This is part of our Coronavirus Update series in which Harvard specialists in epidemiology, infectious disease, economics, politics, and other disciplines offer insights into what the latest developments in the COVID-19 outbreak may bring.
The Senate late Wednesday passed a wide-ranging, record $2 trillion relief package targeting individuals, businesses, and city and state governments left reeling by the coronavirus pandemic. Harvard Kennedy School Professor Karen Dynan, Ph.D. ’92, served as chief economist and assistant secretary for economic policy at the U.S. Department of the Treasury from 2014 to 2017. She’s currently teaching an economics course called “The Financial Crisis and the Great Recession.” Kenneth S. Rogoff, Thomas D. Cabot Professor of Public Policy and professor of economics in the Faculty of Arts and Sciences, is a former chief economist at the International Monetary Fund and an author of an influential history of global financial crises, “This Time Is Different” (2009), with Kennedy School economist Carmen M. Reinhart. Dynan and Rogoff spoke about recent moves by the Fed to calm jitters on Wall Street, the relief package, how deep the damage may go, and how soon the economy might bounce back.
Karen Dynan and Kenneth S. Rogoff
GAZETTE: What do you think about the stimulus package? Given the scope of the pandemic’s impact, what does it accomplish and where does it fall short?
DYNAN: I think the stimulus deal that the Senate has agreed on has a lot of positive features. It has money to send to individuals to help them get through what’s likely to be a very tough period for many of them. Many hard-hit families will also get some relief from the additional unemployment insurance benefits provided by the bill — an extra $600 a week could be a big deal for them. The package also has substantial funding for loans to small businesses to help them stay afloat. Importantly, these loans can be forgiven if they are used to retain and keep paying their workers. It has money that will help the Fed do more lending, some funds for direct loans to larger businesses, money for the health care system, and funds to help states and localities deal with the crisis. The latter is really important, as state and local finances are going to be hit really hard, and it’s especially critical that they don’t pare back social programs and essential services right now.
Depending on how the crisis unfolds, we may need to spend more in all these areas but, all in all, I think the package is a really good start. We now need to turn our focus toward how to get these measures implemented well. We have never tried to do some of these things before — like lending to small businesses on this scale — and it’s super important that the money goes out quickly and effectively.
ROGOFF: I think it’s a tremendous first step. I don’t think this is anywhere near the end. We’ve pushed the pause button on the U.S. economy. Estimates of how much it’s actually going to go down in the second quarter are all over the map because, really, how do you estimate it? Even people who form GDP statistics aren’t able to get a great estimate because it’s so far off the norm. We’re in a war, and I think this has to be viewed in this perspective, where you pull out all the stops.
There are so many people in our economy who don’t fit into regular jobs. Some countries, like Denmark, which have a much smaller informal economy and a smaller gig economy, have concentrated on paying lost wages directly. The U.K. has said that it’s going to do the same thing. We have so many people [for whom] that’s not going to work so easily, and so this idea of capturing everyone in the economy, making [direct] transfers, is definitely a good path, as is focusing on small businesses, which have been extraordinarily hard-hit. So this was a very, very good first step.
The loans to the corporations: If they don’t do it, they have to force the Federal Reserve into doing it, and the U.S. Treasury owns the Federal Reserve. They’re just doing it in a more transparent way. You can’t let all our airlines go bankrupt. There may be some progressives who would feel good about that. But it’s pretty destructive. Carbon tax, yes. Letting all our airlines go bankrupt, no. I don’t think that’s something that we want to do. Large corporations employ a lot of people, and many of them are being hit just like the small businesses are for problems they didn’t create. And if they’re not being directly hit, maybe they’re still functioning. But the ones that are directly impinged, in the travel industry in particular, they’re all going to go bankrupt, and it’s going to be a mess, and we want to try to forestall that.
[Assigning an inspector general to oversee the fund disbursement:] That was a fine idea to give more structure, especially given the lack of trust in the administration. That was a constructive change that both sides should have wanted. I think the Democrats made a lot of constructive suggestions. I’m not in the politics of this, but this is a real war, not a political war. A lot of the debt battles in recent years have really been political. They’re called wars, but they’re not. This is a war, and it’s good to see some consensus.
GAZETTE: Given its size and scope, is this likely all the relief we’ll see from Congress?
DYNAN: If this does not appear to be offering enough support to the economy, I think Congress will step in and take additional steps.
ROGOFF: Unless we get lucky on having an extremely effective antiviral drug or something very quickly, it’s not going to be the end. The health sector is the front of this war. We’re supporting the economy, but if you think about what needs to be done in the first instance, it’s in the health sector at the national level. First and foremost, there should be absolute, widespread free testing not just for people who are acutely ill, but also for people who might have been infected and recovered. That would be so beneficial, if we spent tens of billions of dollars and accomplished that. It’s a fantastic investment. So yes, we need respirators; we need masks; we need personnel to deal with the acutely ill. But in order to know how to deal with this and how to manage the economy, you need to know who’s infected, who’s recovered, and who’s not infected. I would frankly like to see more of a wartime-type mobilization on that front than we’ve seen so far. But in terms of the rest, there will be other costs before lost tax revenues. I’m sure there will be many areas missed that they’ll have to fill in. But if we come out of this just having lost an extra $5 trillion and the economy recovers, that’s going to be a great outcome. The whole point of saving for a rainy day is precisely to be able to borrow with abandon in a situation like this — the worst thing to hit us in 100 years or more.