Economists fear downturn will be worse than Great Recession
Economists are now in broad agreement that the downturn stemming from the coronavirus will surpass the Great Recession in intensity as fallout from the pandemic ravages businesses large and small.
What’s less certain, though, is how long the contraction will last and how quickly the world’s largest economy will be able to bounce back once it’s over.
“The question is: How long does it last, the social distancing,” said Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “Nobody really knows. We’re all flying blind here. This is something really different than we’ve ever seen.”
A study from the left-leaning Economic Policy Institute on Tuesday estimated that jobless claims would spike to a record-shattering 3.4 million in the third week of March.
Federal Reserve Bank of St. Louis President James Bullard told Bloomberg News this week he expects unemployment to hit 30 percent in the second quarter and gross domestic product to be cut in half.
Thirty percent unemployment would eclipse the 10 percent peak in October 2009 shortly after the Great Recession, but economists say the figure could fall back to earth much more quickly than it did at the beginning of the previous decade if the economy recovers quickly.
But if it doesn’t, the downturn could have devastating effects.
“The longer it lasts, the more staying power it has. The more businesses go under, the more people lose their jobs,” said Sheiner. “If we’re lucky on the medical front, then yes it could bounce back very quickly. And if we’re not lucky it could be much worse.”
President Trump said Tuesday that he wants to lift restrictions on economic activity by Easter Sunday, less than three weeks away, despite advice from public health officials in his administration who have indicated the virus is still very much on the upswing.
“America will again, and soon, be open for business,” Trump said Monday.
“This was a medical problem,” he added. “We are not going to let it turn into a long-lasting financial problem.”
While virus containment is seen as determining the duration of the recession, another key factor is whether job losses are temporary or permanent.
“If you sever the relationship with the employer, then you’re really setting the tone with the worker to start looking for another job,” said Erica Groshen, a senior faculty member at Cornell University and a former commissioner of the U.S. Bureau of Labor Statistics.
That’s one reason why the stimulus package under discussion in Congress provides forgivable bridge loans to companies that keep their workers on payroll during the downturn.
The $2 trillion package that the White House and Senate reached a deal on Wednesday morning is than double the amount of the Great Recession stimulus bill signed into law by then-President Obama in 2009.
But the changing economy over the past few decades means this downturn could be much harder on workers.
“The last three recessions were very different from previous post-war recessions in that the share of increase in unemployment to temporary lay-offs was much lower,” said Groshen. “The jobless recovery phenomenon is a lot about job losses being permanent instead of temporary.”
Not only that, but some respects of the economy never fully recovered from the 2007-2009 recession. The percentage of people involuntarily working part-time is higher, as is the share of people unemployed for more than six months. Furthermore, wage growth never kept pace with the most recent expansion.
“We had an 11-year recovery, but the labor market didn’t get to anywhere what people would call tight until 2018,” Groshen said, noting that the 60 percent of the workforce without a college education is likely to feel the brunt of the pain this time around.
There are also questions about whether this sharp downturn will influence how quickly the economy recovers.
“As far as I know, there’s been no previous recession where the layoffs have happened this abruptly. It’s not just that it’s large, it’s like ‘bam!’” Groshen said.
Michael Graetz, who was a Treasury official during the George H.W. Bush administration, sees one bright spot.
Unlike the 2008 financial crisis that led to the Great Recession, the current downturn does not appear poised to decimate Wall Street and the broader financial system.
“This doesn’t have the kind of risks to the financial system that the previous crisis had,” said Graetz, who’s now a professor at Columbia Law School.
That should, in theory, make a recovery quicker.
But Graetz agrees with Groshen that the economy faces structural problems that could work against a swift rebound.
“The problem is that the economy that people are now facing is much more precarious than, say, the post-war economy,” he said.
“The threat of globalization cost an awful lot of people jobs — Trump’s tariffs have not solved that problem. Technological change has cost jobs. And now you have this virus which has shocked the economy beyond what anyone imagined,” he added.
Ultimately, though, experts agree that much of the recession and subsequent recovery will be determined by how long the pandemic lasts and whether the policy response rises to the challenge.
“It’s very hard with any recession to know if it’s a V or a more gradual recovery,” Graetz said, referring to a quick versus a slow recovery. “I expect that a lot of businesses won’t come out of this.”
“But this is a resilient economy and it seems to be a time-limited problem,” he added. “The key is to marshal all the resources to get out of it as soon as we can.”