America has done something extraordinary, perhaps unprecedented. In the face of a looming public health crisis, with potential deaths in the thousands or even millions, we essentially made a collective decision to have ourselves a recession. We’ve shut down a significant portion of our economy, knowing that the result will be businesses going bankrupt, huge job losses and people losing their homes.
The question now is just how bad it’s going to be.
I spoke to a bunch of economists about a situation that seems to be getting worse by the hour. They didn’t have the same answers to every question, but they all agreed that we are looking at a potential economic catastrophe, and how bad it gets depends on decisions the federal government makes in coming days.
My first question was whether this is going to be worse than the Great Recession that began in 2008.
“That is absolutely in the realm of possibility,” said Heidi Shierholz of the Economic Policy Institute. Her colleague Josh Bivens posted an analysis Tuesday using Goldman Sachs projections of 0 percent growth in the first quarter of this year and a 5 percent contraction in the second quarter. It estimated that we will lose 3 million jobs by summer.
But then on Wednesday, JP Morgan forecast that the second quarter contraction would be a stunning 14 percent — worse than the depth of the Great Recession. If they’re right, Shierholz said, it would translate to 7.5 million jobs lost by the summer.
In the Great Recession, about 8 million jobs disappeared. Now some are predicting that the drop in payrolls for April alone could be as high as 5 million.
“Everyone thinks that the single-quarter decline will be bigger than any single quarter in the 2008 recession,” Betsey Stevenson of the University of Michigan, an economic adviser to President Barack Obama, told me.
Jesse Rothstein, an economist at the University of California-Berkeley, was even more pessimistic. “There’s no question it’s worse than 2008-2009," Rothstein said. "The short-term shock is massively worse.”
One of the reasons is that the economy is shutting down so suddenly, which hasn’t happened before. “The closest I can think of is the mobilization for World War II,” Rothstein said. “But then we were shutting things down in order to start up other things.”
“Usually the shocks aren’t quite this dramatic,” Stevenson agreed. Recessions are often set off by some kind of shock, but it’s usually preceded by a period of slowdown or uncertainty. Now we’ve gone from 60 to zero in days.
“You can go to restaurants that are shuttered that were doing a booming business a few weeks ago," Stevenson said.
We’re already seeing a dramatic jump in unemployment claims, but as Stevenson points out, current data almost certainly underestimate how bad the situation has already gotten. Those who have filed so far, she said, “were people who were laid off as of Saturday and also got their act together to file unemployment claims.”
If we know that we’re plunging off a cliff, the next question is how quickly we might begin to recover. Forecasts from Goldman Sachs, JPMorgan and Bank of America all assume the economy will bounce back in the third and fourth quarters of this year. But Rothstein warns that might not be the case even if we get the virus under control.
“Certainly a lot of people are deferring consumption and postponing vacations,” and they might start spending that money again fairly quickly, Rothstein said, adding: “On the other hand, there are a lot of people losing their livelihoods.”
So Rothstein argues that as part of the federal solution, we have to make it possible for businesses not to lay people off even if they aren’t working, through some combination of grants and low-interest loans, to get a “quick bounceback” by keeping "people connected to their employers.”
All these economists said we must do everything: Give support to state governments that are particularly vulnerable because they’re required by law to balance budgets; help employers not go out of business; shore up the safety net, including unemployment insurance, Medicaid and food stamps; and give support directly to people.
We can argue about things like means-testing benefits later on, but right now the economic damage is getting worse every day we wait. “They should be shoveling as much money out the door toward workers, families and small businesses as possible,” said Stevenson.
That’s one reason Shierholz stresses that as Congress designs its stimulus measures, it shouldn’t have end dates, but should wind down benefits only when the economy has reached a certain level of health.
During the Great Recession, Shierholz noted, “we turned to austerity way too fast and lengthened the pain way longer than we should have. We can avoid that.”
All the economists stressed that the danger is not in building up debt that eventually will have to be repaid, but in holding back because the numbers look too large. The risk is not in doing too much, but in doing too little.
All this is pretty frightening — and it doesn’t even take into account how long it might take to control the coronavirus.
“If it’s no longer necessary to have this extreme shutdown in, say, three weeks, then it’s possible the economy doesn’t fall apart,” said Rothstein. “Maybe there’s a more positive story, but at this point I can’t see it.”