The economy, almost literally, is dropping like a stone. This blog summarizes the most recent evidence and points to what it means for federal and state economic and jobs policy.
Our Plunging Economy
On April 2, the Economic Policy Institute (EPI) revised its estimates on the economic impact of the COVID crash. EPI projects Pennsylvania will lose 777,550 by July and have an unemployment rate of 16.6%. Moreover, EPI takes into account the $2.2 million stimulus Congress passed on March 27 and assumes additional federal stimulus in the form of aid to state and local governments.
EPI’S cautious estimates are far from the most alarming. William Rodgers of The Century Foundation projects that the “true unemployment rate” in Pennsylvania is already 34.6%. (Pennsylvania’s March unemployment rate was only 6.0 percent but because workers were surveyed just before mid-month, this rate does not reflect conditions at the end of the month.) Rodgers estimate of unemployment was much higher because it took into consideration the off-the-chart spike in initial claims for unemployment seen nationally, and especially in Pennsylvania, in the last two full weeks of March (see chart.)
The Federal Reserve Bank of St. Louis uses a third method for estimating the national unemployment rate, based on two different estimates of the number of jobs vulnerable to layoff because of social distancing policies. The Bank projects U.S. unemployment of 32.1% in the second quarter. As far as I can tell, this estimate doesn’t consider the macroeconomic repercussions of unemployment in occupations hardest hit by social distancing—so it could easily be too low.
We Need More Federal Action to Limit Loss and Then to Spur Recovery
In one way, the economy’s screeching halt reflects policy success—tens of millions of people have been ordered to stop working in order to stop the spread of the virus. In this sense, Pennsylvania’s potentially faster climb in the rate of unemployment is good news. In another sense, as EPI notes, each escalating forecast of higher unemployment is an indication that policymakers at every level of government need to curb the spread of the virus and protect the health and economic well-being of their communities.
At the federal level, we need to go beyond the $2.2 trillion stimulus with policies that are simpler to implement and that maintain the connection between employers and employees so that individual businesses and the economy can accelerate fast when (most) people no longer need to social distance. In particular, the U.S. stimulus contained a combination of expanded unemployment benefits, assistance for small business (in the form of loans that may be forgiven if used to keep workers on payroll), and support for work-sharing (partial unemployment for workers forced to go to part-time but laid off completely). In terms of their cost, these three stimulus components could approach the use of government dollars to finance 80% of company wages, and approach used in Britain and Denmark. The British/Danish approach avoids the separation of workers from firms, even if workers cannot work from home or their employer is closed. By contrast, the unemployment part of the U.S. policy does require a separation. Moreover, the small business assistance may not get taken up fully because of paperwork challenges and because companies are not confident that the loan they take out will be fully (or mostly) forgiven. Bottom line—unemployment and joblessness may rise much higher in the U.S. than with the British and Danish approach. Moreover, when the pandemic has passed, firms and workers will have to go through the process of reconnecting to one another (although it should be easier in many cases for workers to go back to an old employer than to find a new one).
All Hands on Deck at the State and Local Level
At the state level, we continue to update suggestions for government action made in what began as our analysis of Governor Wolf’s budget proposal. We’re also tracking the many actions our state government has already taken. We expect to publish a summary of those, of federal actions to date, and of opportunities for further Pennsylvania actions next week. One critical issue will be helping individuals and businesses navigate the assistance available to them, and coordinating assistance provided by different programs and agencies–a war room function for the battle against this invisible enemy. Such a war room should ensure effective use of the web (see this the Recovery Hub of the Bell Center, a non-profit in Colorado) and establishment of adequately staffed help lines that support people and businesses until they get the assistance for which they qualify. It should also problem-solve creative solutions–for example, if businesses are hesitant about taking out small business loans to retain their workers despite the promise of forgiveness, could state loan guarantees overcome the hesitance. In some cases, the staff for a help line and problem-solving come from the public workforce system or other social service and economic development agencies whose normal function (e.g., conducting job search seminars and counseling) is on hold.