This transcript is taken from an interview conducted April 3, 2020.
Could the COVID-19 crisis lead to less regulation?
What US policy makers have done right is gotten liquidity into the financial system quickly. The Federal Reserve has done a fast and wise job with the decisions they’ve made. The relief payments coming to households and the expansion of the unemployment-insurance program are good moves, and they were done in reasonably quick order. Those are encouraging signs.
Belatedly, some of the regulatory barriers to innovation have started to come down, or be revised, although this would have made a greater difference if it could have been done earlier. Obviously, testing was not widely available early, in part because of a reluctance to allow decentralized testing. That restriction has been loosened, but too late.
New York, Massachusetts, and other states have allowed doctors who are licensed elsewhere in the US to practice in their states. In other words, to make their licensing portable. They’ve actually graduated medical students a few months early. These things have helped to bring additional medical personnel into the field, who of course are desperately needed.
As to the regulations regarding production of medical equipment, such as respirators, we’re starting to see movement along those lines as well.
One of the good things that might come out of this is that people will realize some of the regulatory barriers that were making it hard for workers to work, or companies to produce what people wanted them to make, were sort of, on net, more trouble than they were worth. Going forward, I think we’re going to have more flexibility in the regulatory system, so that if something like this happens again, we’ll be able to address it more seamlessly.
How fast will the economy bounce back?
The economic effects in the short run are enormous, but they’re necessary. You cannot have people interacting and carrying on with normal economic activity without the threat of the virus spreading at an incredible rate.
There has to be some temporary decline in economic activity. We can’t get back to our original level until we solve the medical problem. This notion that there is some trade-off that exists right now between having a full economy and solving the medical problem is a false trade-off.
You are not going to have a normal economy until we don’t have a pandemic. Given the death rates, the hospitalization rates that we’ve seen, it’s just not going to happen. You have to first solve the medical problem. Then you can bring the economy back.
The question is, how long is it going to take for the economy to come back after you’ve solved the medical problem? It can come back quickly, or it can take longer. The issue is that it will take longer if a bunch of capital is destroyed during the slowdown. Now, we’re not out there destroying physical capital. We’re not tearing factories down. We’re not getting rid of the machines and equipment that make things. The kind of capital you would lose is intangible capital such as organizational effectiveness, trust, financial intermediation, relationships, things like that. If those are destroyed at a high level during the slowdown, it’s going to take longer for the economy to recover afterward.
I don’t have a good sense of how likely that is, or how large the destruction of intangible capital will be, but this is the key question you have to answer if you want to figure out how long it’s going to take after the short-term decline for the economy to return to its long-term growth.
How could COVID-19 reshape the US economy?
How quickly will the US economy recover?
Has the US done enough to combat COVID-19’s economic damage?
How could COVID-19 reshape the US economy?
One thing that may continue to rise at an accelerated rate is the concentration of economic activity in most industries. There are reasons to think that small and midsize businesses could fail at a higher rate than large businesses during the slowdown. That would reallocate more activity toward larger companies than before. This is a trend that’s been going on for a while, and I think we’re going to see even more.
The question is, will there be a wave of new entries after the initial failure of a lot of these small and midsize businesses? The long-term trends, unfortunately, are not encouraging. We’ve been seeing a decline for decades in business-formation rates. Maybe that will change. There will be enough room and niches will open up to get people to start businesses. But that’s an open question. So that’s one issue, the nature of industries and who’s operating in them.
Another potential long-term configuration is a shift in the kinds of products and services people consume. Obviously, everyone’s talking about video conferencing and how things might be shifting more toward interaction that way rather than in person. This has implications for the travel industry as well. I don’t know how large those shifts are going to be, but you might expect to see some movement there. I wouldn’t want to be an owner of a movie theater. That’s probably something that’s not going to flourish in the future, other than perhaps as a novelty.
Another industry that might be reconfigured, or at least its reconfiguration might be accelerated, is retail. A move to delivery-based retail, as opposed to brick-and-mortar stores, might increase after this. A lot of people have gotten used to the notion of things brought to their door, and maybe things they hadn’t thought of before as deliverables they will in the future.
First and foremost, you want to avoid financial chaos. If there are a lot of spillover effects of a particular company defaulting, you need to think hard about those.
When thinking about who deserves a bailout, that’s a hard question. One thing you want to consider is how much capital will be destroyed if the business doesn’t get a bailout. For a lot of businesses, you might think, “OK, they might have to default on their debt. Their equity holders might be wiped out, but the nature of the business hasn’t changed. They could go forward as new entities, or restructured entities, even in an absence of a bailout, and still be able to deliver the same goods and services they were before.”
For others, you might think that crucial things would be lost if the companies went into a bankruptcy or otherwise defaulted—things such as organizational effectiveness or the esprit de corps of their workforce—and that those things would have to be rebuilt on the back side of a financial default. In which case, there is an argument for possibly aiding in those restructurings, or helping the companies meet their financial obligations. First and foremost, you want to avoid financial chaos. If there are a lot of spillover effects of a particular company defaulting, you need to think hard about those. And so, it might be worth the cost of aiding that company.
If we are going to be able to operate for months on end without this shelter-in-place structure, first, we need to get the prevalence rate of the disease low enough so that we can deal with it medically, and, second, we need to test people. We have to test people at a high enough rate that we can catch infected people early, and get them quarantined before they infect others. Then, we need to closely watch their contacts so that we can see if they get infected as well. Until we do that, we’re not going to be able to go back to work at the rates we were before. We’re not quite sure how that’s going to happen yet. It’s not clear that people have realized this is really the only way to end social distancing until we have some sort of vaccine.
What would the new normal of a test-and-trace regime look like? It could look lot like the old normal, with occasional instances, flare-ups, where some particular office, some company, some location, some restaurant is going to have to close because an infection has started there. And so the problems will occur in the form of a random element here and there thrown in. But if we have enough testing and enough tracing, you can keep the rate of those incidences low enough so that, on a day-to-day basis, most people will be unaffected in terms of who they’re interacting with and what they’re doing at work.
It’s become obvious to me as an economist that we need more real-time economic data—even something that comes out with a month lag seems hopelessly archaic by the time it reaches us.We’re going to see more of an effort on the part of empirical economists to put into place data-collection structures that will let us know what’s going on at a more frequent rate and a lower lag time than what we have today.
Financial markets have had that for some time. But other than that, we don’t have a lot of high-frequency real activity data. And I think economists and others realize that’s a hole in our knowledge and something we need to work to fill.