- Unemployment could easily reach 20% or 30% as the coronavirus forces mass layoffs, according to Nobel Prize-winning economist Joseph Stiglitz.
- When the pandemic subsides, Stiglitz expects the US to bounce back from the extremes of unemployment, but does not expect a robust economic recovery.
- He points out that a large fraction of Americans are living on the edge with very little money in the bank and significant debt. Stiglitz says when these people lose their paychecks they will become even more indebted, which will make it very difficult for America’s consumer-driven economy to recover.
- This crisis has highlighted the limitations of our market economy in Stiglitz’s eyes. He says in a market economy there shouldn’t be a shortage of masks when we have such incredible demand. Stiglitz believes Trump should be directing companies to help produce critical items where markets can’t respond fast enough.
- The renowned economist is confident in the country’s ability to keep supermarket shelves stocked. But he believes if we go back to work by Easter, an idea floated by the president, the number of sick people would increase exponentially and that would create a real threat to the supply chain.
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Joseph Stiglitz is a professor at Columbia University and a former senior vice president and chief economist of the World Bank.
On Wednesday, Stiglitz spoke to Business Insider’s Sara Silverstein about how the economic fallout from the coronavirus pandemic will impact most Americans and how quickly we can expect to recover once the virus is under control. Following is a transcript of the video.
Sara Silverstein: I am live-streaming from home for Business Insider, and I am joined by Nobel Prize-winning economist Joseph Stiglitz.
Stiglitz is a professor at Columbia University and the former chief economist of the World Bank.
Joe, What are your thoughts on the $US2 trillion stimulus package?
Joseph Stiglitz: I think it’s remarkably good. It wasn’t so good a few days ago, but I give Schumer and the Democrats a lot of credit for turning the bill around and actually making it one that not only works for most Americans but works for our whole economy.
Silverstein: And there’s a few different parts of it. Some of it is money directly for individuals, and some of it’s loans for small businesses or distressed businesses. Which part of that is going to be most effective in fighting this downturn that we’re facing?
Stiglitz: Well, I think you want to think about this as very different from earlier downturns like 2008, or even the Great Depression, the Reagan downturn of 1981. This is not an insufficiency of aggregate demand. It’s not a demand collapse. It’s not a financial crisis, a result of the bad behaviour of banks. This is caused, as we all know, by the virus. People not wanting to go to work, people wanting to maintain social distances, so in that sense, it’s both a supply-side problem and because people are not buying, it is turning into a demand-side problem.
But it is driven by the coronavirus. And that means the response has to be markedly different from responses to the previous crises. In particular, one of the things here is protecting the most vulnerable, and part of that is three different provisions that are really important to ordinary Americans.
One of them is strengthening the unemployment insurance system. It really would not have been able to meet the demands, the skyrocketing unemployment. Some people think 20, 30%.
Secondly, trying to encourage firms not to simply lay off or to get rid of their workers, leaving them without health insurance. It wants to keep the connection between the workers and the workplace alive, so the government’s going to provide money to corporations to pay for the furloughed workers so they’re not left on their own.
And finally, there’s a provision for people who might otherwise fall through the cracks, and that is providing cash for those with very limited income that are not in one of the other two programs. And then there’s actually a fourth, which provides money to small businesses, loans, provided that they maintain their employment levels. It will have very strong loan forgiveness provisions in that program.
So to me, that’s really important. There’s a second really important part of the program, which is directed at health. I mean, after all, this is a health crisis, and it will provide money for hospitals, things that should have been done a long time ago, now stepping up.
Silverstein: And looking at the unemployment picture, how bad do you think it’s going to get? How many people will be unemployed, and for how long, and how much will that cost?
Stiglitz: Well, the unemployment rate will soar to levels that we have not seen in recent memory. Numbers are bandied around of 20% to 30%. One way of thinking about it is to realise there are only a few sectors that are really going to be protected. The healthcare sector, parts of it, will do very well. Other parts, actually – some kinds of surgery won’t do very well. They’re going to try to concentrate the resources of the healthcare sector on real needs.
Education could be done through distance learning, and they’re adapting remarkably quickly to that. Your business is being done, figuring out how to do it, everybody’s adapting.
But the auto plants have shut down, restaurants, airline industry. So, when you start thinking about the different sectors, it becomes clear that it could easily be 20%, 30%. It will depend, of course, on how generous some employers are.
Some employers are really realising that workers can’t bear these risks and are taking it upon themselves to keep their workers, at least to the extent that they can.
Silverstein: And what about people who are half-employed? A lot of people are cutting hours, keeping people on, but they can’t necessarily collect unemployment insurance. How many people will that affect, and have we ever seen an economic picture where we had so many people who weren’t making enough to live but were technically employed?
Stiglitz: That’s a really good point, and that’s a group that I worry about a great deal. I mean, some of these are gig workers, in the gig economy. Taxicab drivers, they can work all day and get one fare, and what they have to pay in the lease for their taxi cab may be greater than the revenues they make.
And they haven’t paid into the unemployment insurance fund, so they’re not going to be covered by unemployment insurance. Now, that’s where the cash payment provision that I mentioned before, that would go to everybody, but it’s only going to low-income workers, and there are going to be some lower-middle, middle-income workers who are going to find it really difficult making their payments – their mortgages, car payments, credit card debt.
So, that’s one of the areas where I think they could, perhaps should, have done a lot more. The original hope was that it would not have as tight a cap, it would be given to everybody, and then higher-income people would have a chance to pay it back in effect with their income tax in 2021, 2022.
But there’s a little stinginess on the part of the Republicans who are more interested in giving money to the big corporations than giving money to the middle-income Americans who are going to be facing this problem.
Silverstein: And assuming we’re home for a month or two months, and a lot of businesses may shut down during that time, what will it take to re-employ everyone? How long will it take to get back to normal once this ends?
Stiglitz: Well, I think there will be a quick initial recovery. Not back to where we were, but remember, what shut down the economy was not failing banks, it was the disease, and once that goes away, people can go back to work.
The problem is that the balance sheet of many firms, many households, is going to be wrecked. They are going to see their savings used up. There’s still going to be a lot of fear – what about if we’ll come back or the disease come back in the fall?
So I expect while it will bounce back from the extremes of unemployment that we’re seeing now, it won’t be a robust recovery, and the strength of recovery will depend on a lot of things, matters of economic policy.
Let me give you another example. One of the areas that’s going to be very hard-hit are state and local governments. About a third of all government is at the level of state and local governments. And the state and local governments have limited resources. The states have balanced budget provisions, which mean that the revenues go down, they have to cut expenditures, and their revenues for the year are going to go down a lot.
So what we’re going to see is their revenues plummet. They’re going to be laying off people. Unless we give more assistance to the states and localities. So I think as big as that $US2 trillion measure was, it doesn’t come up really, fully to the needs that our economy are going to require.
Silverstein: And that’s only one part of the stimulus. We’ve also seen a lot happen with the Fed lately. What is your reaction to the move the Fed has made in response to the coronavirus?
Stiglitz: Well, the Fed has done what it did in 2008. It said, you know, “We’re not going to wait until the fiscal policy gets straightened out,” and in the case of 2008-09, it never really fully got what was required. After the initial stimulus package in February 2009, the Republicans refused to give another dose, saying that they were worried about the deficits.
And then in 2017, of course, we know that that was a sham, because they gave enormous tax cut to the corporations, resulting in a trillion-dollar deficit before the crisis. So, they’re stepping in and recognising that the fiscal policy may not be up to the mark, and also recognising that in this moment of fear, credit markets may freeze. And they are showing signs of tightness.
So doing that is important. But it should be clear, they can’t make up for inadequate fiscal policy on the part of the federal, state, and local governments. They just can’t, and it’s not part of their purview. They can’t provide money to the hospital. They can help make funds available to state and local governments, but with balanced budget provisions, the state and local governments have a limited ability to borrow. So it’s not access to funds, it’s really the constitutional provisions which limit the ability of states to borrow.
Silverstein: What do you think is the biggest thing that leaders in the US misunderstand about the economic crisis that we’re facing?
Stiglitz: I think the thing that they don’t understand is that to restart the economy, you’ll have to pay a lot of attention to what I call, for the balance sheet, variables. Where the position of individuals are. They will have gone through two months, three months of devastation, and you can’t just pick up.
So, let me give you an example. We know that a very large fraction of Americans are living on the edge. That’s one of the points I make in my book, “People, Power, and Profits.” The bargaining power of workers has been eviscerated. Very large fractions of Americans have less than $US500 in the bank account, $US1,000. And that’s going to disappear when their paychecks disappear.
But even worse, a lot of them have a lot of credit card debt, some of them have student debt. Now, the credit card companies have been charging what I view as usurious interest rates. 30%, 29% interest rates plus fees.
And so, if because of the crisis people lose their income, and those 30% fees and interest rate compound and compound and compound, the position of a lot of Americans is going to be really, really terrible.
And in 2005, we passed a bankruptcy law that was advocated by the banks and put ordinary Americans at a big disadvantage. So, it makes it very difficult for them to discharge their debts.
So, they’re going to begin with this big indebtedness, and that’s going to make it very difficult for our economy to recover. We have a consumer-driven economy, and if people have all of this debt, it’s not going to pick up from where we left off.
Silverstein: And so, you’re talking about once this is over, once this current pandemic is over, getting out of the hole is going to be hard because so many people are going to be behind, basically?
Stiglitz: That’s right. And the state and localities are going to be behind because their revenues are down. They’re a big employer, and so they’re going to have to cut back, so unemployment among them, their layoffs will be going up unless we give them some significant assistance.
So there are a number of big gaps. In spite of the many, many virtues of the bill that is likely to be voted on by Congress, there are some big gaps, and those are going to mean that the recovery is going to be slower than it otherwise would be.
Silverstein: And how confident are you in our ability to keep food in the grocery stores, and keep people in their houses who might be losing their jobs?
I think these are concerns that a lot of regular people have. Are they going to be ok? Can we keep everything going from the bare basic essentials standpoint?
Stiglitz: Well, let me first say that this crisis has really demonstrated the limitations and imperfections of our market economy. Again, one of the points I make in my book.
In a market economy, you shouldn’t have the shortages of masks. Masks are not that complicated. This is not rocket science. But there’s an amazing shortage of masks.
Silverstein: Can you walk us through that example as a market failure, as you would in your book? On the shortage of masks.
Stiglitz: Yeah, well in markets, when there’s a demand, there’s supposed to be a supply. And the supply is supposed to respond very quickly to the demand.
And boy, is there a demand for masks. I have doctor friends who have been told they have to go to work and get one mask a week, or one mask two weeks. They are frightened. That’s not enough. You need to use your mask only for a very limited time.
And you know, it’s putting us in a very embarrassing position. Here, we’re supposed to be the leader, the wealthiest country in the world, the leader of the free world, and I’m getting emails from people in developing countries, emerging markets, saying, “Do you need some masks? I’ll ship some to you.”
It really is a startling position. We don’t have enough protective gowns. We don’t have enough ventilators. And these are things that the market seems to be incapable of supplying in the short order that we need it.
So, when we go to war, we know that the markets can’t respond fast enough. And that’s why in World War II, we took over a lot of the factories. And we kept management, but we worked together. It was a command economy.
And we said, “We’re not going to give up on capitalism,” but for that moment of crisis, we really need – markets don’t work, and people told President Trump, you know, “You need to do something. You actually have legislation already on the books. You can do it.”
And he said, “No, no, I just believe in the markets.” And as a result of that, many doctors will die, many will become critically sick, and that means the supply of critical personnel is going to go down. And that means we are going to be less protected.
So, that’s an example of the market not working, and in a time of emergency, we turn to the government and we say, “Markets work in ordinary times, but they often don’t work in these moments of crisis.” And that’s why in 9/11, we turned to the government, in 2008, we turned to the government, and now in this crisis, we’re turning to the government. By working together, we can do more than we could individually.
Stiglitz: Now, in terms of supply of food, I have reasonable confidence that the market will be able to continue to provide the food. But I do hope if there’s a breakdown in the supply chain, we will get government action to fill in the void. We have the technology. We know how to do logistics. The Army knows how to do logistics.
And so we have the technology, the resources, the capability of doing them. So, I have a reasonable degree of confidence, but one of the things that people do worry about, and rightly: If we let this disease get out of control, then large numbers of people won’t be able to show up for work. And if they don’t show up for work, that could be the disaster, and that’s why most economists, most health experts, say, “No. 1, let’s protect the health of our country. Let’s not go back to work before we’ve gotten the disease under control.”
And the idea of herd immunity, which the UK flirted with and then said, “No, that idea is not going to work,” the idea that we could be back at work by Easter – those are dangerous ideas, because if we did that, all the analysis says that the number of people sick would just grow exponentially, and that would be a threat to our supply chain.
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