Recorded on Sunday, April 19, 2020
TRANSCRIPT
Laura Markowitz:
I think we can get started. Hi, welcome everyone. My name is Laura Markowitz, class of 1985. And on behalf of Alumni Council, I want to thank you for joining us for this special Swat talk on the COVID-19 pandemic series.
Laura Markowitz:
Before we start, I just wanted to acknowledge that all of our Swarthmore alums and college staff members who are on the frontlines of this crisis right now as first responders, working in labs, working on civil rights issues during the crisis, and also keeping our campus viable. We have students who are still sheltering on campus. So thank you very much to everyone. I hope you're all well and safe in your homes with your beloveds.
Laura Markowitz:
Also, just a quick shout out to Lisa Shafer. She's from college advancement and she is the gentle force behind the success of these Swat talks. I'd like to give her special thanks, just even before we get started.
Laura Markowitz:
Also, just to let you know, this talk is being recorded. It will be available in the coming weeks, it won't be right away, it'll take the college a little bit of time to get it edited a bit. You can find it on the Swat Talks page on the Swarthmore College website. And also, I think it's going to go up on the YouTube channel.
Laura Markowitz:
Let's see. So that's all the housekeeping we have. Just to also let you know that as our speaker speaks, if you have questions, please feel free to use the chat function and send the questions. You won't be able to see one another's questions, but I'll get all the questions and I'll kind of consolidate them. And then when Dean is finished, I'll try to pose them in themes.
Laura Markowitz:
So it's my pleasure to now introduce our speaker for this evening, Dean Baker, class of 1981. Although he started in class of 1980, so you may have known him that way. Apparently, he goes to those reunions or considers going to those reunions.
Laura Markowitz:
His talk is called Disaster Economics: Getting Through the Coronavirus Pandemic. He is going to be Zooming in from Kanab, Utah, where he works as senior economist at the Center for Economic Policy and Research, that's actually in DC. He co-founded that in 1999. He's also a visiting professor at the University of Utah. That's the Kanab connection.
Laura Markowitz:
Dean's area of research includes housing and macroeconomics. In fact, he's credited as being one of the first economists to identify the 2007, 2008 housing bubble in the US. He also focuses on intellectual property, social security, Medicare and European labor markets. He's been a senior economist at the Economic Policy Institute and consulted to the World Bank, the Joint Economic Committee of Congress and other big international economic organizations.
Laura Markowitz:
He's written numerous books. I love the title of his most recent one from 2016. It's called Rigged: How Globalization and the Rules of the Modern Economy were Structured to Make the Rich Richer.
Laura Markowitz:
So Dean is a pundit. You might have seen him sitting across from someone from the Cato Institute, arguing about everything, as economists love to do. He's written columns in major newspapers. He's got a wonderful blog called Beat the Press, and it's on the website, I'm trying to get the exact thing. But it's on-
Dean Baker:
Cepr.net.
Laura Markowitz:
Thank you, cepr.net. Thanks, Dean.
Laura Markowitz:
But I just want to tell you, just in classic Swarthmore fashion, he did not study economics at Swarthmore. So if you want some cozy memories of Bernie Safran, you're not going to get them in this talk. He actually studied American... He studied, let's see, majored in history and minored in philosophy. And then he audited a class on American economic history right before graduation, and then based on that, he ended up going to grad school, got his PhD at the University of Michigan.
Laura Markowitz:
And just as a sideline, he also ran for Congress in 1986 as a grad student, won the Democratic nomination, but lost in the general election. He's a really interesting guy.
Laura Markowitz:
Tonight, he's going to be talking to us on a more serious manner, which is about how a post COVID-19 US economy might look different from the economy we just had up until January of 2020. So, Dean, thank you so much for being here. I'll turn it over to you.
Dean Baker:
Well, thanks, Laura. Thanks, Lisa, for setting this up.
Dean Baker:
I've spoken I think at Swarthmore two or three times over the years and I'm always happy to go back there again. I have to say, didn't expect this would be the way I'd be going back. So a little unusual. But in any case, I welcome the opportunity.
Dean Baker:
So anyhow, these are extraordinary times and I'm sure everyone's having their own difficulties, and I hope people are getting through okay, and their family members are getting through okay. But these are difficult times.
Dean Baker:
Anyhow, so I want to talk about what are the major issues with the economy? First off, how bad is the slump? The short answer, of course, very bad, but I'll just give you a few statistics on a few numbers.
Dean Baker:
Secondly, what are the key features of the government response? Because the main point I want to leave you with is that how bad this story is going forward will depend to a huge extent on how effectively the government responds now, and in the months after, when we get to talk about reopening again, which of course, third point, what are the prospects for the recovery?
Dean Baker:
And one of the points I'll make there, and all of us economists have to be humble on this, this is going to be to a very large extent determined by the course of the coronavirus, which I have no particular expertise on. I read the paper like everyone else, but I certainly won't claim to be an expert on epidemiology.
Dean Baker:
And then the last thing, permanent changes in the economy and society. I think many of us tend to exaggerate how often or how much I should say, changes that we see in a crisis like this will be lasting. But I do think there are some that at least I'll say I feel fairly confident saying that they will be enduring, they'll continue once this crisis is over.
Dean Baker:
Okay, so first off, how bad is the slump? So this is a series of industrial production that the Federal Reserve Board puts out each month. And it's a little hard to see, because I have just one month of data and the crisis, the very last number, 220. That's from March.
Dean Baker:
And what you can see is that industrial production, this is manufacturing, manufacturing output fell by over 6% in that month. And the series goes back at least the published data here, goes back to the early '70s. And we had severe downturns, obviously, most recently in the great recession of '08, '09. And then also back in the '70s, we had some pretty bad downturns with the OPEC price increases.
Dean Baker:
There was nothing like this. So the very worst, if you go back to the '74, '75 recession with OPEC, industrial production, very worst month was 4.5%, here we're looking at over 6%. Now, the reason why that's so striking is that's really only half the month. So the first half of March, things were operating more or less normally. So it was only the second half of the month.
Dean Baker:
So basically, you're just seeing a collapse of the manufacturing sector, certainly as we've not seen since we've had reasonable data. We don't have data or at least I don't have data going back to the Great Depression. But for quite some time, this is far and away the worst we've seen. And again, that's only half the month.
Dean Baker:
Okay, another series like this. Retail sales. Retail sales fell about 6% in March. Again, this is far worse than what we had in the Great Recession. Great Recession, I remember following the data, of course, I was following it very closely at the time. We were all looking at this just in horror, we're just seeing the economy fall through the floor. While the very worst month, we had a 4% drop in retail sales. Here, we're looking at 6%.
Dean Baker:
And again, this is only half the month. So if you go back, the first half of March, March 5th, March 10th, for most of the country, coronavirus was not a big factor in retail sales. Second half, of course it was. But that's just showing you how bad things were.
Dean Baker:
And the last one, I could keep going, because there's other series I could give you. But I think these make the point, unemployment insurance claims. So again, I have a relatively shorter period here, just to make the contrast, we were looking at weekly... these are weekly claims. So how many people are applying for unemployment each week?
Dean Baker:
And we had a peak back in the Great Recession, I think it was 900,000, reading off the graph, but I think was 800,000 or 900,000. We had four weeks where the total was 22 million. So we've just never seen anything like this before.
Dean Baker:
Now, none of this is a big surprise in a certain sense. We're getting the data, we're going, wow, these are horrible numbers. But none of it's a big surprise, because we're basically shutting down large segments of the economy. And this is in many ways unprecedented, because you go back to the Great Recession, 2008, 2009. Well, you have a collapse of the housing bubble, a collapse in demand. And we're going, well, how bad is that? Well, we get the data, we go, oh, it looks pretty bad.
Dean Baker:
In this case, it is very bad. But it's not a surprise. We're telling people, you can't work in restaurants, we're telling people, you can't work in most retail outlets, we're shutting down large segments of the economy. So in that sense, it's not a surprise, but the numbers are still very, very striking.
Dean Baker:
So we're talking about at least for this period of the shutdown, and again, I don't have any special insight into how... I'll say a little bit about that. But no one's telling me how long it's going to be, before this period of the shutdown, we're really talking about an unprecedented decline in economic output. The estimates and I've not tried to construct my own, but the estimates that I've seen for what the second quarter GDP is going to look like, on the order of 30% decline.
Dean Baker:
So just to be clear what that means, what we'd be looking at is for the months of April, May and June, and that's it assuming you're going to have some reopening in that period, presumably in June, not to say a complete opening. But some reopening, but for that period, the economy is declining. It's something like a 30% annual rate. That's really, really extraordinary. We think it was horrible if the economy was declining at a 2% or 3% or 4% annual rate, we're likely looking at 30%. So this is really an unprecedented fall off in economic output, employment. We just haven't seen anything like this.
Dean Baker:
Okay, so what's the government response? One of the points that I often make in talking to reporters, other people in this, it's important, people often talk about the stimulus package. I think that's really mislabeled. And it's not just because I'm a fanatic about semantics or anything.
Dean Baker:
We aren't trying to stimulate the economy. I had a friend who was saying, well, don't you think we need more stimulus? We actually don't want people to buy things. We'll arrest people for buying things. So we don't want to stimulate the economy right now, the key thing that we're trying to do is keep people whole through a period where tens of millions are not working.
Dean Baker:
So what we want to do is make sure that people have the money to pay their rent, pay for their food, pay for other necessities. That's what's important. We don't expect them to go out and spend a lot of money on... they're not going to be traveling. We don't expect them to buy new cars. We don't expect people to buying a lot of things right now.
Dean Baker:
So that's why when people talk about being a stimulus, they're really misunderstanding the issue. So it's not just a semantic point, what are we trying to do here? Okay, so here are the main features. I'll try to avoid going into too much depth, because I've been arguing with people all the time about this stuff, but just to outline some of the main features.
Dean Baker:
First off, I'm putting the small business loan program, because I think it's the best, the most important thing. This is something that in many ways follows what was done in many European countries, in Denmark, in Germany, several... The UK did this. I think most of them have done. I couldn't speak to all of them, but many of them have done this.
Dean Baker:
The idea is give employers money to keep people on the payroll. So basically, what's involved here is very lax requirements, some small businesses employing less than 500, these are some fairly large businesses, they go down to their local bank and they say, hey, I want a loan, I can get a loan up to $10 million, or two and a half times my monthly payroll, whichever is smaller of those two.
Dean Baker:
And basically no questions asked. I'm sure there will be some questions asked, but they're not evaluating the business, they aren't evaluating whether it's credit worthy or not. They don't have to, because it's guaranteed by the small business administration.
Dean Baker:
So that program got up and running, a lot of complaints about that, but there were millions of people applying. I actually thought given how quickly this was hatched and how ill prepared in many ways we were for something like that, they did a good job or are doing a good job. It's still ongoing, Congress is likely to devote more money for it because they already ran through the initial 350 billion.
Dean Baker:
The reason why I and other economists think that this is such a good way to go, is it keeps the workers attached to the employers. So what we want to see is a situation where, when this shutdown period ends, whether this is May 1st, May 15th, June 15th, whatever it might be, we'd like to have a situation where workers have jobs to go back to. So they don't have to go looking for jobs.
Dean Baker:
Then on the other side, we want employers to be able to pick up, that they have their workforce, whatever type of business it might be, a restaurant, they don't have to go out and hire another 40 people, train them. We might think of it as less skilled work, but still, you're going to have to train people, you can't just say, hey, go in the kitchen, cook dinner, you have to train people.
Dean Baker:
So we'd like to have a situation where as much as possible, businesses could just pick up where they left off and start operating relatively quickly. So keeping workers attached to employers is a really important part of that story. And again, this small business loan program basically does that, insofar as firms follow it.
Dean Baker:
The second part... Oh, I should also have added, officially these are loans but if they keep their workers attached, they're forgiven at the end of the period. So they end up being grants, the government picks up the tab.
Dean Baker:
Second part, rescue checks, $1,200 per person, 500 for children, that went to almost all citizens. There were some fights over this, would it go to people who didn't pay income taxes? There were various issues associated with it, they ended up to my view, at least with a pretty generous story, the big group of people that's left off is undocumented workers.
Dean Baker:
I don't know what to say, and it's pretty tragic. You have a lot of people, many of whom have been here for years, even decades, have families. They're not documented so they're not going to get this.
Dean Baker:
California to its great credit, Governor Newsome is looking to get at least some assistance to those workers. But it has to be a horrible situation, you've been working, supporting a family and now you can't legally work, no aid. So that's the big gap there.
Dean Baker:
Unemployment insurance. They extended the qualifications. So, in principle, if you're self-employed, you aren't supposed to get unemployment insurance. People, gig workers, Uber drivers, the classic case, those people are not classified as workers. It's a big issue. Many of us have been fighting over that, because for all practical purposes, they are workers. But Uber doesn't want them classified that way. Because if they're classified as workers, they get various rights, including getting unemployment insurance.
Dean Baker:
But Uber didn't want them classified as employees. They're classified as self-employed. Well, we ended up with a good story here, Congress agreed that gig workers, people who are self-employed, you could go down and show your 1099, showing that you earned whatever amount last year and you can get unemployment benefits based on that.
Dean Baker:
They also put in the $600 per week subsidy, which I have to say I thought was very generous. My guess and I have no inside knowledge on this, my guess was they actually intended 600 per month, but 600 per week, I'm not passing a value judgment on people's worth or anything, but you have a lot of people that didn't earn $600 a week when they were working. So someone earning 10 bucks an hour working a 30 hour week, they get $300 a week.
Dean Baker:
So that was very generous, so again, I'm not upset about that. I'm just thinking that they probably didn't intend that. And there were several Republican senators got up and complained about it at the last minute but they weren't able to stop that from going through. So anyhow, it ends up being a fairly generous story.
Dean Baker:
They also dropped the looking for work requirement. All states require and they enforce this to different extents. But all states require that people getting benefits are actively looking for work. And as I think probably is obvious to most people, it would be like little silly to tell people that they should be looking for work right now and there are no jobs.
Dean Baker:
So telling someone got laid off from a restaurant or a retail store, oh, you have to go look for work, it would just be stupid. So they dropped that. They aren't going to go through some charade where they tell people they have to look for work.
Dean Baker:
A big business loan program. There was 500 billion for medium and large sized businesses that the Fed could leverage by up to 10 to one. So that means if you have a large business that gets a billion dollar loan from Treasury, the Fed could lend up to 10 billion.
Dean Baker:
The logic of that, I won't go into detail, but basically, it gets the Fed off the hook because the Treasury stands to lose the first billion. So if the Fed lent them 10 billion, and for whatever reason they're not able to pay the full 10 billion back, they could only pay 9 billion back, the Fed gets the nine, the Treasury takes the loss.
Dean Baker:
There were designated sums for specific industries, airlines got I think it was 25 billion if I remember correctly. Boeing got 17 billion, roughly half of these are grants. Again, I don't have the exact numbers here. Cargo carriers got, I believe it was 3 billion. Again, these are partly loans, partly grants, so we're just handing them money to some extent.
Dean Baker:
There's no requirement for maintaining employment. So again, this is a big difference between the small business loan program and this big business program. The wording was something to the effect of, you have to maintain employment to the extent practicable, which I'm not a lawyer. But if you want to say you have to maintain employment, you say you pay a penalty if you don't maintain employment.
Dean Baker:
So this is wording like we'd like you to maintain employment and in fairness, I think most of them will try to, but in any case, it's not a requirement as it is with the small business loans. Small business loans, you get them, you get the loan forgiven if you maintain employment. The big business loan program, again, you're urged to maintain employment, but if for whatever reason you decide it's easier to lay people off, you lay people off.
Dean Baker:
The last point I'll just make on that is that many of us were concerned about the oversight that we wanted to make sure that the money would be distributed fairly, that there wouldn't be political bias, I guess, just to be straight on that. And unfortunately, that seems to be lacking.
Dean Baker:
President Trump, when he signed the bill had a signing statement, basically saying he didn't recognize congressional oversight. And he fired the inspector general, who would have been primarily responsible for overseeing the program, was a person with a reputation for being very independent and very honest, and he fired him. I don't think many people could look at that and be confident that there'll be good oversight.
Dean Baker:
I'll just mention one other thing on this oversight issue. There's preliminary data on the small business loan program and the states where you have had the highest approval rates for the loans, so just going right through and businesses have the money, all the states that have had the highest approval rates are red states. The states that have had the lowest approval rates, those are blue states.
Dean Baker:
There could be factors that explain that other than politics. I'd always be hesitant to just say, oh, that's political. But I think in this day and age, you'd have to be pretty naive not to think that it could be political. So again, I'm not asserting it is, but we should be worried about that I think reasonably.
Dean Baker:
Money for state and local governments, 150 billion for state and local governments. 117 billion is paid directly to hospitals. The hospital parts story is probably pretty obvious to everyone, you have massive inflow of patients, many of them obviously seriously ill and dying. So they desperately need that money to pay staff, pay for equipment.
Dean Baker:
The money for state and local governments, the story with state and local government is they're seeing an incredible hit to their revenue. So their revenue, they would ordinarily get somewhere about 150 billion a month in income taxes, sales taxes, other taxes, much of which, of course, they're not going to get during this period of shutdown.
Dean Baker:
So let's say half of that, I'm pulling that... well, I'm not totally pulling it out of the air. But let's say they're losing half of that. So they're losing somewhere on the order of 75 billion a month in revenue. So again, we don't know how long this shutdown is.
Dean Baker:
But the point I just want to make here is 150 billion is not going to cover that, if we're talking about a lengthy shutdown. And if we'll open up tomorrow, 150 billion might be enough to cover that. But we're not opening up tomorrow. And even when we do open up, it's not going to be back to normal.
Dean Baker:
So the long and short, the point I'd make about that is states need a lot more money. So the Democrats in Congress are trying to get more money for state and local governments. That's been a sticking point. Again, there's another bill likely to come through very soon. We'll see what if anything the Democrats were able to get through on that.
Dean Baker:
I should also just mentioned here, some of you probably have noticed, the post office has been very badly hurt. It was not doing all that great previously, but their revenue has gone through the floor. It's not a good time to be sending advertisements, advertising mail through the postal service, their revenue has gone through the floor and they're still paying people, of course. So they're in very, very desperate shape. And the Republicans, particularly President Trump, has been adamant he does not want to help them. So that's going to be a very serious problem going forward.
Dean Baker:
The last part of the rescue package, the Federal Reserve Board has played a huge role. They've lowered their interest rate, the overnight interest rate to zero, trying to lower interest rates throughout the economy, to my view, very much the right thing to do. Try to do as much as you can to make it easy for people to borrow the money they need to keep going, for businesses, for households, whatever it might be.
Dean Baker:
They created special lending facilities for businesses. So they had done this back in 2008, 2009. There were a number of special lending facilities, mostly for financial businesses. They did have some buying money market, commercial paper from businesses. But in this case, they're having much broader lending to businesses pretty much across the board. So basically, they're trying to make it so businesses could stay in operation.
Dean Baker:
Also, another point hasn't got a lot of attention but was very, very important. They set up dollar swap loans. So you have a lot of countries, particularly developing countries, that are very stressed for money they need for their imports. And that means getting dollars for the most part, and the Fed has made that available.
Dean Baker:
Again, I haven't studied it carefully. So I don't know that all countries are able to get that. There's probably some politics. My guess is Iran is not getting it. I'm pretty sure Iran is not getting it. But in any case, they've extended dollar swap loans to many countries around the world.
Dean Baker:
The last thing I'll mention with the Fed and this is a really, really huge deal, they created a special facility for state and local governments. Historically, the Fed has only lent money to state and local governments for a period of three months. I don't think that's in their charter. But that's been their practice.
Dean Baker:
So if you're New York City or the state of Illinois, and you want to borrow for a year, the Fed will go, no, we could lend to you for 90 days, but not longer than that. Well, they suspended that, and they're lending to state and local governments for periods of up to two years.
Dean Baker:
Now, the reason why that's so important is that you have a lot of state and local governments that literally don't have money in the bank. So they're in a situation that they don't know they have money to pay their police next week or where you have government run hospitals, they can't pay for the workers or they can't pay their Medicaid bills to hospitals that have Medicaid bills, Medicaid patients.
Dean Baker:
So this was really, really crucial, it was a huge step. It was a departure from past practice. What that means is that for the time being, at least state and local governments will be able to pay their bills. Now these are loans, they're not grants. So at the end of the day, the state and local governments will have to pay this back. So they have to find money somewhere.
Dean Baker:
So this doesn't get them out of the bind. I was talking about all the revenue they're losing, they're still losing that. But what this means is at least for the time being, that they could pay the bills next week, so that they could pay the doctors, the nurses, the other people working in the hospitals. They could do that for the time being.
Dean Baker:
So it was a hugely important step. I give Jerome Powell, the Fed chair, lots of credit for doing that, because I suspect that he probably got a lot of heat for it, but it was the right call in my opinion.
Dean Baker:
Okay, so prospects for the recovery. Again, the point I started with before, containment, control strategies, that's really got to be front and center. So we have a lot of people saying, well, we have to reopen the economy. Yeah, it would be great to have the economy reopened, but if we don't have the coronavirus under control, we're just going to be right back to where we were.
Dean Baker:
So, I'm sure most people followed the general pattern, we were seeing instances of contamination, of infection, just go up 15%, 20% a day. And then we had this period of shutdown, and the rate of growth has slowed immensely. And in many states, it's just 1% or 2% a day, again, we have to get lower.
Dean Baker:
But the point is, that is manageable, it's not going to overwhelm our hospitals, our doctors can deal with it, we have the equipment to deal with that. Now, that's what was hugely important.
Dean Baker:
If we were just to say, okay, open up, well, we'd be back where infections were growing 15%, 20% a day and again, we'd be overwhelmed in no time. So we can't do that till we could be reasonably confident that we could control the spread. So that presumably means testing, again, I don't want to get over my head and the medicine, not being an expert here, but it's kind of common sense.
Dean Baker:
We need to be able to test, to know who's infected, who isn't. Researchers are looking at antibody tests, so we will know who's immune. Again, some questions, even if you have antibodies that protects you from being reinfected. Let's hope that's the case.
Dean Baker:
So we need that, we need to be able to track people who are infected, so we can figure out who they've been in contact with, who they might have infected. So that's really front and center. If we don't have that, it's very hard to talk about reopening.
Dean Baker:
Now, on the other hand, we're seeing this pressure to reopen. It's really across the board. Trump, very much, you may recall, he wanted to have the pews full for Easter Sunday. Thankfully, we didn't for the most part have the pews... I don't have anything against Easter, but that would have been pretty horrible to have all those people crowded into churches.
Dean Baker:
That didn't happen, but he is talking about May 1st. And just the reality of the politics here, if he pushes that, my guess is that a lot of governors are going to go along with a premature reopening. My reason for putting Europe in there is that you have a number of European countries that have started to reopen. Denmark has opened up their elementary schools, Austria has small stores are opening, all with restrictions. So they're not just saying hey, go back to just like what it was, they have restrictions they're monitoring.
Dean Baker:
But I worry that's going to put more pressure on Trump, just because Trump being Trump, he might find it hard to say, oh, we're not ready to reopen. But Germany is, but France is. I don't know which countries are going to go first here. Germany's taking steps too, I do know that. I think it'd be very hard for him to sit there and say, oh, we're not ready to reopen.
Dean Baker:
And it does have this real risk that he's going to push people to open before they're ready. And again, red states, the governors might be happy to follow his lead. But even blue states, because again, getting back to that point I was making, that they don't have the money. They might find it very hard to sit there, shut down, not collecting revenue, paying bills that they don't have money for, and Trump is obviously not going to help them with getting respirators and other equipment, they might find that very difficult.
Dean Baker:
So even governors that have stood up to them to some extent, Newsome in California, Pritzker in Illinois where I'm from originally, they're going to find that very, very difficult. I think we do have a real risk of a premature reopening, which obviously would be bad for people's health and I'd say bad for the economy too, if we get a huge uptick again.
Dean Baker:
Okay, other things, what does the economy look like? I think there'll be a lot of demand for big ticket items. People have been saying, oh, everyone's going to be really depressed. My guess, people were going to buy cars in March. They didn't because of the coronavirus. They were going to buy them in April. They didn't because of the coronavirus. People were planning to move, they were going to look for houses.
Dean Baker:
I think a lot of people will do those things and for better or worse, that's something you can actually do with social distance. I could go and buy a car and the car dealer, we don't have to shake hands. We could keep our... So long and short, I don't mean to make a joke of that, but I think there'll be a lot of demand for some pent up items and also probably a lot of people are going to say, hey, we've been sitting in our house for two months, we haven't been able to do anything. Let's go to the store, this and that.
Dean Baker:
One of the points, again, people are overestimating how poor people are going to come out. Again, I don't want to be cynical or cryptic or anything or celebratory. But the reality is, if you look at those numbers I put up before, a lot of people are working, they're getting their normal paychecks, they got $1,200 from the government for a two month period or whatever, a lot of people are unemployed, they might be getting unemployment benefits that were more than what they got when they were working. And they got $1,200 on top of that.
Dean Baker:
So this isn't to say everyone's going to come out great, but I think you are going to have a lot of people who have a fair amount of money to spend, and in many cases, are probably going to be anxious to spend it. Again, a lot of people will be nervous, people with health conditions, older people, but a lot of people, my guess is they're going to be looking to go out and spend money, which is, the point I make in number five that you're likely to see a story where you have a lot of businesses that aren't able to meet the demand.
Dean Baker:
So think of a restaurant trying to operate. And again, let's assume that there's some common sense here, that they're trying to maintain some social distance. Well, they're not going to see crowds at every table, they're not going to have a table of 12 people. What they're going to do is maybe have two people, four people at the table, presumably people know each other and are willing to take that chance with each other, and then they'll separate them. The next table is going to be empty.
Dean Baker:
So they're not going to have the same capacity. And of course, a lot of businesses aren't going to be up and running right away. I think you're going to have a lot of shortages of capacity, and that's number six here, that we're likely to see some amount of inflation.
Dean Baker:
Again, I don't think any of this is terrible. So restaurant meals will go up no one's going to like that. But the point is that I've had a number of people saying, oh, we're going to see deflation. We're going to see the Great Recession, deflationary spiral. I don't think that's likely to be the story at all. I actually think that we'll have a lot of situations where capacity is really stretched, and that will lead to price increases. And again, some inflation, I'm not an inflation hawk, I'm not going to say, oh, no, end of the world, but I'm just saying that's something that we should expect to see.
Dean Baker:
The last point, the economy, by the end of the year, I think it's reasonable, I think will be most of the way back. What does that mean? Well, I was giving you a moment that we were going to see a fall off of maybe 30% in the second quarter, that's an annual rate. It's not actually falling 30%, but I think we're likely to take back most of that ground in the third and fourth quarter.
Dean Baker:
Now again, big question marks there. Are we going to have the virus reasonably well contained? I don't know that. I'm hoping we do. Also, treatments, again, people have emphasized the vaccine, which of course would be wonderful. But if we have effective treatments and apparently one of them, Remdesivir, Gilead, had originally explored that as an Ebola drug but apparently, we've had success with that.
Dean Baker:
If we can have successful treatments, again, we'd like a 100% cure, but if we have 80% cures, that's pretty good. And probably what that means is we'd be willing to take a lot more risk than where we are today, where there is no effective treatment.
Dean Baker:
But what I'm saying is, I think it's reasonable, I think we'll make back most of the lost ground by the end of the year, that's not a great economy story, because they're probably still looking at a story where we have probably high single digit unemployment, which is really, really bad. I don't mean to say we're going to be in great shape at the end of the year. But my expectation is barring really bad outcomes, in terms of opening prematurely and another huge spread, that we will get back to something that we might consider a more normal economy, still a very bad economy, but a more normal economy.
Dean Baker:
Okay, changes that will be lasting. Again, maybe I'm getting old and cynical, but I just think back to prior catastrophes, the September 11th terrorist attack, I remember all of these people making grand pronouncements how everything was going to be different. Someone decided that irony was dead. I can't remember who that person was, which is probably good because they were wrong.
Dean Baker:
In any case, so people are prone to make grand pronouncements, and in the 2008, 2009 downturn, again, there was expectations that things would be hugely different, finance would never be the same, this and that. It really didn't pan out that way. I wish I could say it did. But the reality was finance, after, certainly today, doesn't look all that different than it did say in 2006, 2007, before the crisis.
Dean Baker:
So the predictions for grand changes, I think tend to be overdone. What I've listed here are trends that I think have been accelerated. They were preexisting trends before the crisis. But they've been accelerated and likely by a very large amount, as a result of the crisis.
Dean Baker:
Telecommuting is just obvious. We have tens of millions of people telecommuting now. It did happen before, of course, some people were able to do it and it tended to be a more privileged thing. So it tended to be more educated, higher paid workers who were able to telecommute rather than say blue collar workers, and obviously, some jobs, you can't clean the bathrooms, telecommuting. Some jobs just aren't going to lend themselves to that.
Dean Baker:
But I think we will see many, many more people telecommuting after this crisis than were before, for the simple reason that they did do it. And people were able to continue to do their work without coming into the office, it's going to be hard to tell them, okay, you have to come in.
Dean Baker:
I'm going to say I think that's a really, really great thing because why do we want people to have to go in and commute every day? It's a pain for them. People often take an hour each way. You have traffic jams, of course, from the standpoint of global warming, it's terrible, because they're burning gasoline that there's no reason to, and you create a traffic jam, so everyone uses more gasoline. So if we have more telecommuting, that's a really great thing to my view.
Dean Baker:
Now one part of it some people may not say is great, I guess I have mixed feelings on it myself. I did a class at the University of Utah, my last class for this semester, I did it remotely. I did it from here. I think you're going to see more online classes, which again, on the one hand, is convenient for people, it'll be cheaper. The other hand, my time at Swarthmore is incredibly valuable, and I don't think it would have been the same thing if I were sitting on my computer, listening to a professor speak from 3,000 miles away.
Dean Baker:
So I have mixed feelings on that, but I just think the reality is, we will see more classes done remotely, which means less in person contact. I think that'd be a loss, but obviously a gain for many people as well. So a mixed story, but that's just I think going to be the reality of this.
Dean Baker:
Online shopping. Again, orders for Amazon are just going through the roof. Other online retailers, again, seeing massive increase in demand. Obviously, that's in large part because people don't want to go to the stores and risk getting a virus. A lot of stores of course are shut, but even a lot of food items, in principle, you can get at a local supermarket, people would rather get that online and avoid taking the risk of person to person contact.
Dean Baker:
Online teaching, I'd forgotten, I guess I had that as a separate item here. But in any case, again, just making that same point that we're likely to see a lot more online teaching. And again, mixed story, more convenient for people, energy efficient, so good parts of it. But again, I think insofar as students don't have the direct in person contact with a professor, I do think that's a loss.
Dean Baker:
The last thing I'll say is something that's again not my area of expertise. But I think it's kind of obvious that China's influence in the world has expanded enormously, by the standard measure of GDP, purchasing power parity. China's already like one third larger, its economy is one third larger than the US economy. And it's growing more rapidly, it has been growing more rapidly. I expect it to continue to grow, or not just I expect, the projections from the International Monetary Fund and basically everyone I've ever seen, projects that China will continue to grow much more rapidly than the US. And by the end of this decade, it's likely to be twice the size of the US economy.
Dean Baker:
So the US had obviously a legacy that we were at the forefront of international institutions like NATO. We're at the forefront of creating the United Nations and the United Nations institutions, like the World Health Organization. For better or worse, I think our influence in all those areas, it's just plummeting.
Dean Baker:
And partly that's designed, again, Donald Trump makes no bones about this, he doesn't want the US to play that role in the world. He wants the US to be for itself or whatever, America first. That's his line. And China's obviously grown rapidly and has acted, obviously, sometimes for better, sometimes for worse, but they've moved in aggressively.
Dean Baker:
I think coming out of this, China is going to have much more influence relative to the US and that gap is going to grow. And certainly, obviously, China was in some sense responsible. The virus originated there. How much you want to blame them, people could make up their own mind, but in any case, originated there.
Dean Baker:
But in the wake of that, they did effectively contain it very quickly. In that sense, do everything they did in the sense that they're much more authoritarian in their dealings with their own people. I'm not going to say we necessarily want to replicate everything they did, but they did effectively contain it.
Dean Baker:
And then the reality is that they are the ones who are making protective gear. They're making respirators, they're making drugs available to the world. And that has to be, I don't think anyone's missing that. I'll just put it that way, so they're the ones in a position to lend aid to the world. We're the receivers, which again, we should all be happy that we could get protective masks from anywhere, we can get them, the other items we need. But needless to say, if you're the one getting aid, you have much less say in the way things get done, rather than the one who's giving it.
Dean Baker:
Okay, so just to conclude, I'll just say an awful lot when we try to think, okay, what are things going to look like middle of April 2020, '21, an awful lot will depend on the government's response. So will we get enough money to state and local governments, so that they can keep operating, keep workers employed, pay their bills? That's going to be a really huge deal.
Dean Baker:
And at this point, I don't think anyone could say they know for certain that they will get that money. So if they don't get that money, that's of course horrible for the state and local governments. Also, really bad for the economy, because if they make all these cutbacks, if they lay off a lot of workers, cut back a lot of their payments, that means less demand in the economy, there'll be a slower recovery and higher unemployment.
Dean Baker:
The other big uncertainty are of course is, again, I'm not going to try and predict the path of the virus, the path of our medicines to treat it or the path of vaccine, but that will be huge. So if we could successfully come up with treatments, again, a vaccine even in the best of all worlds, as I understand it, we aren't going to be looking to one for at least a year out, more likely 18 months.
Dean Baker:
But if we can come up with effective treatments, that will be huge in terms of allowing us to reopen with comfort, because if we know that, even in the event we do get the virus that odds are it can be treated and it won't be a deadly disease, that will make people much more willing to go about their normal life.
Dean Baker:
I'll stop with that, and see if we have some questions here.
Laura Markowitz:
Thank you so much doing Dean. Wow, and thank you everyone for your questions. They're flying in like crazy. Basically, Dean, what everyone would like would be for you to be a seer and tell us, when is the market going to recover? What is it going to do to the sports industry, the oil industry, air travel, healthcare, education, higher education?
Laura Markowitz:
So we have obviously some anxiety that people are feeling and they'd like you to know the answers right now.
Dean Baker:
Well, let me take the easiest one, the stock market. I can't tell you anything. Let me just say a couple things on the stock market. Some people, certainly our president has been treating the stock market as this all encompassing measure of the economy. It's not only not all encompassing, it's not even designed to measure the economy. I'm just giving you the textbook. So this isn't Dean Baker's crazy flipping view of the stock market, in principle, stock market is the value of future corporate profits.
Dean Baker:
So, again, it doesn't measure them perfectly, because no one knows the future perfectly. But in principle, if we see the stock market goes up by 5% next week, that's because investors in the stock market think that future corporate profits will be 5% higher. Now, that could be a good thing for all of us. If we go, oh, the economy's going to be growing rapidly and corporations will be gaining their shares. So we could say, okay, well, that's good.
Dean Baker:
But on the other hand, it might be the case that corporate profits are going to be higher, because we just gave them a huge handout in the bailout package. That's not good for most of us. That's good for people who have a lot of stock.
Dean Baker:
If the stock market falls, and I have money in the stock market, I'm semi-retired. So I'm not happy to see that, for that reason, but the reality is, I can't get too upset when the stock market's falling. I should also point out, again, I have a lot of friends going, what am I going to do? The market is down.
Dean Baker:
I took a look at it, even at its absolute blow, back I forget, it's like two weeks ago, three weeks ago before the big rallies, it was still about 17% higher than it was five years ago. That's not a great return, but that's not horrible. So basically, what we had was we had an extraordinary run up in the stock market. It gave up some of that ground. And obviously people were unhappy about losing money that they thought they had, but we have much bigger tragedies to worry about. I'll just put it that way.
Dean Baker:
Now, in terms of some of the other industries, again, a lot will depend on how effective we can develop treatments. But some of this, if we just think, and other countries are going to do it, and hopefully we'll learn from them, they might learn from us. But there's a lot of things you could do that reduce the risk, some of them fairly simple.
Dean Baker:
I'm sure people will come up with more complicated things that I wouldn't know about. But if you have temperature taking, if you just take people's temperature, ask them as they get, suppose everyone goes into an airport, they have to have a forehead temperature check, and they're asked, how are you feeling? Have you had any health problems? Have you been in contact with anyone that's been diagnosed for it, people might lie. I understand that.
Dean Baker:
But you could drastically reduce the risk that way. Then, if you get on a plane, maintain social distancing. So one person per row of seats and maybe the row in front of them and the row behind them is empty. Well, that would be really expensive, because you will be flying planes that are two thirds, three quarters empty. But we might have to do that at first until we have better control.
Dean Baker:
But that's the sort of thing I think we could do. I was mentioning with restaurants, if you have people at every other table, you can do a decent job maintaining social distancing. We're having the summer come up. So a lot of places, outdoor seating, well, that should be good, that should reduce the risk.
Dean Baker:
So there's things we could do that will reduce the risk, it won't make it zero. But I think for most people, they would be willing to take that risk that you could sit at a table, there's someone two tables over, most likely you won't get it, even if they happen to be infected. And again, even at the restaurant, anywhere you go into, they should be doing at least some basic temperature check, questioning, are you feeling healthy, this and that.
Dean Baker:
And those are things we can be prepared to do fairly quickly. So you do have states that are going to begin to end their shutdowns May 1st, hopefully they'll be prepared to take these precautions. So at least they could reduce the likelihood that you'll have rapid spread.
Dean Baker:
Now, when you get to things like concerts, big sporting events or a football game with 80,000 people, I'd be very surprised if we're prepared to do that this year. Now, maybe you could have a football game where the teams could play, it can be shown on television, and you have very scattered seating. You have people come in in groups of two and four, and they're scattered throughout a stadium. So no one's right next to each other. You could probably do something like that.
Dean Baker:
But absent some very effective treatment, and/or very widespread testing and tracing, I can't imagine you're going to let 100,000 people into a football stadium, that would just be a nightmare.
Laura Markowitz:
I can't even imagine it. A lot of listeners here, attendees have asked this question in various forms, which is what kind of toll is this recovery package going to take on our national debt? And how will we pay it back?
Dean Baker:
Yeah, that's a great question, because a lot of people are raising that and I had fun in my Beat the Press blog on Washington Post column, not column, news article that was saying how this is going to be this really big issue.
Dean Baker:
I think the concerns on the debt are hugely misplaced. So, just very quickly, a deficit can be a big problem if it's pushing the economy beyond its capacity. That one, for practical purposes, being the story we're facing today. As I said, there can be shortages, because we can't have shortages of capacity in particular areas. So that's some of an issue but it doesn't make sense not to run the deficit, meaning giving people the money they need to pay their food bills, to pay their rent. That wouldn't make sense.
Dean Baker:
But the issue of a debt, so we're going to add $2 trillion, $3 trillion, $4 trillion, I don't know exactly how much it's going to be when we're all over, but it could well be in the order of 4 trillion. So we're going to add $4 trillion, about 20% of GDP to the debt. It could even be more I should say, but let's just pick that number.
Dean Baker:
So what does that mean? Well, we have to pay interest on the debt. Well, the interest we've been paying is actually very low. So even though the debt to GDP ratio right now is extraordinarily high, you'd have to go back to right after World War Two to have a period where the debt to GDP ratio is as high as it is today. The amount of interest relative to the economy that we're paying is actually relatively low.
Dean Baker:
So we're paying around 1%, 1.5% GDP in interest on the debt, we're paying about 3%, 3.5% of GDP and interest on the debt in the '90s. So we faced a much bigger interest burden then. And of course, the '90s were a pretty prosperous decade, at least the second half of it.
Dean Baker:
So my takeaway in that is, we don't really have to worry about the debt. I think this is kind of a false concern. We always hear these stories. We're going to be like Greece, and the reason Greece had such a huge problem was Greece doesn't have its own currency. It's in the Eurozone, it has to go to the European Central Bank and they control its ability to issue debt.
Dean Baker:
Whereas in the case of the United States, at the end of the day, the Federal Reserve Board could just buy up our debt, which is exactly what it's doing today. Now, that can't be an inflationary story. You can't have inflation. But that's again, getting back to the story where we have an economy that's operating above its capacity.
Dean Baker:
So that's how you get the Zimbabwe story, where you have inflation, hyperinflation of 1 million percent a year or whatever, it ended up being there. They were clearly operating beyond their capacity. So you could tell a story where we could get there, but that's nothing like where we are today or really in any foreseeable future. So barring basically an economic collapse, we don't really have to worry about that.
Dean Baker:
I'll just throw in one more thing, that it angers me because economists don't talk about this, and it really is just a matter of logic. Paying for things, direct payments from the government are only one way in which the government pays for services. And the other obvious large way it does is providing patent and copyright monopolies.
Dean Baker:
And these are really big deals. And I say these to economists, they start looking at me blank faced, well, we're going to spend $500 billion this year on prescription drugs, it's about 2.3%, 2.4% GDP. If we got rid of patents and other monopolies like that, that the government has granted, we would be paying less than 100 billion.
Dean Baker:
So that difference is $400 billion. It's about 1.8% GDP. That's more than what we pay in the interest on the debt this year. So that's a huge amount of money. No one pays attention to that when they talk about the debt. But if we want to be serious about what sort of obligations we're creating for the future, you have to look at patent and copyright monopoly rents. And those in fact, are much, much larger than any plausible story of interest on the debt.
Dean Baker:
So until people start paying attention to that, I just can't take them too seriously when they start saying, oh, this huge burden of the debt. It's just not a serious story.
Laura Markowitz:
Thank you. Wow. Interesting. You've convinced me not to worry so much about the debt. Thank you. I'll sleep better at night.
Dean Baker:
We have better things to worry about or worse things, however you want to put it.
Laura Markowitz:
Dimitri Nada, I hope I pronounced that right, class of '02 asked early on, what are the chances of global competition for food? And also later, he asked the implications for housing prices and rents, short term and long term?
Dean Baker:
Yeah, those are really good questions. So question is, are we going to have a breakdown of our food supplies, so that they'll be worldwide shortages? Now, obviously a lot of people are going hungry already, and that's not new and not good, but not new.
Dean Baker:
But will we have breakdowns in our food chains, so that we don't have enough food or Europe doesn't and we're fighting with each other to try and get the food we need? I don't think that's impossible. I think it's unlikely. One of the, to my mind, scandals here is that we haven't done more to try and protect workers in the supply chain.
Dean Baker:
So particularly, I'm thinking of food processing plants. I think it's a pork processing plant, Smithfield in South Dakota, that shut down, because it's only 250, 300 cases. I'm not sure how many people work there exactly. But in any case, it's I'm sure a very high percentage. And there have been some other plants. There was a plant in Iowa that shut down about two weeks ago, that was a pork processing plant.
Dean Baker:
So we should be taking precautions, making sure these people have certainly some basic protective equipment, making sure there's ventilation. I don't think that's been done. I can't say for certain, clearly not adequately, if you have those sorts of outbreaks.
Dean Baker:
That's the thing that worries me most is that we could be seeing more instances like that, and then major facilities shutting down. You don't want to see those people getting sick. But obviously, if we don't have processing plants to bring us our food, make our food, we will have food shortages. So we aren't there yet. And hopefully we will never get there. But that would be the biggest risk that I would see.
Dean Baker:
And what was the second half of that question?
Laura Markowitz:
About housing prices and rent.
Dean Baker:
Housing, yeah, I definitely want to talk about it, it's a really, really important point. The telecommuting might have a very large impact on housing. I've been a big fan of Detroit, not just because I went to school in Michigan, but you've had this flood of money, basically, money, good paying jobs in the very major metropolis. So this is New York City, Boston, San Francisco, Los Angeles, and much of the rest of the country has been suffering.
Dean Baker:
Well, Detroit, of course, went bankrupt a few years back, and it's had this mini boom where, I'm forgetting the guy's name, but he's one of these billionaires from Quicken Loans. And he loves to make money. So I'm not saying he's doing this out of just altruism, but he is trying to establish that as a real business hub with some success.
Dean Baker:
So he's brought in a number of new businesses, taking advantage of the fact that rents are really cheap there relative to, say, the Bay Area, if you're looking at a tech company. And of course, people could buy a house, I have friends there sending me house listings in areas that look to be... they were very middle class areas when I was there back in the '80s. And they'd have like a nice three bedroom brick house with a yard and everything for $50,000. In the Bay Area, that would be probably $1 million.
Dean Baker:
So anyhow, my hope was that you could see places like Detroit get revitalized because there'd be such an advantage in lower cost rents, low cost housing. And if we have widespread telecommuting, that will likely accelerate. I would consider that a really great thing.
Dean Baker:
Now, the downside, anyone who owns a condo in New York, New York City or San Francisco, that might go down in value a lot if that happens. It means other people can come in, it'll be a lot cheaper. But I think that's a plausible story. So that would be a case of continuing a trend that at least was insipidly already there, but obviously would be accelerated enormously.
Laura Markowitz:
Dean, thank you. This is great. This is much more optimistic than I expected.
Dean Baker:
I'm usually not the big optimist. I have a friend that says I could find the cloud in any silver lining.
Laura Markowitz:
I hope you're right. I'm sorry to... We have more than 350 people on this right now and have lots of questions. And unfortunately, we've just run out of time. But just thank you so much for all your time.
Laura Markowitz:
And just to remind everyone that this was recorded. So if you wanted to go back and see, review, it will be available on the Swarthmore College website under Swat talks, probably give it a week or two. And before I sign off, Dean, do you have any quick last words?
Dean Baker:
Well, I just hope everyone stays safe. It's a tough time for all of us. I feel very lucky I'm in southern Utah in a relatively rural area, so we could stretch out and everything. I know a lot of people aren't that lucky. But I hope people are able to get through this. It's a tough time and that they and their families stay safe.
Laura Markowitz:
I agree. And I second that and echo that, and just on behalf of the Alumni Council, just thank you all for participating. Even though we can't see you, I've been hearing your wonderful questions and concerns and coming from people from so many years and so many places in the world, and just having this feeling of community that we come together. Although we have diverse ideas, probably diverse economic perspectives, that we all care very much about the world we live in, and hope that everybody gets through this, copes as we're getting through and gets through this safely.
Laura Markowitz:
So on that note, I just wish you all a very good night and thank you again. Oh, there's going to be one more Swat talk coming up this Wednesday with biology professor Amy Vollmer. So maybe we'll see you then. Thank you very much, Dean. Thanks again.
Dean Baker:
Thanks, Lauren. Thanks, Lisa.
Laura Markowitz:
Take care.
Dean Baker:
Bye.
