WWS Reacts: Envisioning a Safe, Effective Economic Recovery
Fifteen U.S. states remain in shut down due to the ongoing Covid-19 pandemic, while the remainder have reopened partially or plan to reopen soon. In the past seven weeks, more than 33 million workers have filed for unemployment benefits. Amid increasing political pressure to re-open, how can policymakers catalyze economic recovery while keeping workers safe?
To examine these issues, we spoke with Cecilia Rouse, dean of Princeton University’s Woodrow Wilson School of Public and International Affairs. Rouse, whose interests are in labor economics, served as a member of President Barack Obama’s Council of Economic Advisers from 2009 to 2011.
Q. Based on the information we currently have, how did the onset of the current recession differ from the Great Recession, and how might the recovery align or diverge?
Rouse: This is not a typical downturn, since this is a public health crisis for which we needed to power down the economy because we lacked widespread testing for Covid-19 and contact tracing. Since the government could not be strategic in addressing the pandemic, the U.S. had to use a blunt instrument — the shuttering of non-essential businesses — to try to mitigate the spread of the virus.
The financial crisis of 2008 had an economic cause – a problem in the financial sector. Conversely, this downturn is induced by a health crisis, our efforts to slow a pandemic. As such, unlike in 2008 we have not seen a slow meltdown of the economy and a slow increase in the number of people who lost their jobs due to the loss of economic activity because of Covid-19; rather, we nearly just turned off the motor.
Q. Do the monthly estimates from the U.S. Bureau of Labor Statistics (BLS) represent an accurate picture of the current state of the labor market?
Rouse: The recently released BLS estimates of the state of the labor market certainly are eye-popping, but they also are an underestimate of the economic distress. The reason is that the unemployment rate is defined as those who are out of work, have actively looked for work in the past four weeks, and are currently available for work (those on temporary layoff and who expect to be called back are included). However, the number of unemployed is estimated from the Current Population Survey, a survey of households. Given that people are out of work because the economy is on pause, how will they respond to the questions? Do they expect to be going back to their employer? Do they know? Because of the pandemic, the Department of Labor has decided to count those individuals who are out of work and not actively looking for work as unemployed, but again, how will individuals interpret the questions?
Gallup has been following a panel of individuals since mid-March 2020, which provides some of the most up-to-the-date reads on what is going on in the economy. I compared Gallup’s attempt to replicate the BLS estimate of the unemployment rate, then I explicitly added in those on temporary layoff –– while these individuals are technically part of the BLS definition, I’m just uncertain how they will likely respond to the question in the Current Population Survey. Finally, I added in those who have experienced reduced hours as a result of the pandemic. The percentage of those affected is more than twice the rate estimated by the BLS.
I am both heartened and concerned about these numbers. I’m heartened that so many employers and workers heeded the call by our public health community to put activity on pause; I’m concerned because it means individuals and businesses are without their typical activity, which has implications for financial security as well as mental health and other issues that can arise when individuals do not have an income and structure in their lives.
Q. Political pressure is mounting for all governors to reopen their states for business. In the absence of effective treatments or a vaccine, how far can reopening businesses go in spurring economic recovery?
Rouse: Most states already have started to re-open. That said, it seems clear that we will need to learn to live with this virus for another year at least before we either reach herd-immunity (when 70-90% of the population has become immune), or we have a widely available vaccine. Remember that we had to pause the economy because we did not have the tools for a more strategic approach. An effective strategy will need to involve much more information about who is infected, individuals whom that person has been in contact with, and the isolation of those people as soon as possible.
We also will need additional federal assistance to minimize the economic pain of getting to the other side and beyond. Not only do I suspect that small businesses will need additional assistance, but so will our state and local governments. More than 40 states have balanced budget laws. The Center on Budget and Policy Priorities estimates that states could have a combined shortfall of more than $500 billion (based on traditional patterns between unemployment and state tax revenue, which is likely an underestimate). States are losing money due to decreased tax revenue (both sales and income tax) and increased expenditures for first responders, medical care, and other Covid-related costs. How will they balance their budgets? I bet they will lay off teachers, first responders, and other public employees.
Many people have asked, can we “afford” this? The federal government is not like us in that it can carry debt over many decades (or forever) and it can control how much revenue it takes in (within bounds). Importantly, interest rates are historically low right now and since the right thing to do in terms of the pandemic is to enforce physical distancing, the federal government has to step in to protect the economy. Yes, there will be a reckoning, but it will be worse if we don’t provide workers and firms with the help they will need to get to the other side of the pandemic.
Q. Many small business owners were unable to secure funding under the initial iteration of the Paycheck Protection Program (PPP), and the latest funding is expected to run out quickly, as well. What is the best course forward to help small businesses?
Rouse: The PPP has been underfunded and not well implemented. According to a survey conducted by LendingTree, as of April 22 only 5% of small business owners surveyed had received a PPP loan even though 60% had applied. And yet, the median small business has less than one month of cash on-hand — suggesting that unless they get relief soon, we are going to see many of the smallest employers go under. Further, Gallup estimates that 80% of business owners who have lost money as result of the crisis have not been approved for PPP funding.
We rely on unemployment insurance (UI) to get cash assistance to workers and often others during economic downturns. But UI is designed to facilitate job transitions, which is an important role. It’s the system we have and that’s not inherently a bad thing, but it’s underfunded, antiquated, and not really designed for this type of emergency. A Department of Labor report this year reported that 22 state unemployment trust funds were under the minimum solvency level. As a result, many workers who have lost their jobs have been unable to either file or have yet to receive any benefits.
In addition, living with the virus will mean that firms will need to be able to implement physical distancing in the workplace, which will be costly. Since firms will need to keep the density in the workplace down, that may have an impact on the labor force in some sectors like restaurants, hair salons and barbers, and other retailers. Travel, especially, will take some time to recover. The airlines took nearly two years to recover after 9/11, which was a very discrete event. Even if economies are “open,” until there is a vaccine or herd immunity, I expect people will not want to travel extensively.
The bones of the economy were strong enough, such that if the federal government provides adequate assistance to workers and businesses, then we should be able to get through. However, it is far from clear if we will accomplish that.
WWS Reacts is a news-focused series featuring faculty who present their views on current events.