“Look, you shouldn’t think that the estimators have got a lot of experience with anything like this, so this is a seat-of-the-pants estimate,” economist Dr. Alan Blinder told me.
The estimates he was referring to? A stimulus package to revive the economy in the wake of the COVID-19 challenge. Our national experience right now is, in many ways, unique. A novel virus, a global pandemic, this particular political landscape, today’s economic situation—none has ever converged as we are experiencing now. And we feel the overwhelming uncertainty of model after model, theory after theory, prediction after prediction.
But Blinder’s tongue-in-cheek advice isn’t the whole story. During a roundtable discussion hosted by A Second Opinion Podcast and the Princeton University Griswold Center for Economic Policy Studies and the Center for Health and Wellbeing, Blinder and two colleagues joined me to provide context for this moment.
Blinder is the Gordon S. Richler Memorial Professor of Economics and Public Affairs at Princeton University, a former vice chairman of the Board of Governors of the Federal Reserve System and a former economic advisor to President Bill Clinton. We were also joined by Dr. Jessica Metcalf, Assistant Professor of Ecology, Evolutionary Biology and Public Affairs at Princeton and an expert in disease modeling and the challenges of disease elimination. And Dr. Bill Dudley, the former president of the Federal Reserve Bank of New York and now Senior Research Scholar at the Griswold Center.
Learning from the past
Even if none of us working today has ever seen a global coronavirus pandemic, we are not without context, Blinder, Dudley and Metcalf argued. We need not make decisions in a vacuum; we can learn from our past.
The 1918 flu pandemic gives us the best historical viewpoint on this infection, Metcalf explained. There are both scientific and economic lessons to be gleaned from the 1918 pandemic that we can apply to our response today. Dudley and Blinder also advocate for looking carefully at past financial crises—most recently in 2008, but also in the 1930s—for counsel.
Like the SARS-CoV-2 virus, the 1918 influenza pandemic began abroad before arriving in the United States. As U.S. sailors returned from the World War I fighting in Europe, the new strain of influenza spread across the country starting in naval yards in Boston and Philadelphia. Worldwide, 50 million people died between 1918 and 1922; in the U.S., about 22 million caught the disease and we saw 675,000 deaths.
The virus was stopped by aggressive “non-pharmaceutical interventions”, Metcalf explained, though they were implemented to varying degrees in different cities. These isolation mandates, like the ones we are implementing now in the U.S., kept people at home, apart, and let the economy grind to a halt. But cities using these same interventions actually did better economically by some metrics when it was over, Metcalf explained.
A summer reprieve?
As the United States approaches summer, many hope that the SARS-CoV-2 virus will die down or disappear in the warmer months and we can quickly pull back on such measures. While that may be the case—other coronaviruses respond that way seasonally— Metcalf cautioned against clinging too tightly to that view. The 1918 flu started in the summer, not because it was “flu season”, but because the population was almost universally susceptible to infection, she explained. We are in the same position today.
Even if transmission is reduced a little bit by a traditional seasonality, we may still see a large number of infections in the summer. In fact, there’s a chance that we could see multiple spikes of SARS-CoV-2 infections over time.
Metcalf emphasized again and again that, “this is going to be a very long game.” Our population-wide susceptibility is extremely high, and we are still learning about the virus’s transmissibility and demographic patterns.
Hoping for a V-shape recession
Economists Dudley and Blinder followed Metcalf’s disease analysis with an economic one. “We want to turn this into as close as we can to a timeout,” Dudley said. “Things pause and then resume.” But our panel acknowledged that we can’t truly “pause”. There is already massive human cost with more than 26,000 deaths in the US. But economically, perhaps a recovery will come quickly with an economic restart.
Our goal, Blinder said, is to make this as close to, “the proverbial V-shape recession and recovery as we possibly can.” That is fast down—we can’t help that; we’re having a fast down—and then a fast up, if we can do it.
During the 2008 financial crisis, we saw a collapse of the financial system which threatened to bring about an economic collapse, Dudley explained. “This time, the causality is quite different. We’re having an economic collapse—a sudden stop to economic activity—which is putting a lot of stress on the financial system.”
Many of our usual economic tools won’t work in this case. For example, Blinder explained, “If you cut taxes to mitigate a recession, which is a typical response, you rely on people to spend that money. That money becomes income to other people and they spend that money. When you have a population shuttered inside and afraid to go out, and spending minimal amounts on groceries, medicines and absolute essentials, you don’t get that much oomph from a tax cut.”
Because the Fed can’t do anything about the drop in demand, Dudley explained, it is working to mitigate the second and third round effects of an economy on pause, and in a much condensed time frame compared to summer 2007 through spring of 2009. Already the Fed has cut interest rates, bought large amounts of Treasury and agency mortgage-backed securities, and worked to supply liquidity to the banking system.
“The enemy is our collective enemy”
Dudley thinks the Fed has done a great job responding aggressively and broadly. Unlike in 2008, the economic strain isn’t the result of “big banks or big insurance companies that did stupid things,” he said. “The enemy is our collective enemy.”
But even with many differences in cause, duration, and effective strategies, Dudley says without the 2008 financial crisis, we wouldn’t have had the tools in place to allow the Fed to respond rapidly.
With the benefit of hindsight, we are likely to draw more parallels between the current situation and various experiences in the past, but we don’t yet have that perspective. All of my panelists emphasized that there is still much we don’t know about both the health and economic outcomes of the virus.
In both cases, outcomes are worse the longer the crisis goes on. Hitting “restart” will be harder for both the economic system and our individual lives and health. That’s why the “non-pharmaceutical interventions” Metcalf described are so very important in our multi-faceted fight against this once-in-a-generation pandemic.
Listen to the full discussion here, and join me and Drs. Blinder, Dudley and Metcalf for Part II of this discussion on May 28th at 11am ET. Register at the Griswold Center for Economic Policy Studies.
