- Austan Goolsbee, former President Obama's economic advisor, says, "The most important rule in virus economics is that you have to stop the virus before you can do anything about it."
- Goolsbee says that once the virus has been checked, you need to remedy the situation so that nobody starves to death or has to liquidate everything due to a temporary slowdown. He insists that a regular stimulus only takes effect after these steps.
- The economic impact will be worse in the US than in China, as the American economy is more dependent on personal services, according to Goolsbee.
- According to Goolsbee, Trump is not doing well in terms of credibility in dealing with this crisis. When dealing with the great recession, he remembers Paul Volcker, who always said that credibility is the only asset you have during a crisis.
- "We're already in recession," says Goolsbee, "if we allow a short-term downturn … to transform into something more permanent, talk about depression."
- You can find more stories on the Business Insider homepage.
Austan Goolsbee is an economics professor at the Booth School of Business at the University of Chicago and a former business advisor to President Obama. On Tuesday, Goolsbee spoke to Sara Silverstein from Business Insider about the economic consequences of the novel outbreak of the corona virus. A transcript of the video follows.
Sara Silverstein: We stream live from my living room for business insiders and I'm thrilled to have Austan Goolsbee here on Skype.
Austan is the former economic advisor to President Obama and currently an economics professor at the Chicago Booth.
Austan, what is the best possible outcome that we can expect given the economic situation?
Austan Goolsbee: Well, first you set up there much more elegantly than here, so I wanted to tell you that I admire that. I think the best scenario is a sharp, intense downturn in the economy that only lasts for a short time that we can get the virus under control, infection rates slow down, and then we can return to do something like that we did before.
We would be a little scarred, but the best scenario is that in winter it's like being in the beach town: you climb into the windows and then it gets warm and everyone comes back.
Silverstein: How do we get there? If you could put together a package for Congress, what would it be like? What do you want to see from them to get there?
Goolsbee: Well, I mean, my view is that the number one rule in virus economics is that you have to stop the virus before you can do anything about it.
The number one rule in virus economics is that you have to stop the virus before you can do anything about it
I don't think I fully understand why we don't pull out every stop to slow the spread of the virus. Okay, in the early discussions I tried to emphasize that there are some things that are not traditionally incentive-based, such as paying sick people who don't go to work and paying sick days so they don't go to work . This reduces GDP in the short term, but it is actually good for the economy because anything that slows down the rate of spread of the virus makes us less anxious and helps us get out of the deadlock. We cannot really recover until we are out of the lockdown.
Now I saw the President today after yesterday's discussion in which he seems to be saying, "Well, lockdown is a problem, so maybe we can just cancel the lockdown by Easter." I fear that the number one rule in virus economics will really be missed: you cannot get out of the lockdown unless you have very extensive testing so we know that the only people who are isolated are the people who are sick and if we run into people on the street, we don't get sick from them, or you need to have a vaccine or treatment, or otherwise have the virus under control.
It's like, as I say in the financial crisis, the rule is that you can't do anything until you stop banking. There is nothing you can do here until you stop the health runs. The health runs are people who are currently withdrawing from the economy. I am a little nervous that we will take a long-term or even medium-term path that aggravates the problem and does not improve it.
Silverstein: What kind of things would improve the problem?
Goolsbee: Well, number one, if you control the virus, we are well on the way to returning to where we were before. The reason why people don't spend and get their hairstyles and won't fly on planes is not because they didn't have the money. It is obvious that it was about their fear of the health system. I think it's step one to get some control over the virus.
Step two: I find it misleading that they call this the "stimulus package". You should call it an "aid package" because it aims to do what you have to do next, namely to cover the bills so that no one starves and no one has to liquidate everything, just because of this hopefully temporary slowdown.
Once you've got that over with, you can start getting regular stimuli now, but you can't really stop them and you can't try to do old-fashioned stimuli while the virus is still raging. It doesn't work because you can give people money, but they won't spend the money.
Silverstein: I saw you talk about credibility in a time of crisis. I think you quoted Janet Yellen. How is Trump doing at this booth and what should he do?
Goolsbee: Look, I quoted Paul Volcker at the time, who always told me in the last crisis: "When a crisis begins, the only capital you have is your credibility." From my point of view, I would say that things are not going so well for the President. They start out of the gate, the pandemic begins to rage in China, comes to Korea, comes to Japan, comes to Iran. You can see it in several places. We had at least six to eight weeks to get our test regime up and running. The message was a lot: "No, no, it's not a problem. Don't worry." That set us back.
Silverstein: Do you think our economic impact will be worse than in China?
Goolsbee: I wrote a piece before it really got here The economic impact on the United States will be worse than in China and it was pretty bad in China. The reason why I think that this will be the case and already turns out to be so is that if an outbreak of the same size occurs, all of these personal services, such as transportation, tourism, hair salon, healthcare, all of these things are face to face Face to face getting done, that's a bigger part of our economy than the Chinese economy. So there is every reason to thank for the equally large outbreak that will only have a more negative impact on the US economy.
Silverstein: Guide me through what the Fed did. It seemed like last week, maybe they are using their last bullet to cut rates, but this week it seems You speak of unlimited QE. What do you do? Does it make sense? Should the Fed buy municipal and corporate bonds?
Goolsbee: Okay, the Fed follows the Bernanke and Yellen traditions and unconventional monetary policy.
The Fed can control some interest rates and they lower their interest rates to zero and then say, "Well, what do we do now?" So, for example, they buy mortgages to raise the price of mortgage-backed securities and lower the interest rate that people would have to pay. It is a creative idea. I think that's what you should do. I don't think it will have such a big impact. I think that’s why the market didn’t react more positively.
The Fed tries to pull out all the stops it can pull, but it presses on the proverbial string. You can have an unconventional monetary policy that, for example, lowers long-term mortgage interest rates a bit. They could try to make local government bonds, they could try to do small business, different things.
I just think that monetary policy as a channel stems from my virus economics problem. By the time you control the spread of this virus, any conventional stimulus will be much less effective. If you lower interest rates, you want the business to go out and invest. Will cruise ships buy a new ship because the interest rate is really low? Probably only when we're out of the virus and people come back and do cruises again.
I think the second thing that happens to the Fed is that the Fed somehow drifts into the underworld of fiscal policy. You can see that in this rescue package. From what we've read so far, there will be unlimited or very large credit facilities and they will try to hand it over to the Fed to do so. As long as the executive and the elected officials make the decision about who should be saved and whether the taxpayer wants to be willing, that's fine.
But there is a British central banker, Paul Tucker, who has basically written an entire book on the question of the political legitimacy of central banks. I think there is a second warning for Paul Volcker, "The Fed is doing everything to alleviate this crisis," but in some of these cases they are approaching something that elected officials should do to decide and the American taxpayer and American voters are the ones who decide, so I think there is even a risk to the Fed's reputation if you get too drawn into this middle.
Silverstein: We speak on a very large scale, but on a single scale, business owners have to make very big decisions. What decisions do you hope companies make to keep or stay open, and how do we get them to behave in ways that are optimal for everyone?
Goolsbee: There are some difficult things about this. For one thing, of course, not every company is the same, and there are some absolutely vital, crucial companies that we can't afford to even hiccup, let alone fail.
If you look in particular at the health sector and hospitals, we have to invest money to keep the hospitals liquid. The prospect that hospitals at a time like this when everyone comes in cannot enable them to check and maintain: "Well, do you have insurance? How good is your insurance? Who will pay?" for our corona virus tests? "I believe that the government has to turn on and stop all industries that are critical to the slowdown of the virus.
Okay, then Category Two: As part of our relief, we need to keep the people who have food on the table and be placed in an environment where the virus passes or slows down at such times or where you can return to work. I think the government helping settle the bill so companies keep employees on the payroll is a very good idea.
I think the idea of paid sick leave, as I described it earlier, I think is an important idea. I think money for people who lose their jobs is an important idea.
I also think you want to keep an eye on them all when you do them. If you made unemployment insurance more generous than paying workers, you could create an environment in which companies had an incentive to actually fire their workers, and they would tell them, "Well, you can get a better job by going to The unemployment insurance program ignores: "I think that would be a mistake.
I think if you want to give money to companies that I think are talking about giving billions of dollars to cruise ships, airlines and hotels, you have to be really careful now to set the framework. Who? What? How do you decide that something like cruise ships should get money? That strikes me as strange, because our goal with small and medium-sized companies is to employ these people and try to keep the food on the table.
Cruise ships, we could spend billions to keep them going if no one goes on a cruise. Do we protect the shareholders or debtors of the cruise ships? I'm a little confused without a frame, so I guess whatever comes out of this stimulus package, then all the pressure will be on whoever decides that money outlines the frame. How do you decide who will be saved and who will not?
Silverstein: What is at stake here? What is the worst case if we get it completely wrong?
Goolsbee: Yes, yi, yi. Look, the worst scenario is that we are transforming a short-term, very negative shock, which is not a question. We will not be able to avoid a recession. We are already in a recession. We're going to get unemployment benefits that are terrible. The unemployment rate will rise significantly, okay? Our goal is to reduce unemployment and unemployment benefits to decrease as quickly as possible.
The worst-case scenario or a bad-case scenario, separate from health … Look, there is a worst-case scenario for health that is almost unfathomable: millions of people die, the disease changes in something more deadly cetera.
Only on the economic side, if we allow a short-term downturn, even a sharp one, but if we turn that into something more permanent, then you're talking about depression.
To do this, the employees would first have to be laid off, then the companies fail, then the bank's financing of these companies failed, then the financial system begins to collapse, and we link the downturn from 1929 to & # 39; 32 with the financial crisis of 2008 and we leave the normal business cycle, ie the self-correction mechanism no longer works. Even if the virus passes or we get a vaccine or treatment, the economy cannot return, it is only so low that it cannot recover. That is the worst case.