COVID-19’s effects on the economy with macroeconomist Char Weise

Char Weise: It’s possible that we will discover things about the economy as a result of this that we didn’t anticipate.

President Bob Iuliano: Hi, and welcome to Conversations Beneath the Cupola, a Gettysburg College podcast. I’m Bob Iuliano, president of Gettysburg College and your host. In these days where the global outbreak of the coronavirus has raised so many issues, from our personal health to the global economy, we’re all struggling to make sense of the significant changes that have been made to the way we live. Starting last week, we have begun to use this podcast to explore some of those issues with the guidance and expertise of the Gettysburg faculty. Today we are joined by Char Weise, a professor of economics at the college. His teaching and research interests lie in the area of macroeconomics. That is, the behavior of the economy as a whole. He will use this background to help us make sense of the dramatic effect the COVID-19 outbreak has had on the economy, what the U.S. government could have done differently, and how long the reverberations may last.

President Bob Iuliano: Char, as we have this conversation on April 1st, the short term implications of the coronavirus really truly have been staggering. I think I’ve seen something that there were a record number of unemployment claims, more than three million, filed last week. Both Morgan Stanley and Goldman Sachs have come out with estimates that the gross domestic product is going to be down by nearly 30 percent. I’m not an economist, but it seems to me we’ve never seen something like this. Have we?

Char Weise: I would say no, we really haven’t seen anything like this. The magnitude of the numbers may be a little bit misleading. The 30 percent drop in GDP as a quarterly figure, and usually we express these at annual average rates, so that really converts to a 7.5 percent annual drop. That’s sort of a normal beginning of a major recession. But still, I mean, it’s shaping up to be a pretty big recession depending on how this thing plays out. The origins of this are unique. I would say that the 1918 to ’19 influenza epidemic is the closest parallel, but you know, that was a long time ago. It’s not in our lifetimes that we’ve seen something like this.

President Bob Iuliano: You used the word twice in that, the beginnings of a recession. Is that clear to you from the signs that you see, or is it possible that this is a brief economic dislocation caused by the virus and the economy will bounce back quickly when the virus leaves us?

Char Weise: I think it’s clear that we are in a downturn. I mean, there’s no question that there is going to be significant unemployment. Whether we can bounce back quickly, I suppose that if in the next month, if we had a vaccine or a cure for the virus, sure. I think we would have a robust rebound. I don’t think there’s anything structurally in the economy that would prevent that from happening, but I just don’t see the virus situation, the health situation, returning to normal for months, or even a year or more, and so I think there are significant barriers to a strong recovery. I mean, we’re going to get a lot of the jobs back in the summer I think, but I don’t think we’re going to go back to normal for a while.

President Bob Iuliano: So, Char, you may have already touched on this in what you’ve said a moment ago, but what makes this different from past economic crises?

Char Weise: Well, I think there are a couple of things. This is a recession where the economy was fundamentally sound going into it. By and large, consumer debt was under control consumer, the consumer sector was healthy. This was a healthy economy, and then it just received this gigantic hit. So, in a sense, that’s a good thing. It means that the recovery period might not be as painful as previous recoveries because we don’t have to work through a bunch of imbalances having to do with debt.

Char Weise: Most recessions begin with big ticket items, durable goods, auto sales, big capital investments by firms, and so they tend to hit the large corporate sector first, and then components of consumer spending tied to restaurants and entertainment or so on, those are affected much later in the recession as a result of a pullback of consumer spending. And here, it’s sort of the reverse impacts. Main street businesses first, small businesses first, and corporate, big corporations only as a result of that.

President Bob Iuliano: Do you think that has ... Maybe it’s just not known, but do you think that has implications for the nature of the recovery?

Char Weise: Well, I think, I guess one implication is that there are going to be ... I mean, absent forceful government action, there are going to be a lot of small businesses that are wiped out by this recession in a way that maybe we haven’t seen before. Maybe that’s been a slower, more drawn out process before. And so that’s why I think that it’s really important that the CARE legislation that Congress passed includes a lot of support for small businesses to keep them afloat, at least for a little while.

President Bob Iuliano: We’ll turn to that in a second. Again, I suspect you didn’t bring your crystal ball with you, but we’re certainly seeing on the social side really dramatic changes in the way we live, and there are some people beginning to wonder whether those changes are going to endure, at least in some respects. As you look at it from a macroeconomics perspective, do you think there are going to be fundamental structural changes to the economy that have visited upon us by virtue of this pandemic?

Char Weise: Well, first and foremost, we’re going to need an emergency toilet paper reserve I think. I’m not sure about structural changes in terms of how the economy functions, but I think that big changes in the way we manage our economy, the way we manage our capitalist system, is bound to change, and I don’t know what way. I mean, I guess it’s more of a political question, which direction we’ll turn in that respect.

Char Weise: I mean, one way you could go is sort of a more nationalist approach to economic policy. Maybe the lesson we learn from this is that we have to disengage from countries like China and not rely on them for provision of intermediate goods and medical supplies and so on. On the other hand, it could be in the other direction. I think what this crisis is exposing is just a grossly antiquated, broken social safety net healthcare system. The fact that we don’t have universal paid sick leave or family leave has made it really hard to respond to this crisis. What may end up happening is that the fixes that we make to deal with this crisis in terms of providing more access to health insurance or some kind of an income support program, like a universal basic income program, things that we adopt as a temporary measure may end up being a permanent feature of our government management of the economy. But again, that’s sort of a political issue, and it’s hard to tell which way things are going to go.

President Bob Iuliano: I’m hoping in a future podcast, as we explore the various aspects of this virus and the pandemic, we will have the opportunity to talk with a faculty member about the political aspects because I think they raise some very important and foundational questions. You mentioned a moment ago the CARE Act and the stimulus that the government has now put into place, which is, as far as I can discern, and I haven’t done an adjusted, but one of the largest in U.S. history, if not the largest in U.S. history. What do you see as the strengths and the weaknesses of that response?

Char Weise: Well, I think you’re right. It is the largest piece of fiscal stimulus that the U.S. has ever embarked on. I mean, the 2009 stimulus package under Obama was just under $800 billion I think, and that was unprecedented at the time, and now we’re talking about $2 trillion, and this $2 trillion is sort of a down payment. I think everybody expects that there’s going to be more coming.

Char Weise: So the strengths, I think, is that there is a lot of money going to individuals. There’s $1,200 per person, per adult, I guess, or per taxpaying unit, and that’s a one time payment. $500 per child. That’s also part of the one time payment. So that’s a significant amount of money, and then adjustment to the unemployment insurance system so that the federal government’s going to add $600 per week to people who qualify for unemployment insurance. I think that’s crucial because I think that we need people to be able to stay home for the next month, or maybe the next two months, and we have to be able to provide them sort of a ... We have to replace the income that they would have earned on the job. So I think those are really good things, and I think money spent that’s being paid $150 billion for hospitals and medical support, and then $150 billion more for state and local governments, I think that’s probably crucial, although I don’t know the details of that spending.

Char Weise: I think the thing that really concerns me is $500 billion in loan guarantees for large corporations, and I think $46 billion of that is direct support to the airlines, Boeing, and other large corporations. The $454 billion apart from that is really supposed to prop up loans, and the purpose of the $454 billion is to sort of absorb any losses that the federal reserve incurs on those loans. They could be buying corporate bonds, they could be buying shares of stock. They could be making all sorts of loans that end up losing money, and then that comes out of the taxpayers, the $454 billion. I’m not the only one who’s concerned about this $454 billion that sort of appears to support large corporations that arguably could do without it.

President Bob Iuliano: I’ve watched from my perch the passage of the legislation, and while it will help places like Gettysburg, it doesn’t nearly come close to covering the many various expenses that we’re going to end up incurring by virtue of the dislocation that’s taken place. I’m not suggesting that’s the government’s responsibility, but it’s just worth noting that, to the extent that the CARE Act was intended to create real incentives and to protect entities, it has not done that, at least for higher education in large measure, which is something that I know the higher education lobby groups have tried to make clear to Congress.

President Bob Iuliano: We entered this period running pretty large deficits to begin with. We’ve now injected trillions of dollars into the economy, which has positive effects to be sure, but we’ve done so without the tax revenues to support it. Indeed, we are deferring payroll taxes, and presumably the government’s taking in much less generally. How do you make sense of the deficit picture and what that means for the longterm health of the economy?

Char Weise: Well, I’m in the camp of economists that thinks that we do not need to be overly concerned about the size of the debt or the size of the deficits. I think the consensus has really moved in the economics profession on that issue. I think 10 years ago the consensus in the economics community was that deficits and debt are fairly dangerous. They raise interest rates. A large budget deficit, large government debt, raises interest rates and chokes off private investment. I think what we’ve really learned over the last 10 or more years is that, for very good theoretical reasons, that phenomenon really hasn’t happened and isn’t likely to happen. I feel like I need a chalkboard here to draw the differential equation that will prove this, but the implication of the interest rate being lower than the economy’s growth rate is that it really is possible to borrow, say $2 trillion or more today, and never pay that off, never raise taxes to pay off that debt. Just allow growth in the economy to reduce the size of that debt relative to GDP.

Char Weise: In the long run, we end up exactly where we started with the same debt to GDP ratio. So, if we’re worried that the size of the government’s debt is 70% of GDP and we don’t want that to rise, well, we can borrow $2 trillion, and over time the debt to GDP ratio will return to 70%. We will be in the exact same position. We will never have to raise taxes to pay off that debt.

President Bob Iuliano: To that end, maybe this is a dark question, but some public health people are worried that the arc of the virus means that it may be with us for awhile. Others disagree with that. It depends in part upon how we respond as a society now. Let’s pretend for the purposes of this question that it either persists for a period of time, Char, or comes back with a strength in the fall. I’m not saying that will happen, but let’s assume that it does. The fed has basically dropped interest rates to zero. The government has introduced this trillions of dollars into the economy. What tools are left in the arsenal for the government to respond if this proves to be a long running problem?

Char Weise: Yeah, gosh, that is an excellent question. I think the key policy that we need to maintain that we have begun with the CARES Act ,or CARE Act, is payments to households who are out of work, who are sort of being required, for good reasons, to stay out of work because of the epidemic, and if that means ... So, the CARE Act gives people $1,200 per taxpayer or tax paying unit, the one time payment, but we may have to do that every month. And I think the solution that we’re possibly going to gravitate towards is sort of a universal basic income, the kind of thing that Andrew Yang was talking about in the election, and that’s sort of become very popular in a lot of circles, both liberal and conservative circles. We may have to end up having a system in place where we routinely make payments to individuals.

Char Weise: To be grim again, to add a wrinkle to your grim picture, this crisis I don’t think has hit the developing world and sort of the emerging economies yet as hard as it’s going to, and maybe it has and we just don’t know about it because the data collection in Africa and parts of Latin America may not be as robust as it is here, but if this virus affects the Southern hemisphere as severely as it’s hitting the Northern hemisphere, the health crisis, the economic crisis that that entails, is devastating.

Char Weise: I don’t know what to do about that. Keep the money flowing to households, keep the credit markets functioning. That’s the Federal Reserve’s job. Ultimately, we have to be realistic. If 10 percent of the population has to stay home and not work at any given time, maybe we have sort of rolling lockdowns where some parts of the country go into lockdown, some parts of the country are functioning. At any given time, 10 percent of the population isn’t working. That means GDP is going to be 10 percent less, more or less. We can’t do anything about that if people aren’t working. We can’t sort of magically produce goods and services without the people to produce them, regardless of what the federal government does.

President Bob Iuliano: One of the things this underscores is the interdependence of the world, and your point about the Southern hemisphere just gets me thinking that it will be important that the countries that are working their way through this share their learning, their expertise, and their resources with the Southern hemisphere as the weather changes and the virus has more of an opportunity to take root there as well.

President Bob Iuliano: So I leave you with one last question. You’ve identified some as we’ve talked, but are there are lessons here that you think we should learn either as a country or as a world by virtue of this pandemic and how we’ve responded to it?

Char Weise: Yeah. Well, I mentioned the lessons I think we’ve learned about our social safety net and our health care system. I mean, I think whether you are coming at this from the right or from the left, when you see that there are so many people in this country that basically live paycheck to paycheck and an interruption of a couple of weeks really destroys their finances, when you see there’s a photograph going around, I guess appeared in some newspapers of ... and you wonder, “We’re the richest country in human history, and we’re having people sleep in parking lots. What is wrong with us?” And so the lesson I get from this is just a desperate need for some kind of reform of healthcare, reform of the social safety net, and so on.

Char Weise: Another thing I’ll say is that when events like this, or significant events like the 2008 financial crisis, the Great Depression, the inflation of the 1970s, when these things occur, it is revealed in hindsight that economists really didn’t understand how the world worked, and we learn so many new lessons, and it’s possible that we will discover things about the economy as a result of this that we didn’t anticipate. And obviously, since ... In that sense, I can’t tell you what lessons we’re ultimately going to learn, but I think there will be some.

President Bob Iuliano: I have no doubt about that, and I will leave you with this. As you know, one of the things that I have ... points I have sounded in my early days as presidency is the importance of being able to talk across difference effectively. Many of the lessons that you’ve articulated outside of the economic sphere involve the importance of we as a people, a government, being able to look at questions in a clear-eyed way and to find common ground in order to move forward. Let me hope that this creates the opportunity for some of those conversations to take place in a different way. It underscores to me the importance of the work we’re trying to do here, which is to create students, graduates who are going to go out into the world able to have those conversations, but also able to have the skills that let them transcend difference and build coalitions to address some pretty important structural problems that this has revealed. So I leave you with that as my thought about this. Char, thank you for sharing your wisdom and reflections on this really unusual moment in our history.

President Bob Iuliano: Let me conclude with a slice of life from Gettysburg College. Given the appropriate worry that people across the world have about the health and economic impacts of the pandemic, it’s all the more important to take a moment to reflect on the sources of joy in our lives and to share that joy with others. One of our recent alumni has done just that: Kelly Reymann, class of 2018. Kelly, a music education major, created a YouTube channel for her students. In one of the videos she posted on the channel, Kelly is joined by four other Sunderman alumni: Megan Riley, class of 2017, Molly Clark, also class of 2017, Isaac Hawkins, class of 2018, and Eddie Holmes, class of 2018. Together they sang the song This Little Light of Mine, sharing a message of hope, kindness, and love. Take a listen.

New Speaker: (singing)

President Bob Iuliano: Thanks for listening. If you’ve enjoyed this conversation and want to be notified of future episodes, please subscribe to Conversations Beneath the Cupola by visiting gettysburg.edu or wherever you get your podcasts. If you have a topic or suggestion for a future podcast, please email news@gettysburg.edu. Thank you, and until next time.