The United States badly botched the response to the Coronavirus pandemic. But it’s not too late to do better. Here’s even more good news: we don’t have to choose between a depression and tens of thousands of avoidable deaths. What we need is a smart reopening.
And, of course, economists are on the case.
In my favorite economic paper on the COVID-19 economy, Harvard University economist James Stock describes a new family of epidemiological-economic models that provide guidance about how best to reopen the economy. Here are his smart reopening requirements: promote collective behaviors to stop the spread of the virus; protect workers who are going back to work in high-valued jobs (manufacturing, schools, etcetera); suspend high-contact/low-value activity (gyms, bars, sporting events); mitigate costs of a second lockdown with good regulations around workplace safety and good supply chains for essential equipment.
As Fed Board Chair Powell has emphasized recently, a smart reopening is one that doesn’t scare people and doesn’t make many of them sick.
What would such a smart reopening involve? To start, I’d suggest policy makers consider a few key principles:
1. Regulate collective behavior in ways that researchers find most effective.
If a political leader, say a governor or a president, encourages smart reopening guidelines (masks, contact tracing, testing) and privileges not only essential services but high-value, high-multiplier sectors (schools rather than bars), then there will be tiny risk-to-GDP ratio. However, good tradeoffs depend on retaining strong restrictions on non-work social contacts, contacts that are not essential to economic well-being.
Research shows government stay-at-home orders don’t directly and by themselves have much effect on the economy though public officials are begging for leadership among government officials to put in strict standards. Both observations can be true. Policies matter, but behavior (affected by policy and media) is the most important variable. It’s a complicated pathway from policy to success: evidence revealed that job losses were no higher in states that implemented stay-at-home orders than in states that did not. That seems strange, right? Why didn’t Florida, Texas, and Georgia’s economies do so much better than California and New York’s economies in April and May when New York had strict orders and those southern states’ governors were more lax than New York and California?
One answer is that economies are interconnected and if New York shuts down, Georgia will be affected by the decline in trade. New York Coca-Cola demand falls and that hurts Georgia. Georgia can’t go it alone. And, if Georgia tries to go it alone and open the economy and take the deaths, the tradeoff is a poor one — they get high deaths for very little return. Bars and restaurants, because of their low pay, have small multipliers on economic activity.
Georgia was first to reopen and the last to close and now Georgia has the seventh most COVID-19 cases per capita, just behind New York, Florida, and New Jersey and they are catching, death rates are rising. Research shows that people need more than public messaging to be influenced to change their behavior to practice social distancing, wearing masks, and washing their hands. One study found that people who consume a lot of TV and radio are “less likely to currently engage in social distancing or are less likely to envision themselves sustaining strict social distancing for several weeks or months.” Government orders, if smartly targeted at non-essential workers, get better results than pleas for voluntary compliance, and do so without harming the economy.
2. Make sure essential workers are safe at their jobs.
If essential workplaces became safer, key members of the labor force won’t be scared or made sick. That’s why the Occupational Safety and Health Administration needs to issue an emergency federal standard for infectious diseases for the duration of the pandemic and pass a permanent one as we will certainly face more zoonotic infectious diseases. All employers will have to provide employees with personal protective gear, as needed, and offer reasonably reliable instant tests to see if a worker is contagious or not. All employers will have to make sure that their workers observe proper hygiene on the job (as hospitals and restaurants currently do for all their employees).
3. Focus on high-impact sectors when we reopen.
The first Friday of every month at 8:30 a.m. is Jobs Day — the day the unemployment numbers come out. From March to April 2020, the leisure and hospitality sector lost half of its employment. Despite the grim numbers, reopening this sector should not be a priority: these are low-impact jobs. A note on what I mean when economists classify bars (for example) as a “low” impact job, by observing how little relative value accommodation and food services provide the economy. People work hard in these jobs and no one deserves to be thrown out of work. But for every 100 jobs lost in food and accommodations, 161 other jobs are lost. In contrast, for every 100 jobs lost in utilities, 957 jobs are indirectly lost. The reasons for the differences in multipliers make commons sense. There is a readily available substitute for hotels and food services, namely home production, but there aren’t any practical substitutes for utilities. Also, food service is one of the lowest-paying jobs in the economy in the United States. It doesn’t have to be, but it’s mostly non-union, and utilities are highly unionized, so the wages are much higher.
Bars are low-impact and contact-intensive. This means bars have low multipliers on jobs and huge multipliers on deaths, quarters are close, people speak loudly, and once tipsy, forget social distancing.
Instead, the federal government should make a priority out of opening back up high-impact sectors, those jobs with few substitutes and high wages. For instance, we are seeing how valuable in-person K-12 education is for children, since parents are struggling to work remotely and teach kids at home, even with the aid of a teacher on Zoom. We need to spend more money to make valuable in person teaching and school activities less contact-intensive.
Opening up full-time K-12 is a high priority sector for three reasons. Full day, full quality K-12 (1) helps all children acquire human capital, (2) provides free high quality day care, and (3) provides good jobs for women and minorities. And since fighting the disease takes considerable public investment to test people and isolate the sick — immediately — bartenders could be trained as contact tracers — which would be a much smarter way to open the economy than what we are doing, which is to starve state and local government and trying to reduce income loss through restaurant and bar openings.
WHAT GOVERNMENT SHOULD AND SHOULD NOT DO
1. Do restore unemployment, stimulus checks, and encourage work with a boost in minimum wage.
Congress acted quickly and appropriately in March and April. But Congress stalled in August to pass a new stimulus. I expect eventually Congress will continue the $600 per week in special pandemic unemployment compensation. This additional $2,400 per month to individuals who were collecting unemployment compensation from their state programs often meant the low-income workers losing their jobs (and some having suddenly to home-school their children) were earning in their jobs. The extra benefit ended on July 31, 2020.
The HEROES Act — not yet passed by Congress because it is opposed by Senate Republicans and Congress stopped negotiating in the second week of August — proposes to extend the benefits until the end of January 2021. Shahar Ziv, writing in Forbes, points out many are worried that extending benefits creates a disincentive to go back to a job that pays less. But this logic only makes sense in a world where there are jobs. I dug deep into a June 4, 2020 report by the bipartisan Congressional Budget Office (CBO) requested by Republican Senator Grassley about what would happen if the $2400 per month was extended six months through January 31, 2021.
The CBO ran their own model and cultivated other research to conclude that extending the extra UI for 6 months boosts the economy (good) and reduces labor force participation (bad). But the CBO didn’t model what happens if we increase pay at the same time that we keep unemployment benefits. The CBO found that if UI was extended the effect on output and employment are the net results of two opposing factors. An extension of the additional benefits would boost the overall demand for goods and services resulting in an increase output and employment. But the extension would also weaken incentives to work as people compared the benefits available during unemployment to their potential earnings, and those weakened incentives would in turn tend to decrease output and employment.
Raising pay will certainly encourage going back to work when there is enough demand to warrant businesses creating jobs. And making jobs safer will also boost labor supply. All the evidence points to the wisdom of extending the UI benefits, keep the economy going in the pandemic by raising pay and — through OSHA regulations — making jobs safe. We can increase labor force participation by making the jobs worth going back to. The recipe for staving off the deep recession includes extending unemployment benefits and raising pay for low income workers.
2. Don’t worry about the deficit.
What is strange about this recession is the absence of austerity economics except from the fringes of the Republican party that is holding up what is sure to be an agreement for more stimulus checks and unemployment benefits as the election gets closer In the last recession, there was a strong tug from austerity economists. Harvard’s Kenneth Rogoff and Carmen Reinhart got all the attention in the midst of the 2008 Great Financial Crises (GFC, as they call it on Wall Street); the number 90% was invoked as the knife edge over which societies would slow. A University of Massachusetts grad student, Tom Herndon, and professors Michael Ash and Robert Pollin found a mistake in Rogoff and Reinhart’s work, reversing their conclusion, but the repudiation was made too late to stop the Obama administration from trimming the recovery act in 2009 for fear of too much debt and the stimulus was much smaller than many economists think it should have been.
I am amazed at the near unanimity among economists that government debt should grow and the economy stimulated as we wait for testing and the vaccine despite the reality of a deep recession. The University of Chicago Booth School of business regularly surveys economists and the latest on in August 2020 revealed that without an aggressive stimulus personal consumption would fall triggering a more severe recession. The Federal Reserve economists signaling Congress to shut down the non-essential economy while financially supporting households through a stimulus spreading was floated in an op-ed in the New York Times in early August by an epidemiologist and president of the Minneapolis Fed.
The differences between economists may emerge soon, as some economists call for a return to normal and others balk at the increased concentration of government power, the increased wealth inequality and decline in labor power because the long-lasting high rates of unemployment — over ten percent by the end of 2021.
3. Worry about inequality.
Health inequality: The disparate health effects of the COVID-19 disease was apparent at the beginning. And coincidently, economists Anne Case and Angus Deaton published their long-awaited book on economic decline and premature death in March. They found, because of the underlying inequities in the incidence of obesity, diabetes, and children being immunized, unemployment and poverty have unequal health consequences.
Wealth and income inequality: The COVID-19 recession is causing more inequality, simply because high-income workers are more likely than low-income workers to keep their jobs.
By August 17, the stock market had almost reached its pre-pandemic highs. Those who didn’t have to liquidate and was invested in the SP 500 on March 23 earned 51% rate of return in 146 days. The rich got much richer.
Power inequality: When the unemployment numbers come out every month on “Jobs Day,” I look closely at the “labor power index”: the percentage of people who are unemployed because they left their job to look for a better one. They are called “job leavers.” I call them the people who are able to say “take this job and shove it.” In February, 2020, the “take this job and shove it” was a rather normal 13.4%; since 1968, the share of the unemployed who left voluntarily has been steadily declining, ranging from a high of over 15% to a low in the 2008 recession of 6%. In June 2020, the share of job leavers was only 3% of the unemployed. This low “take this job and shove it” number means workers will have a difficult time bargaining effectively for higher pay or safer working conditions.
At the same time, current government policies have helped the rich get richer. Governments have shored up liquidity and boosted demand by providing $2 trillion in income in the form of tax cuts, stimulus checks, small business relief, and unemployment supplements. The Fed has in effect supported a massive wealth transfer from citizen savings to private equity. And consumers themselves have helped Alphabet (Google) and Amazon emerge as corporate winners in the post-COVID economy.
This is a moment of reckoning for politicians. Economists and public health officials are in complete agreement. The virus comes first. There is no tradeoff between health and wealth if the economy is opened in a smart way, not a dumb way. The vast majority of economists, for a change, do not oppose aggressive fiscal stimulus to mitigate the cost of life-saving closures. Some economists — and I am one of them — fear that the ongoing pandemic and galloping inequality poses an existential threat to America’s future. To meet the challenge effectively, the United States urgently needs new political leadership.
Teresa Ghilarducci is the Bernard L. and Irene Schwartz Chair of Economics at The New School for Social Research.
