy that's unfolding right now, and many people are in a very precarious situation.

So that's that's already a very very different situation. But you know, an ECON language, it's both a supply shock and a demand side shock at the same time. So this is a very very peculiar situation. Typically we have mostly one or the other, and typically they're not as extremely urgent as you know, a pandemic unfolding. So it's not going to be a normal situation, and what follows won't be a normal recession. So ECON textbooks don't really cover how to deal with a you know, with a

fallout from a global pandemic. Speaking of the ECON textbooks, when you say that it's both a supply shock and a demand shock, do you mean that I'll try to be the good freshman. Do you mean that the ordinary people are not demanding goods and services the way they usually would because they're staying home and businesses aren't in a position to deliver those goods and services because they're

not operating. That's exactly right. So there are disruptions at every level of production and at every level of consumption and work. So because of the social distancing that's necessary in order to limit the spread of the virus, you know, people have to in a sense stay home and limit the amount of economic activity they engage in, which means we don't have the usual demand that we're used to. At the same time, the whole work and supply chain is disrupted as well as workers cannot or should not

be going to work. So in a sense, it's this weird situation where we have to accept you know, economic losses in the in the short run because they will actually protect health. So the decline and activity right now is not just it's not just unavoidable, it's also desired. You know, we cannot just self quarantine and prevent the

virus from spreading and less activity declines. So the key right now is really not to focus on these economic costs which makes this unusual, but also really to try to basically, I'll try to restimulate the economy, but try to accept the fact that we need to shut down for a little while. So the accepting of the shutting down is itself a completely fascinating phenomenon. And a little later in the conversation, I want to come back to the question of how we know how much is a

good amount of shutting down to do. But before we get there, I just want to hear a little bit about the tools that economists do have for other situations and how they might be borrowed into this situation. What are the what are the tools that you think of as having in your economist toolkit. So in an economist tool kits, there's there's a lot of tools. There's all sorts of you know, taxes and transfers in both directions, so either tax cuts, tax increases, increase in transfers decrease

and transfers. There is monetary policy that can you affect the supply of credit or the interest rate. There are regulations that can shape how people will act or how businesses will act on a day to day basis, and so all of these are currently you know, to some

extent useful and should to some extent be applied. So if we start from the immediate situation, the key is basically some direct intervention of government on the public health side, so a bit of a whatever it takes approach to increase hospital capacity, personnel, production of the necessary equipment like respirator's ventilators. So this that requires some sort of direct intervention and in a sense industrial policy perhaps that we're not that we haven't been used to for quite a while.

It will require direct intervention and lots of funding for developing vaccines or anti virals, and so it's really it's really a whole, a whole new world here in terms of what is needed for that. And in that sense, it's not at all the time to worry about government's costs, about government's debt and deficits, because the less we act now,

the worst it will get later. If you want, like if you think of a household or family, you know it's exactly for such bad times and health emergencies that we save money typically, So saying for the government, this is why we save money. It's for these emergency situations now and then we have other tools which are on the ensuring the supply of essential services side. Uh. You know, there's there's some things that still need to be done for people to have food and you know, clean water

and sanitation, so those still need to work. And for those, you know, direct regulation of how it should look in a workplace, what amount of distance is safe, what essential businesses should keep doing. Uh. Those are also tools that can be applied here. And one thing that we notice the past days, which is again very unusual, is that

perhaps the price mechanism doesn't work very well. You saw perhaps the Amazon sanitizer prices UM that's spiked up, and so perhaps some amount of rationing imposing that there's a limit on what you can buy at once, so that everybody gets some basic supply. Those who another you know, another instrument that the government may want to apply. And

then the final is perhaps more standard. It's what you alluded to initially, and when we have a perhaps more standard recession, which would be to support you know, the demand on both the household side and maintain businesses alive while this big shock passes UM. Because you know, the health shock is not the only shock that is a

threat here. It is the most immediate but letting people slide into poverty into unemployment can be you know, disastrous and very detrimental and carry a huge human toll that we also want to avoid. So we want to also flatten the recession curve in a sense, not just not just the pandemic curve. So there's a range of tools and all of these that we can that we can apply.

So let's take it in two parts. Let's start with what you might call you call them, I think old fashioned interventions, and I think of these as you know, quasi autocratic interventions, where the government says, you know, company, you must now devote yourself to producing this particular vaccine, or you know you factory you must make these medical masks. Industrial policy of the old fashioned top down sort. Prices

are secondary. And then alongside that comes the emergency version of the same, which includes, as you point out, rationing, and I guess could also include price limits, right. I mean, in this theory, the government could tell Amazon you can't charge five hundred dollars for a bottle of hand sanitizer, or you can't charge thirty dollars for a tube of toilet tissue. So are those I mean, am I combining

things that shouldn't be combined. There or they all seem to have in common to the lay person the idea of determination from above, and of course that raises the question of do we trust the people above to do it right? Absolutely, this is again this is very unusual.

We don't often resort to such kind of emergency emergency actions, but we see it right now in all countries being rolled out basically essentially forcing people to stay at home, to limit their interactions, forcing companies to impose some different rules of working, whether it's remote work or safe distances, etc. So, yes, this is very unusual, and it's because of the emergency

of the virus spreading. But there are more, there are more standard strategies that should be combined as well, and that's what I would call really the the econ interventions per se. So all these things about insuring the health, polic health and the direct restrictions, they go a bit beyond just basic economics. But now the pure economic interventions they also come in several in several forms. So the

first one is already alluded to. It is to already accept that some economic classes which will actually be necessary to protect health right now, and you know, we cannot totally totally ignore the economic costs, but in the short run, we just need to limit the health the health impacts. And what we're trying to do at the same time is not to restimulate the economy. So that's what I'm saying.

It's not a standard recession where we're trying to re you know, recondle the economy's activity, but whether we're trying to plug the holes in the budgets of the most vulnerable households and businesses. And the first thing that this will imply is to protect basically our productive capacity. So when the risk recedes and when we can actually start going out again and producing again, that it's ready to go.

So that's not obvious. It might sound obvious that one day we can turn the lights off in the factory, the next day we can restart, but that's not quite true because we have to avoid a temporary shock from becoming permanent. You know, if businesses cannot bridge this period, they can go out of business. If workers cannot sustain themselves over that period, that will be terrible for them

trying to find jobs again later. So the bridging here is very important, and that's what I mean by social insurance. So this happened at several levels. One is to ensure that workers actually remain paid, and countries are thinking of different policies here. One would be to strength and layoff and recall policies so that you know, workers can temporarily go home, be paid some fraction or full salary and

be able to come back easily. Ensure that firms can weather the storm with easier credit even you know, imagining waving loans or giving direct assistance where needed in general, you know, keeping credit lines open for those that simply cannot survive in the short run, but that would do very well in the medium run. That's the businesses we

don't want to go out of business. And then support the financial system to some extent too, so that you know there is credit where needed and money where needed. And then on the on the you know, household side, extremely important to support, you know, support the ability of households to have to have their budgets not completely decimated so that when the economy goes back to full capacity

that they actually can you know, restimulate demand. So here again it's mostly social insurance because they're lots of new needs. There's a need to bridge this very strange period, and there will be extra health spenning that will require households to have extra money. And one important thing to note here is that it's a situation that's full of what economists call externalities, which means something I do affects others as well. So if I go out and I'm sick,

I'm going to hurt others. If I cannot do my job, for instance, as a as a cleaner, it's going to affect others. So there's lots of externalities here. So even for people who don't necessarily worry too much about inequality or social inequities, helping people over their current economic difficulties is extremely important because it will keep people at home where they should be, it will reduce the spread of the virus, it will help doing essential jobs, so to

actually help everyone. So they're very strong efficiency arguments for doing that. So you know, there's lots of packages that have been proposed here which all make some sense. One is to have paid six leave, which is also very complementary to the pure public health intervention making people stay at home. Unemployment insurance that should be given out much more leniently and much faster even partial unemployment insurance, food support, and you know, any safety net measure that can be

much much more relaxed and generous. At the moment. What is tough is that there's a very quick need for action, and that's why some people have suggested to not think too much and worry too much about who exactly needs help right now, but to go a bit all out and give basically a lumpsom transfer, something like a universal basic income immediately, like sending every American a X dollar check right now, perhaps more for households with kids and

things like that. And that's an unusual situation again, and if it is very difficult to see who needs it, time is very precious, so that sense, it could make sense in this situation to just try to maintain households budgets and not worry excessively about the debt and deficits that's built up. But it's of course a very difficult decision and has to be has to be discussed very carefully, because there is absolutely no perfect magic bullet here that will save us at no cost. So writing a check

to everybody is obviously one of the options. And our colleague Jason Furman in the AT the Kennedy School has been recommending that for a little while now. Before we get there, though, it's worth checking into what Congress has done and trying to see if it matches what you're what you're saying, And my instinct from listening to you

is that it doesn't. So you know, there was an article in The New York Times published by the Editorial Board so an editorial arguing that the congressional plan really doesn't cover nearly eighty percent of Americans with respect to sick leave because it has an exemption for companies with more than five hundred employees, which a little more than half the economy, a little more of half of American workers.

That it has another exemption for companies with fewer than fifty workers, and that's apparently nearly another quarter of the workers in the country. And the upshot is that we don't really have in place the kind of social insurance model that you're describing, even before we get to handing out cash to people. Am I am I getting that right?

That that would be really inadequate in your account, there are a lot of constraints on policymakers given this very unusual situation, So drastic action is very tough, but many countries have taken it, and for instance, Germany announced a very sweeping plan, which was almost a surprise given that Germany has been in the past years, you know, advocating a lot of a lot of very conservative fiscal policy.

But it seems like they did save their you know, their cartridges for such an extreme situation and giving a sense that in this extreme situation, if you have to stay at home, if you are lacking you know, necessities, they will be provided by the garment. Giving sweeping, you know, sweeping generous insurance to you and tiding over private small

businesses that cannot survive seems quite quite critical. It's critical, of course, to save lives in the short run, it's also critical to you know, damn the blow that will happen to the economy, and that can you know, make the pain last much longer. As I said, you know, protecting the productive capacity is important and entails not letting businesses die which could have been surviving well, not breaking employment relationships that then will be very costly to restore.

So we can soften the blow by acting more generously now and saving you know, resources on this later. If we don't act enough. Now we're going to untie all these economic links that take a lot of time to form. We're going to push many people in very precarious situations to have long lasting effects, and we're going to decimate businesses which should have survived, and that will make the following recession potentially way costlier than the funds we may

spend now to soften the blow. So I hear you saying that there are really two distinct advantages to both to the social insurance model and to cash transfers. One is to alleviate immediate short term suffering and make sure people have enough, and the second is to cushion a

little bit the blow. And in this respect of the possibility of going deeper and deeper into recession, I'm wondering, when it comes to a one time cash transfer, is it more about trying to help people in the short run, because it seems like that would run out pretty quickly for a lot of people, or is it more about giving people something that would enable some degree of stimulus going forward when people are able to go back to work and the economy is start starting to get rolling again.

And that might go to the question of the timing of a cash payment like that. Yeah, I think in the short run the most important is to just as I said, plug plug the holes and people's budget constraints. So people will suddenly not be able to get income

because they have to stay at home. So whether it's you know, paid sick leave or letting them get a fraction of their salary again, whether we call it unemployment insurance, whether we give some cash transfer, food support, any other safety net measures, those are extremely critical in the short run. And it's not about stimulating aggregate demand or the economy again,

that will wait for later. And then later, you know, the textbooks can be applied again in terms of do we want to give more tax cuts at this level of income or at that level of income. Do we want to give a bit more transfers here, a bit less transfers here, What do we want to do unemployment insurance? That part will be a different discussion right now. In the short run, any hole that can be plugged should be plugged to help people bridge this very difficult period.

You know, when a country is in bad recession, not because of an external shock like this, but because of something more fundamental to the economic cycle, or even in depression as a result of the economic cycle, it can be really slow and painful to grow out of it. In this instance, presumably when this is over, although we'll still be worried about our future in which this could happen more frequently. Confidence, I would think would come back

pretty quickly because people will be able to remember. You won't be years from now, so people will be able to remember what it was like before, and they should, in principle be able to get back to the confidence levels that they had previously obviously updated for the reality that there can indeed be a pandemic that crunches us. Does that sound like, oh, hopelessly optimistic way of thinking

about it. Let's say it's the more optimistic way to think about it, which is possible if nothing else happens in the economy, and if we manage to contain this virus, and if we take all the actions to often the blow that we spoke about previously, So if we managed to not turn what should be a temporary shock, although a very severe one, into a more permanent one because we untie all possible economic relationships and break down businesses and many parts of the economy, it is possible in

principle that we could jump back to a situation where things are better. But how long this process will take right now and how much we will actually destroy of economic activity is very much up in the air. The point that you keep making about untying economic relations is

it really seems like a really profound one. And the metaphor that keeps coming into my mind is sort of like a fall of Rome, a situation, you know, you have a very developed economy and it's got lots of people doing complex things in relationship to each other, and then there's an external shock like the fall of Rome, and then instead of everyone bouncing back and rebuilding Rome, you get something like the dark Ages where people can't

really rebuild those those kinds of ties. And maybe that's too extreme a way of thinking about it, but is that sort of what you're describing when you talk about the breaking of economic relations? You mean that I lose my job, and then I stop shopping at the corner store, and then the corner store stops getting supplies from the place which it orders from, and then none of us can exactly rebuild that overnight. We have to slowly, gradually

each redevelop each of those links exactly. There's so many links between workers and companies, between customers and suppliers, especially also in the very complex supply chains we have right now. So all these links are there and arnstorm sort of equilibrium, and once you start breaking them down, it's going to simply take time to rebuild. It's not as smooth as simply going back to the way things were at once. These are the things people mean when they say we

need to maintain the productive capacity. We need to avoid destroying links in the economy which are productive and should normally be saved and are simply suffering in the short run, and we need to bridge that short run. It seems to me like we're going to need economists in this next phase of dealing with Corona just about as much

as we need physicians in the first phase. I mean, obviously the physicians are the ones who are dealing in the immediate term with people's health and lives, but people's health and well being in the long run really does depend on being in a functioning economy. I mean, we know that in a down economy, more people will become sick, more people will die because there will be poverty. Assuming we don't have a perfect social insurance system, and we

in the United States definitely don't. So it seems as though the role of the economists as sort of physicians of the economy is going to be absolutely central here. Yes, very soon. The economic costs on people who fall into poverty, who have no more income to take care of their of their basic needs for just basic necessities, take care of their health in a very basic way, that's going to have gigantic costs and antic human costs, so those

we also need to avoid. It's hard to rank things because every every situation sounds very bad, whether it is that your sick, whether it is that you have nothing to eat, or that you lose you know, your shelter, or your your your job. All of these are bad. So there will be a role for economists for sure to ensure that the poverty doesn't take a huge tool

as well. We'll be back in just a moment. Are there any historic examples that you can think of off the top of your head of where societies did come back from massive shocks like this one? I mean, one shock that seems maybe vaguely comparable to the shock of disease is the shock of war, which also presumably affects both supply and demand side. Is there I mean, is there sort of general learning among economists on how how

hard it is or how long it takes to bounce back. Yeah, I think quantifying the severity of the shock, the length of time it will take to recover, those are really really difficult right now. All the other shocks like wars or other big pandemics or epidemics happened at very different times in very different contexts, and so it's just it's

just impossible to draw quantitative conclusions from there. But in the advice that economists are giving today about, for instance, the need to act pretty generously and very quickly, that is very much informed by you know, historical experiences where it was just critical to contain things. And it's also you know, informed by even the very short run experience of different countries over the past weeks. So we learn

a bit in real time as well. We see what happens in other countries in this case, you know, sadly in Europe and in Asia about different different paths that countries too, So we very much learn in real time. But again it's just impossible to predict how long, how severe, and what it will look like, Stephanie, I really want to thank you for this very clear analysis and very clear set of prescriptions. You know, I think tell me

if I'm summing this up correctly. But what I'm hearing you say is, first of all, extremely unusual situation relative to the usual shocks. Ordinary tools of economics not immediately

obviously applicable. We need strong social insurance to make sure that we meet people's immediate economic needs, but we also need some sort of transfers of wealth in order to soften the long run effects of the recession that we're going to go into, so that we don't break economic ties that exist and make it harder to climb out

of it. That does that sound like, you know, Stephanie Stantcheva's official takeaways, I would say more than transfers of wealth, it would be really social entrance to bridge this shock, both on business sites and on household sites. So that's the most most critical. On top of course the public health intervention, which is a first order, just not in my expertise, but yes, bridging the gap for households and businesses in the short run will also make the longer

run look much better. Thank you. That's very very helpful. Thank you so much for your time. Deep Background is brought to you by Pushkin Industries. Our producer is Lydia gene Coott, with studio recording by Joseph Fridman and mastering by Jason Gambrell and Martin Gonzalez. Our showrunner is Sophie mckibbon. Our theme music is composed by Luis Gara. Special thanks to the Pushkin Brass, Malcolm Godwell, Jacob Weisberg, and Mia Lobel.

I'm Noah Feldman. I also write a column for Bloomberg Opinion, which you can find at Bloomberg dot com Backslash Feldman. To discover Bloomberg's original slate of podcasts, go to Bloomberg dot com Backslash Podcasts. You can follow me on Twitter at Noah R. Feldman. This is Deep Background.