- Austan Goolsbee, the former economic advisor to President Obama, says "the number one rule of virus economics is that you have to stop the virus before you can do anything about economics."
- Goolsbee says after controlling the virus you need to provide relief so that nobody starves or has to liquidate everything due to a temporary slowdown. He insists that regular stimulus will only be effective after taking these steps.
- The economic impact will be worse in the US than in China because America's economy is more dependent on face-to-face services, according to Goolsbee.
- Goolsbee says Trump is not doing well in terms of credibility in handling this crisis. In dealing with the Great Recession, he remembers Paul Volcker always saying credibility is the only asset you have during a crisis.
- "We're already in recession," Goolsbee says, "if we let a short-run downturn... morph into something more permanent, that's when you talk about depression."
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Austan Goolsbee is an economics professor at the University of Chicago Booth School of Business and former economic advisor to President Obama. On Tuesday, Goolsbee spoke to Business Insider's Sara Silverstein about the economic fallout of the novel coronavirus outbreak. Following is a transcript of the video.
Sara Silverstein: We are streaming live from my living room for Business Insider and I'm thrilled to have Austan Goolsbee here via Skype.
Austan is the former economic advisor to President Obama and currently an economics professor at Chicago Booth.
Austan, what is the best possible outcome we can expect given the situation that we're in now from an economic perspective?
Austan Goolsbee: Well, first, you got a lot of classier set up there than I got here, so I wanted to tell you that I admire that. The best-case scenario, I think, is a sharp, intense drop in the economy that lasts only a short time, that we could get a handle on the virus, that the infection rates slow down, and that we could then go back to doing something like what we were doing before.
We'd be a little scarred, but that's kinda the best-case scenario, that it's sort of like the beach town during the winter: They board up the windows and then it gets warm again and everybody comes back.
Silverstein: How do we get to that? If you could put together a package for Congress, what would that look like? What would you like to see them do to get there?
Goolsbee: Well, I mean, my view is that the number one rule of virus economics is that you have to stop the virus before you can do anything about economics.
the number one rule of virus economics is that you have to stop the virus before you can do anything about economics
I guess I don't totally understand why we are not pulling out every stop we have to try to slow the rate of spread of the virus. Okay, in the early discussions, I tried to highlight there are some things which by conventional calculus are not stimulus, like paying sick people not to go to work, giving them paid sick leave so they don't go to work. That reduces the GDP in the short run, but it's actually good for the economy because anything that slows the rate of the virus spreading makes us less fearful, helps us get out of lockdown. We can't really recover till we get out of lockdown.
Now, I saw the president today following on his discussion of yesterday in which he seems to be saying, "Well, yes, lockdown is a problem, so therefore, maybe by Easter, let's just call off the lockdown." I fear that really misses the number one rule of virus economics, which is you can't come out of lockdown unless you have very extensive testing so that we know that the only people that are isolated are the people who are sick and that if we bump into people on the street, we're not going to get sick from them, or else you have to have a vaccine or a treatment or in some other way have brought the virus somewhat under control.
It's like, as I say in the financial crisis, the rule is you can't do anything until you stop the bank runs. Here, you can't do anything until you stop the health runs. The health runs are people just withdrawing from the economy. I'm a little nervous that we're going to start down a path that long run or even medium run, make the problem worse, not better.
Silverstein: What sorts of things would do that would make the problem better?
Goolsbee: Well, number one, if you control the virus, then I think we're well on the way to going back to where we were before. The reason that people are not spending and are not going to get their haircuts and they're not going to fly on airplanes isn't that they didn't have the money. It's obviously that it was about their fear of the health system. Getting some control on the virus I think is step one.
Step two, I think it's misleading that they're calling this a "stimulus package." They should call it a "relief package" because it's aiming at trying to do what you need to do next, which is cover the bills so nobody starves, nobody has to liquidate everything just because of this hopefully temporary slowdown.
Then once you're past that, now you can engage in regular stimulus, but you can't really do those out of order and you can't try to do old-fashioned stimulus while the virus is still raging. That doesn't work because you can give people money, but they're not going to spend the money.
Silverstein: I've seen you talk about credibility in a time of a crisis. I believe you quoted Janet Yellen. How is Trump doing on that stand and what should he be doing?
Goolsbee: Look, I was quoting Paul Volcker at that time, that in the last crisis, used to always tell me, "When a crisis begins, the only asset you have is your credibility." I would say from my perspective, it's not going that well for the president. They start out of the gate, the pandemic begins to rage in China, gets to Korea, gets to Japan, gets to Iran. You see it in a number of places. We had six to eight weeks, at least, to get up our testing regime to get ourselves in order to confront this. The message was very much, "No, no, it's not a problem. Don't worry about it." That set us back.
Silverstein: Do you think our fallout will be worse than China from an economic standpoint?
Goolsbee: I wrote a piece before it really got here saying the economic impact on the US is going to be worse than it was in China and it was pretty bad in China. The reason I think it will be and already is proving to be is that for the same-size outbreak, all of these personal services, like transportation, tourism, going to the barbershop, healthcare, all of this stuff that's done face-to-face, that's a bigger share of our economy than it was of the Chinese economy, so there's every reason to thank it for the same-size outbreak that's going to just have a bigger negative hit on the US economy.
Silverstein: Walk me through what the Fed has done. It seemed like last week, maybe they use their last bullet by cutting rates, but then this week, it seems like they are talking about unlimited QE. What are they doing? Does it make sense? Should the Fed be buying municipal and corporate bonds?
Goolsbee: Okay, what the Fed is doing is following on the traditions of Bernanke and Yellen and the unconventional monetary policies.
The Fed can control some interest rates and they cut their interest rates to zero and then they say, "Well, now what are we going to do?" so they go start buying up, say, mortgages to try to drive up the price of mortgage-backed securities and lower the interest rate that people would have to pay. It's a creative idea. I think it's what they should be doing. I don't think it's going to have that big of an impact. I think that's why the market didn't react more positively.
The Fed is trying to pull out all the stops it can pull out, but they're pushing on the proverbial string. They can engage in unconventional monetary policy that, that let's say, does reduce longterm interest rates a little bit in mortgages. They could try to do municipal bonds, they could try to do small business, various things.
I just think monetary policy as a channel goes back to my issue about virus economics. Until you've got control on the spread of that virus, any conventional stimulus is going to be much less effective. If you reduce the interest rates, you're wanting business to go out and invest. Are cruise lines going to go buy a new ship because the interest rate is really low? Probably not until we get out of the virus and people going to come back and start taking cruises again.
I think the second thing that's happening with the Fed — is the Fed is kinda drifting into the netherworld of doing fiscal policy. You can see that in this rescue package. From what we read so far, there's going to be unlimited or very large lending facilities and they're going to try to turn it over to the Fed to do it. As long as the executive branch and the elected officials are the ones who are making the decision about who should be bailed out and whether the taxpayer wants to be on the hook to do this, that's okay.
But there's a central banker from the UK, Paul Tucker, who wrote a whole book, basically, about the question of the political legitimacy of central banks. I do think that there is a second admonition for Paul Volcker in this, which is: "The Fed is doing everything they can to try to reduce this crisis," but in several of these cases, they're approaching something that elected officials ought to be deciding, and the American taxpayer and the American voters are the ones deciding, so I do think there's a risk, even to the reputation of the Fed, by getting too sucked into the middle of this.
Silverstein: We're talking on a very large scale, but on individual scales, business owners have very big decisions to make. What are the decisions that you're hoping that businesses will make as far as keeping employees or trying to stay open and how do we get them to behave the way that is optimal for everyone?
Goolsbee: There are several hard things about that. One is, not every business is the same, of course, and there are some absolutely vital, crucial businesses that we cannot afford to let them even have a hiccup, much less fail.
If you look at the health sector and the hospitals, specifically, we have to throw money at keeping the hospitals solvent. The prospect that hospitals at a moment like this where everybody's coming in, we can't put them in the position where they're having to check and care, "Well, do you have insurance? How good is your insurance? Who will pay for our coronavirus tests?" I mean, 100%, the government has to step in and fully backstop all industries that are vital to the slowing of the virus.
Okay, then category two: As part of our relief, we need to keep people having food on the table and be set up in an environment where at such times the virus passes or slows down or what have you, that we could go back to work. I think that the government helping foot the bill to get the companies to keep the employees on the payroll is a very good idea.
I think the paid sick leave idea, as I described before, I think is an important idea. I think money for the people who do lose their jobs is an important idea.
I do also think you want to keep them all in mind when you're doing them. If you make the unemployment insurance more generous than the pay for the workers, you could set up an environment where the companies had an incentive to actually go lay off their workers and they'd tell them, "Well, you can get a better deal by going on to the unemployment insurance program," I think that'd be a mistake.
I think if you're going to give money to companies, which I guess they're talking about giving billions of dollars to cruise lines and airlines and hotels, now, I think you've got to be really careful setting up what's the framework. Who? What? How are you deciding that something like cruise lines should get money? That seems weird to me because small business and medium-sized businesses, our goal in giving them relief is to try to keep those people employed and to try to keep food on the table.
Cruise lines, we could spend billions trying to keep them operating when there's no one taking a cruise. Are we protecting the cruise lines shareholders or debt holders? I'm a little confused without a framework, so I think whatever comes out of this stimulus relief package, then all the pressure's going to be on whoever decides that money outline the framework. How do you decide who gets rescued and who doesn't?
Silverstein: What's at stake here? What is the worst-case scenario if we get this completely wrong?
Goolsbee: Aye, yi, yi. Look, the worst-case scenario is that we morph a short-run, intensely negative shock, which this is, there's no question. We're not going to be able to avoid recession. We're already in recession. We're going to get unemployment claims that are horrible. The unemployment rate's going to go way up, okay? Our goal is to let it come back down, unemployment come back down, let the unemployment claims come back down as quickly as possible.
The worst-case scenario, or a bad-case scenario, separate from the health... Look, there's a worst-case scenario on health, which is almost unfathomable: Millions of people die, the disease morphs into something more deadly, et cetera.
On just purely the economic side, if we let a short-run downturn, even a sharp one, but if we let that morph into something more permanent, that's when you talk about depression.
What would have to happen for that is first, the employees are fired, then the companies fail, then the bank's funding those companies fail, then the financial system starts to collapse, and we combine the downturn of 1929 to '32 with the financial crisis of 2008 and we get out of the normal business cycle, which is to say the self-correcting mechanism no longer works. Even when the virus passes by or we get a vaccine or a treatment, the economy cannot come back, it's just so far down that it can't recover. That's the worst-case scenario.
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