TCF Senior Fellow Andrew Stettner interviewed Jeff Madrick, director of the Bernard L. Schwartz Rediscovering Government Initiative, about a coronavirus spurred recession and economic stimulus.
Andrew Stettner: Jeff, why don’t you start by talking about why, in your opinion, an economic recession looks so inevitable?
Jeff Madrick: I think we should step back a moment. Just two weeks ago, you could hardly find a professional economist, maybe you couldn’t find one at all, who would dare to forecast that a recession was coming. Within those two weeks, many prominent, well-known, and mainstream economists were now forecasting just that—a very sharp downturn in the second quarter at the very least. What I mean by a sharp downturn is a fall in demand for goods and services in the economy. In other words, negative growth.
Stettner: What will the impact of a recession be?
Madrick: This recession will likely be very steep. We’ll have two catastrophes going on simultaneously, but they are interconnected. A new model from the Imperial College in London, which I think the Trump administration had started to use on Monday, suggested that the number of deaths could reach hundreds of thousands. That’s added to the sense the economy will be undermined even more.
What happens to the economy is that incomes fall for almost everyone. People think it’s just the front line of workers—the gig workers who have no protections, don’t work for big companies, the small business entrepreneurs who also don’t have capital to fall back on, the travel industry and restaurants in particular. Airlines are now probably going to get a bailout.
There are a few general categories that will be hurt: workers, business, and housing. Workers will lose jobs, businesses will go under and default on loans, which in turn makes it very difficult for the financial industry, and the banks, who then also may go under. And then finally, housing. People who lose jobs will not be able to pay their mortgages, will not be able to pay their rent, and may get evicted. So we need policies to help all three of those groups.
Finally we need policies to invest in health care. We are inadequately prepared in terms of masks, ventilators, protective equipment, and so forth, not to mention hospital beds.
Stettner: Let me ask this follow-up then. I think a lot of people are thinking, well, this is temporary. And this is something that Lawrence Kudlow has said, as soon as we mitigate the virus, the economy will bounce back up. I’ve heard some people say we’ll have a v-shaped recovery. So won’t the economy just bounce back?
Madrick: Well, Lawrence Kudlow has been saying that about economies, at least when they’re under Republican presidents, many times in the past and has been wrong. And it’s quite amazing he has any credibility at all.
But no, I don’t think it will bounce right back, because recessions do damage. People will have pent-up demand, but if they lose jobs, they lose savings. They may not be able to get that job back. They don’t get trained for another job. They don’t automatically take another job. So incomes will not suddenly bounce back.
If businesses go under, they’re not going to come back very easily. If business doesn’t pay off loans, banks may go under, or at least have to curtail their lending operations. They will make borrowing terms more difficult—that is to say, raise interest rates and payback terms. And people will be thrown out of their houses. All these factors interrelate and lead to a further downward spiral. The question is whether the federal government will respond adequately.
Stettner: In terms of the policy responses, should we be focusing immediately on those who are directly impacted by the virus, such as airlines, as you mentioned, and also small businesses such as restaurants and bars that have been closed? Or should we wait for a broader stimulus package until we deal with initial business victims of the coronavirus?
Madrick: I think we must do both—focus policies on victims, and support general demand. I think we need micro-policies for the specific industries who are hurt first and worst. But we need a general policy that makes sure the recession does not spread to everyone. And this is the thing people—even some economists—often don’t understand about recessions. They spread out. Everybody basically gets caught up in a recession. People may lose travel jobs and restaurant jobs, but eventually that will spread to all kinds of service jobs, and manufacturing jobs for that matter. So we need a general policy that mitigates recession and prevents a rapid and deep fall in demand for goods and services in the country. Which would mean much higher unemployment, many more defaults on loans, a fragile banking industry, inadequate investment in health, and people losing their homes, pure and simple.
Stettner: How will the poor have a harder time now, and further on if this problem lasts?
Madrick: Well, I think one of the examples of why a nation like ours cannot tolerate high levels of poverty becomes tragically obvious at a time like this. Take poor children. We have the highest child poverty rate in the rich world. They are not going to be able to go to school. One of the most humane policies we have are school lunches and school breakfasts, paid at the federal level and to some extent at the state level. Children, especially poor children, who go to public schools often depend mostly on the food they get in school for their nutritional needs. Now school districts and localities have to go out of their way and figure out how to get food to these kids.
Also what are the poor kids going to do at home instead of going to school? Middle class kids probably have opportunities. They have backyards to play in. parents may be able to spend time with them. Typically the parents of poor kids do not have spare time, and can’t fill in the educational gaps. Poor kids are going to suffer because they’re not in school. Research tells us that times gaps in teaching especially have a larger impact on the cognitive abilities of poor kids.
It’s not only the kids, of course. Many of the poor have full-times jobs they may now lose. Others will lose jobs and fall into poverty. The Trump administration has raised work requirements for food stamps. Other welfare policies are inadequate. The Earned Income Tax Credit and the Child Tax Cut depend on how much money parents are earning. So the horizon for the poor is fewer jobs, lower wages, more layoffs, and a very skimpy social net.
Stettner: Let’s talk about how policymakers should be dealing with the crisis. How should Congress think about the size of the economic stimulus needed?
Madrick: My attitude is we probably need a trillion dollars, just on the basis of what we needed in the 2009 stimulus of President Obama. The stimulus equivalent then was about 5 percent of GDP. This recession may even be steeper than the 2008–09 recession, so we may need more. Five percent of GDP today would be a trillion dollars, which would be my benchmark. That’s how we should judge it.
I don’t want readers to think however, that it’s a simplistic filling of this hole. Keynesian economics—based on the work of John Maynard Keynes in the 1930s—suggested that by filling up that hole, we create more investment. And investment is what drives growth. That’s how to think about the valuer of government spending.
Stettner: And you do see today, even in just the last few hours, people are starting to talk about the need for a trillion dollar stimulus, and more. So I think people are coming to your way of thinking.
Madrick: It’s amazing that it took that long. I think the Democrats’ $100 billion plan that the House passed was actually a really weak plan, really inadequate, especially after it was watered down after counterattacks by the Trump administration. They needed a much more robust plan, and we can talk about some of what could have been in that plan.
Stettner: They’re already talking about that as the second package, because there was an initial bill. What are the elements that should be part of an economic stimulus?
Madrick: A trillion-dollar Trump plan that may include cash payments to individuals is in the works. But not all of the trillion dollars is spending. I think the House will have to fill in Trump gaps. Expanding and deepening unemployment insurance is a first step, but it may not be enough in this kind of climate. We have to expand it imaginatively to those without permanent jobs and increase it as a portion of wages. It could be that we can devise policies where wages are guaranteed for a while, or companies who maintain their wages and don’t fire their workers are given tax credits or other benefits. There may be an imaginative way to do that.
So I think, as I say, the first group that needs protection are workers themselves. And I should say this, another aspect of protecting workers and a very important one is expansion of paid sick leave. The Democrats put forth a weak package on expansion of paid sick leave that required small businesses to expand paid sick leave and did not require those with 500 or more workers to provide paid sick leave. That just has to be changed. Now Republicans in the Senate are pushing back even on that. We have to provide paid sick leave to everyone.
The second area I think is business. We do have to create a window of some kind as we’ve done in the past where small and even large businesses can borrow money to pay off their bank loans and other obligations without going under in the next few months.
And the third issue is demanding forbearance by banks on mortgage collections and forbearance by landlords on rent collections, and other loans like car loans. We have to allow room for people to extend their payments, extend the time they can pay back. And that’s a very big issue. And finally, of course, and the Trump administration has moved in this direction to some degree, we have to supply substantial funds to the medical industry to resupply the obvious areas.
Stettner: There is still talk about a payroll tax cut, or tax cuts. What do you think about that approach?
Madrick: I think it’s pretty close to a terrible idea. It’s been a favorite of Republicans and some big businesses for years. The Trump administration looked like they were going to propose a one year holiday on payroll taxes. There are several problems. One is they don’t provide immediate stimulus. They’re drawn out over six months or a year depending on the length of the holiday. So you don’t get spending into the economy very quickly. Another problem is that they are severely unequal. People who make a decent living will get a far higher benefit than those near the bottom of the wage spectrum who pay little in social securities taxes and therefore, if you eliminate them, it doesn’t matter. And third, I should note payroll taxes are the foundation of Social Security, and if we eliminate a full year it’s a pathway to underfunding Social Security in the future. The Republicans, and some Democrats for that matter, love tax cuts. We don’t need a tax cut right now. We need serious spending, we need to be able to get money into the economy.
One thing I think is not a bad idea is cutting checks of $1,000 per adult plus $500 per child to get the cash spigot going right away, as suggested by Jason Furman. Some senators are recommending even more, such as Cory Booker and Sherrod Brown, who are talking about $4,500 per person including children. Truth is, $1,000 is not very much. But unemployment insurance is also a critically important way to target help to workers, and even those long out of work, without giving money to the rich. We would otherwise be sending $1,000 to some very well-off people.
Stettner: Let’s go on to one more question. What can the Fed do to help with this situation and the balance of monetary action and fiscal action?
Madrick: There’s no real advantage to having the Fed act in order to create demand for goods and services. They just can’t do it at this level of interest rates. Interest rates are too low. So if you cut interest rates on borrowing, people are just not going to borrow. There is talk of a plan to let business use Fed money to meet payrolls, but I am not sure how this would work.
What the Fed is trying to do is make sure there’s not a financial failure. That the commercial paper market, that is short term loans to business, and longer-term corporate debt, doesn’t dry up and banks can’t keep making loans any longer. There is an enormous amount of corporate debt right now, and much of it will become increasingly risky as business revenue falls. As a reminder, the 2008 recession was caused by financial failure. All the banks at that time—it’s hard to envision in retrospect, because it really was so extreme—but those banks and other financial institutions made so many loans to people who could not afford to pay off their loans. Once the banks weren’t getting their money from these homebuyers, it affected all aspects of their business. Companies such as Lehman and Bear-Stearns went under. Merrill Lynch almost went under. Morgan Stanley was near death. And then the big banks—Chase, Citi, Morgan—their capital was reduced sharply. That’s what led to the extreme collapse in demand back then.
The Fed is worried something like that might happen this time around because they’re seeing this panic, and they want to make sure financial markets don’t dry up. That’s a different issue than stimulating the economy. And I’m just not sure Donald Trump at all understands that. I think he thought once the Fed cut rates to zero and put in whatever it was—$100 billion, or $500 billion—into the financial system, everything would be fine. My impression is that he and many others did not understand the nature of recession and the dependence on spending by individuals and by business and making investment.
Really, this should be an opportunity for the Democrats—and Republicans, for that matter, if they so choose—to put through an aggressive infrastructure investment plan, because we need demand badly and it would be nice to get demand in so constructive a way.
Ancillary to that, is that we don’t have to worry about the deficit at this point. Because if we don’t stimulate in a big way, the deficit will get even worse. Demand will slow down, people will pay far less in taxes as we go into a recession. If we mitigate a recession, they’ll pay more and mitigate the deficit.
But finally, I think the Democrats in particular should be thinking about social policy after Trump. It’s time to start a real New Deal, with proper social benefits for people who need them, including the poor. With public health, that could be Obamacare plus a public option on the way to single payer, or it could be Medicare for All, which I think would be harder to implement quickly. So it’s time for a real New Deal with real social protections and investments, and it can start now.