An economy put in a ‘medically-induced coma’
UMass Dartmouth’s Michael Goodman takes stock of what we're up against
THE ECONOMIC CONVULSIONS from the coronavirus pandemic are unlike anything we’ve ever experienced. We’re not being blindsided by an unwelcome economic downturn; we have decided to set one in motion.
Michael Goodman, an economic sociologist and director of the Public Policy Center at the University of Massachusetts Dartmouth, says the best way to understand things was offered recently by Northeastern University economist Alan Clayton-Matthews, who said we’ve opted to put the global economy into a “medically-induced coma.” How the patient will fare is now anybody’s guess.
Goodman spends a lot of time studying the ups and downs of the economy and its impact on public policy and budgets. He has long served as part of a group of experts who help develop the annual consensus estimate of state revenue that is used to build the state budget. Goodman also serves as co-editor — along with Clayton-Matthews — of MassBenchmarks, a journal focused on the Massachusetts economy published by the UMass Donahue Institute in cooperation with the Federal Reserve Bank of Boston. I spoke with him on Thursday afternoon about the state we’re in. What follows is an edited transcript of our conversation.
COMMONWEALTH: How do you think about the economic crisis we’ve been thrust into?
CW: Would you say we are in a recession or that, from every indication, it’s certain that we’re heading into one?
GOODMAN: This is something that we discussed at great length at the [MassBenchmarks] editorial board meeting last week. The consensus view is that a global recession is a virtual certainty. The pace of the job losses that are being experienced and are expected to be experienced certainly do push the nation and the state into a negative growth state. Recessions get called and dated retrospectively. So as data come in, you can say, here’s where it peaked, here’s where it started to decline, here’s where it bottomed out, etc. So saying when it started and when did it end at a level that’s somewhat precise is going to take a while. How long it will last, I think, will be a function of the effectiveness of our response — of whether efforts to support displaced households and businesses are implemented effectively — and the duration of the impacts of the virus.
CW: In terms of the economic policy response, do we begin to think about that?
GOODMAN: If people lose jobs in large numbers, they have significant disruptions to their income, which impairs their ability to pay their bills and of course that has these cascading and reinforcing effects. It started as a supply shock — China is in trouble and then other nations are in trouble — and that’s impeding our ability to trade with them. That harms certain sectors of the economy, and that’s a problem. But once it shows up here and we see these real world economic consequences including job losses, then what ends up happening is a negative feedback loop, where that demand shock leads to income disruption, which then reduces demand. I think the actions that the federal government and the state government take in the coming weeks are going to have a lot to do with how much pain and human suffering on the economic side as well as the public health side is going to be experienced. But it’s going to be painful for awhile.
CW: At the national level, we have a proposal from the Trump administration for a package totaling about $1 trillion, about half of which comes in the form of direct payments to Americans. The other half is various kinds of relief and stimulus to different sectors of the economy, including some that may be very targeted to airlines or other parts of the tourism economy. What’s your overall reaction to the size of it and the breakdown in rough terms, as it’s been proposed?
GOODMAN: There’s already been one federal package passed, which provides resources to public health agencies and the like and loosens up some rules that only a state of national emergency allows, to broaden the public health response in ways that are absolutely necessary. I think yesterday there was talk of more coming in terms of targeted assistance for businesses and something about paid leave. Then there is the plan the treasury secretary has been talking about that would involve direct cash transfers to households depending on their size. I think in this situation all of those things make sense. I think more is coming. Replacing that income or minimizing that financial disruption that’s resulting from our necessary public health actions needs to be top of mind. That means helping businesses stay open, helping workers stay on payrolls wherever possible, and then providing financial support and access to the health care services that the people who are unavoidably displaced are going to be experiencing until we get to the other end of this crisis. We don’t have any time to waste.
GOODMAN: Part of it is going to rely on the degree to which the federal government can be a fiscal backstop. Historically they have been. I don’t envy our policy makers trying to think through things that need to be done but can’t be fully sustained using state resources for very long. The level of unemployment insurance, I think, replaces, half of your wage up to a limit. I think under extraordinary circumstances moving that 50 percent to, say, 75 percent, at least temporarily, would go a long way. I know if my income was cut in half, I’d be in trouble. Then there are the people who are not eligible for unemployment insurance or paid sick leave — the contractors, the consultants, small business owners or sole proprietors. Even if it were just temporary, allowing those workers to be eligible for unemployment and finding a way to cover them might make sense. Under normal conditions you’d be very concerned about ensuring that nobody received a benefit that didn’t deserve it. But I don’t think we’re in a position where we can afford to take the time to do that. There are relatively large segments of the population here that just simply are not eligible to benefit from those programs.
CW: How is this going to play out with state finances, which are obviously very dependent on a robust economy?
GOODMAN: It’s obviously going to be hard. We can expect, with a bit of a lag, a reduction in state revenues precisely at the moment when lots of money is starting to flow out [in things like unemployment claims]. We have a sizable rainy day fund right now — about $3.5 billion — and we’ve got about $1.6 or $1.7 billion in the unemployment insurance trust fund. And so there is cash. But what’s already, I’m sure, begun to happen is the money coming in starts to slow pretty dramatically and money flowing out starts to increase. The stylized fact that keeps jumping out at me is that Monday’s unemployment claims exceeded the entirety of February’s claims. When businesses don’t have revenue, it’s very difficult for all but the largest firms, unless their workers can be productive remotely, to sustain those payrolls. So there’s going to be a lot of job losses in the next several months.
This kind of an event hits us in multiple ways. We have every form of tax that you can have. But if I’m not working, I’m not paying income tax. If I’m not shopping, I’m not paying sales tax. If I’m not earning money on my investments, I’m not paying capital gains tax. And if my broker is not making money on my investment, he’s not getting a bonus. So that combination of factors historically has been a recipe for a dramatic decline in state tax receipts. To the extent that those households can maintain their income, hopefully through federal resources, it will be helpful. The state is prohibited from running a budget deficit constitutionally, so there are limits to what we can do. Obviously the federal government has no such restrictions. Interest rates are extraordinarily low even by recent standards, so I think this is a moment where the federal government needs to act, and act in a big way. How the state keeps all its commitments going remains unclear. If the federal government isn’t in a position to transfer resources to the state to help cover the costs associated with the public health crisis and then offset some of these declines in revenue and help keep income flowing, to the degree possible, I think next fiscal year is going to be very, very, very difficult.
CW: We do have precedent for the feds kind of directly aiding state budgets.
GOODMAN: Last time, the recession really built throughout 2008 and it took a while, but they finally did get aid to the states. All of these disruptions create additional need and pressure on state-funded institutions at all levels — K to 12, higher ed, human services, labor and workforce development. This is always the case. It’s counter-cyclical. At precisely the moment that we need the resources, they’re not available. And so this is what the federal government is for.
CW: As enormous as the overall sums are, the talk in the federal plan has been of two payments of maybe $1,000 each to most American workers. Is that going to be enough to keep people afloat?
GOODMAN: The figures that have been circulating suggest two payments, something like I think $1,000 a month per adult and $500 a month per, per child, one for April and one for May. I saw talk that there might be a third round. Right now, the stimulus that’s been proposed isn’t particularly targeted. It’s like send everybody everything. And I think it’s better to err on that side based on what we know. But as time goes on, and we see where the problems are most concentrated and which people have been displaced from their jobs, I think it’s important that states and the federal government use those mechanisms — the Social Security system, the unemployment insurance system, et cetera, to do what they need to do to keep those households afloat. Because once we get through this, the pace at which we’re able to recover is going to be a function of the condition that these households and businesses are in when we come out the other side of this. It’s one thing to say we’re going to suspend loan payments for six months, but six months from now I’m still six months in arrears.I don’t think we’ve ever been in a situation quite like this. I think these proposals that have been put forward to date are just the beginning of what we’re going to see.
CW: In your world of economists and folks who think about this, what are some of the bigger ideas floating around that might go beyond what we’ve had proposed so far?
GOODMAN: I think universal paid leave for people who are ill or who are caring for people who are ill is sort of top of the list. Because those are the people who will have their income disrupted. And while a check from the government for $1,000 or a couple thousand dollars is going to be helpful, it’s not going to replace that lost income. Even here in Massachusetts where we have mandatory paid sick leave, we have lots of people who are working in fields where they’re simply not eligible [for those benefits]. If there’s a lesson here early on that I think we can all embrace it’s that it’s in everybody’s interest to make sure that people who are sick are not financially penalized for missing work. We have huge gaps nationally and even here in Massachusetts in who’s covered. I think in this environment and under these circumstances, it makes much more sense to overreact and regret it later than to then to underreact. We look back at what happened [during the recession] in 2007 and 2008. I think there’s broad consensus that while the American Reinvestment and Recovery Act had some issues, that if we had it to do over again, we would have made it much larger. You can lose jobs very rapidly. But our experience was that it took us quite a while to regain them and to regain that economic momentum. I’m hoping that our policy makers, locally and nationally, have learned that lesson and are ready to jump right in. But I think it’s tough for states to do it. The federal government is going to have to play a very large role, particularly on the financial side.
CW: When you hear people like the treasury secretary, Mnuchin, throw out there that we could see unemployment hit 20 percent — as a worst case scenario — that’s approaching the kind of the levels that we saw in the Great Depression. Could this be kind of a moment for a sort of “New New Deal,” just as we saw things like Social Security and come out of the Depression of the 30s? When you talk about rethinking unemployment assistance or some kind of payments for people who are in the gig economy or contracting world, that really gets at whether our social safety net, which looks much the same as it did in the 1950s, is really suited to the 21st century economy.
GOODMAN: That’s as much a political question as a technical one. I’ll put it to you this way: if we can’t muster the will to match the rest of the advanced economies of the world and guarantee access to paid leave and health care when needed, and if this experience doesn’t teach us that we all have a stake in ensuring that every one of us has access to those benefits, if only to protect each other, in addition to the social benefits that might be associated with that, then it’s hard to imagine a scenario where we would be able to do it. I think it’s too early to tell what the political fallout is, but who was it — Rahm Emanuel? — who said never let a good crisis go to waste or something like that. I think we had the same kind of New Deal-style opportunity 10 years ago. I think it’s hard to argue that we took full advantage of it. And so here’s hoping that if there’s a silver lining here, it’s that this is an eye-opening moment for our leaders and policy makers, a recognition that we are reliant on each other and that this whole crisis would be a lot easier to respond to if everybody knew that they were going to get paid and that if they got sick, they would be able to receive treatment.
CW: When you say that some of the relief packages approved in the last downturn didn’t quite go far enough, a lot of that, I think, was the result of political realities and compromise with what could be passed with Republican resistance to going too far. Now you’ve got obviously a Republican administration in Washington that’s leading the charge. As some people have pointed out, Trump himself, from the sidelines back in 2009, had critical things to say about the auto industry bailout and other things. But it seems that he’s now got religion now or is taking a different view.
GOODMAN: It’s different when you have to solve the problem. I think clearly the president and his team have gotten the message that this is dramatic and it needs dramatic action, and I think they’re hearing that from the private sector too. I listened to an interview on CNBC with a billionaire hedge-fund trader essentially calling for a shutdown of the global economy for 30 days and the federal governments of the world essentially funding life until the virus is under control. Now it’s hard to imagine a card carrying, billion-dollar-having capitalist icon calling for that under any other circumstances.The whole private sector operates on top of institutional arrangements and rules and laws and free flows of people and goods and resources that are just simply not occurring and are not likely to be for awhile. In a world where there is this catastrophic drop in willingness or ability to spend and invest on the private side or in the household side, then the only thing you can do to keep your head above water is to start spending on the public side. And I think the broad trajectory of the strategy so far, which is to lead with programs that help households and businesses, is right. I do think as this crisis unfolds, those policies are going to need to be more targeted and refined. I think the scale of this is going to be bigger than anything you’ve ever seen in terms of government intervention.