How Long Will It Take for the Economy to Recover?

Author: Spencer Bokat-Lindell
Source: The New York Times
Date: May 21, 2020

Paul Krugman thinks it could be quick. But he also thinks Paul Krugman could be wrong.`
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An additional 2.4 million U.S. workers filed for unemployment last week, the government reported Thursday, bringing the total to 38.6 million in nine weeks and providing more evidence — in case there was any doubt — that the economy is plunging ever deeper into crisis. Of the path to recovery, Nicholas Bloom, an economist at Stanford University, told The Times, “I think we’re in for a very long haul.”
But not everyone is despairing of the country’s economic future. Last week, my colleague Paul Krugman, a Times columnist and Nobel Prize-winning economist, expressed some guarded optimism in his newsletter: “If we were patient and self-disciplined,” he wrote, “we probably could eventually see rapid recovery.”
I got in touch with Mr. Krugman to talk about why he’s relatively hopeful, how long a recovery could take and whether he might be wrong.
S.B.L.: You’ve written that after the Great Recession, we had an extended “jobless recovery,” in which G.D.P. rebounded but jobs took a long time to come back. Could you explain why you think this downturn might be different?
P.K.: The Great Recession was brought on by fundamental overreach. There were underlying problems in the economy. There was too much debt, there was overbuilding of housing. We just were overextended, and that was hard to cure. It took a long time to work off those things.
What’s just happened now — not to say that everything was fine, but there was nothing like the housing bubble or the extraordinarily high levels of household debt we had in 2008 — this was just an act of God, almost, that forced us to shut down a large part of the economy. So you don’t have the kind of underlying drag from past excesses that we had last time.
But if the virus hangs around for a long time, that could mean a slow recovery. And if we mishandle this badly enough, we could create structural problems that retard recovery. If the pandemic were to lift in the next couple of months, though, I don’t see any real reason we couldn’t have a quite fast recovery
S.B.L.: How realistic do you think it is that epidemiological conditions will have gotten better, rather than worse, in a couple of months?
P.K.: I was more hopeful a month ago than I am now. What we’ve found is that social distancing works. If you look at the curve in New York, compared with where we were just a few weeks ago and where people feared we might go, death rates and hospitalization rates are way down.
But if the virus is still out there, that sets the stage for recovery only if you get the infection down to a low level, and then you have testing, tracing and isolating, as in South Korea. We seem to be receding from that goal. We could be getting it under control, but we don’t seem to be.
Let me put it this way: Nothing I say about the fundamental economics saves us if we have really, really bad health care policy.
S.B.L.: Many economists, including the Federal Reserve chair, Jerome Powell, have predicted that a full recovery may not be possible until the country develops herd immunity, whether by way of a vaccine or enough people getting infected. That would probably bring us into 2021, if not later. Do you disagree with that assumption?
P.K.: Full recovery is a tough standard. Absent a vaccine or herd immunity, there will probably still be some drag. We may have an interesting situation where the economy is growing quite rapidly, starting later this year or early next year, but we’re so far down that rapid growth still doesn’t get us back to where we started.
And if the government says, “It’s OK, you can go out and shop,” will people actually do it? I’ve been looking at a very imperfect indicator, OpenTable bookings, and it turns out that even in states that have opened, nobody is going out anyway.
Everything hinges on the epidemiology. In the 1918 influenza outbreak, there was a first wave that receded and then a monstrous second wave, and that unfortunately does look like a real possibility for us. If this virus hangs in there, then all my arguments about how the economic scarring from this is not so severe that we can’t recover fast become irrelevant, because we can’t recover fast if the virus is still hanging around.
S.B.L.: Assuming that happens, what are some of the long-term risks you’re concerned about?
P.K.: The first one is if people are ready to go back and shop at their usual businesses, what if those businesses have failed? I’m not going to go back shopping at the Pier 1 right by my Trader Joe’s because there is no Pier 1 anymore. It’s liquidated.
If families have dug into their savings, even when the virus is gone, they might be unable or unwilling to spend because they’re desperate to rebuild a bit of a cash cushion.
And the real big risk I’m concerned about is state and local governments, which unlike the federal government are not allowed to run budget deficits. They’re bleeding revenue and have extra expenses, so they may be forced to cut. One of the really amazing things in this last job report was that we’ve already seen a million jobs lost in state and local governments, which is way more than we lost in the whole of the last slump. And more to come.
All of those things could be managed if you provide enough disaster relief. For some of them, we partly have. After a very rocky start, the unemployment benefits are playing a big role. They’re probably making up something like 75, 80 percent of lost wages. We’re sustaining household finances, but the small-business support has been a disaster. And there’s been no significant aid to state and local governments. So we could be making this into something that will last a long time.
S.B.L.: What’s your most pessimistic prediction for the economy if the timeline for the pandemic is similar to that of the 1918 flu?
P.K.: Then we’re talking about double-digit unemployment for 18 months, which is a depression. Then you start to have really long-term damage. What happens if affluent people stay home, so the economy stays depressed, but less affluent people go out and mingle in crowds and spread the virus? Then we end up with the worst of both worlds: the economy still flat on its back and a second wave of infections.
I think there could be at best a plateau, at worst a second wave, and we’re going to stay depressed — not because of the fundamental economics but because of failure to contain the coronavirus. And we will have a year or more of a depressed economy.
But if we’re taking the 1918 flu as our baseline, the economy did in fact come roaring back. It was nothing like the sustained depressed economy after 2008.
S.B.L.: So you don’t see this downturn rivaling the Great Depression, as some economists have predicted?
P.K.: I don’t think that’s going to happen. If the virus hangs on that long, even if we don’t have a revolution, I suspect people will learn to live with it. Somebody said, if you don’t think Americans can live with the constant threat of mass death, think about school shootings. It’s just become part of the background. It’s a horrible thing to say, but I think that even if we totally mess up the immunological response, the economy will recover a lot faster than it did from the 2008 crisis.
S.B.L.: What’s your most optimistic prediction?
P.K.: We’re not going to have a national policy, but let’s think about the tristate area, which has had a very severe outbreak but has really brought the number of cases down. It’s certainly conceivable that three months from now, New York could look like South Korea. The most optimistic scenario would be that the major hot spots have reached low levels of infection and developed the ability to flood the zone with testing, tracing and isolating when a new cluster appears.
I’ve been taking this relatively sunny point of view, but other people are not. I just read a long, dire warning from Claudia Sahm, who was at the Fed for a long time, and has a very good track record on these things. And she thinks that absent really dramatic new policies, we are headed for a sustained very high-unemployment economy.
She and I have the same forces in mind; she just puts a different weight on them. And I have no high confidence that I’m right.