Is the economic shock of the coronavirus pandemic a black swan event — rare, unpredictable, with severe consequences? Or is it more of an old crow? If politicians could've seen the virus coming, could they have reacted with traditional economic stimulus tools?
The Business Tribune talked to three prominent economists on Monday, March 16, the day the Feds announced their intention to spend a trillion dollars on stopping the economy from grinding to a complete halt.
Responses have been edited for clarity and length.
John Tapogna, President, ECONorthwest
Business Tribune: We lived through a recession 12 years ago and it came on in a slow motion, with the financial meltdown on Wall Street. This one seems to have come in within a couple of weeks. How will it affect the Portland area economy?
John Tapogna: This is unlike anything we've ever seen. We need to shut down entire sectors of our economy all at once. And that is very different than the financial crisis.
We're in the process of shutting down the entirety of leisure, hospitality, industrial sector, hotel accommodations, food outlets, bars, entertainment, etc., with no certainty as to when it's going to reopen.
Portland has a robust tourism industry that intersects with that, but beyond tourism, we all go out and eat in restaurants and bars and go to movie theaters. And that's just a tremendous shock to hundreds of thousands of people who work in those industries. The other direct and almost complete hit is to transportation: planes, buses, trains, etc.
But then you've got an awful lot of other work that is going to be hit — the professional and business service industry. If the courts slow down, that's going to affect the legal industry. Permitting officers can't have people congregating to review plans and approve anything from a new house or a new family development or even the repair of a sidewalk.
BT: And yet construction workers are still out there.
JT: If this pandemic gets so bad that we don't even want to congregate in groups of three or four workers, then they need to stop working. Aside from that, it really depends on how does government figure out how to keep its gears turning in some of those approval processes?
The city can go out and fix streets and paint crosswalks, but if private contractors need the permit to go lay the sidewalk in front of the house, and they can't figure out how to get access to the person to get the permit approved, then they're delayed.
So, it's imperative on government to figure out how we keep as much of this activity as possible going, because there are so many other industrial sectors that are just completely shutting down."
(Three big automakers shut down their U.S. plants the next day, on Wednesday, March 18.)
With respect to manufacturing, it's really going to boil down to can you keep folks at 6 to 10 feet apart from one another? And are the supply chains up and running? The original concern was that supplies coming from Asia were going to be a problem. That almost seems like a modest concern now compared to some of the disruption right in front of us.
Landlords are going to see rent payments slow down because the people that are living in their property are not making rent payments. You'll have the remodeling business slowed down considerably because people who thought they were wealthy a month-and-a-half ago, looked at their 401(k) and all of a sudden are much more concerned about their financial prospects.
Any kind of discretionary expenditure, like travel or an addition to the house, is going to be harder to come by.
BT: How long with this downturn last?
JT: The economy was in very good shape going into this, and it will be our success or lack of success against this virus that will determine if this is a V-shaped recovery, where you fall hard and come back fast, or if this turns out to be a period where you hunker down until late April, and then things just don't come back.
If we can't convene in groups of more than 25 into the summer, there's no precedent to understand what that kind of damage that would be and how long it would take to run out.
Tim Duy, University of Oregon economics professor
Duy sees the coronavirus shock as a black swan event: something strange and unexpected.
Tim Duy: "It looks like it's an unprecedented stopping of activity. The first point of impact is leisure and hospitality, and the second is nonessential retailers. But it's going to spread far and wide through the economy where a lot of different types of firms are eventually going to feel some pressure.
BT: Of the professional services, which do you think are the ones that would be affected last?
TD: All these professional services can be affected. The last one will be health care. So, whether it be your software firms, dealing with telecommuting and video conferencing, that is obviously going to be in demand. Legal activity will probably still see substantial demand. Everyone right now is trying to operate as normally as they can, and it will be harder to do so, the longer the downturn lasts.
In manufacturing, you might be affected by supply chain issues or closures in the rest of the world. And then you've got a potential downside in demand being delayed. So, you could be hit on both sides: The supply-side shock first, but then the demand shock on the other side of it.
In education, more and more school districts have to consider what the universities are already doing: distance learning.
BT: What should the fiscal stimulus do?
TD: The real goal here is to keep as many paychecks going as we can for as long as we can because that's what's going to allow us to come back more strongly on the other side.
Can the government find creative ways to keep people employed? That is going to be important to minimize the damage from the downturn. It should be like a giant natural disaster. We've all been through a snowstorm for a week, and then we go back to normal. In theory, you could have something similar, except for the depth of it.
Small and midsize businesses are going to find themselves unable to continue. You've got a couple of different options. One is unemployment insurance (which employers pay into), and we should try to compensate people who lose their jobs. And to the extent that the state can organize and deliver low-interest bridge loans for firms to get from point A to point B, that would be helpful, too.
Anything that sustains the flow of activity right now is really important. When businesses go totally out of business and liquidate, that's harder to come back from.
BT: Are government workers' jobs in Portland safer than private-sector workers?
TD: Yes, in the near term. I don't think they're vulnerable to local property taxes (shrinking), but they were during the last downturn because it was a different time. They go up by 3% every year, and it's only in a weird situation where you get these severe drops in housing prices you're going to start to impinge on that world. We shouldn't see the same dynamic in the housing market that we saw in the last downturn.
BT: Is it the biggest thing in your life so far?
TD:This is an unprecedented event. A sudden stop of economic activity of this magnitude, with this much to the global economy, is just unheard of. I would say that the only sort of good news is that the authorities, both fiscal (Congress) and financial (the Federal Reserve) are responding very quickly. Like getting checks to people. France announced that they're going to basically delay or eliminate utility bills. Those sorts of things, preventing evictions, can help minimize it.
This is really unlike last time (2008), where there was some part of the economy that was out of whack. The housing markets were out of whack. But we don't really have a situation. It was fundamentally healthy last month; in theory, it should be fundamentally healthy again in three months. It's just how do we bridge that gap? How do we keep the activity flowing? And that's your argument for V-shaped recovery.
Jim Glassman, JP Morgan Chase head economist for commercial banking
Glassman was in Portland in February giving a state of the economy speech to local customers. Known for his rosy outlook, he explained at the time why he saw no recession on the horizon.
BT: How do you see this shock to the economic system?
Jim Glassman: It's both the coronavirus and the economy, two different things.
We're asking people not to go to certain activities, and that's creating huge problems. But at the same time, we're asking people to produce a GDP, and we also need to figure out how to compensate them.
Finally, the machinery is starting to move. They're (the politicians) willing to come up with something like a trillion-dollar fiscal stimulus. They don't know how to get it to the people that really are hurting. They want to get it out quickly.
The problem is, it's the hourly workers and the people who are working for the restaurants and the bars and the athletic facilities that are cut first, but it ripples out.
I'm pretty confident. They're finally getting their hands around what they need to do, and the numbers are not going to stop. We're not going to be constrained by a certain size. They're going to come up with enough to compensate for all the damage that we're doing by putting the country in quarantine.
I look at the way things are evolving in Japan, Korea, China, Singapore, the Asian region. This thing is cresting already. And it crushed it after four to six weeks. The flu season, everything has a rhythm to it. And I think the hope is that they can get a grip on it by mid-April, late April. They're talking longer in some cases. Eventually, we'll get back, and we won't be so crazed.
What's more important is they're willing to come up with as much fiscal help as is needed. And with interest rates as low as they are, and inflation not a problem, no one's going to say, wait a minute, we got to be careful how much money we're spending.
The problem is, it doesn't help me, a check for $1,000 if I'm not allowed to go to a restaurant. The problem is the guy who works at the restaurant. He can't get his job back, but I'm willing to go back to the restaurant. That's not going to happen until we get our hands around a difficult problem.
People believe this will be a short-term shot. It's not like we're fundamentally changing the path going forward. You always have to ask, if we didn't do this, what would be the depth of the recession?
It looks like it would be far worse. Because if you just let the economy rot and recover slowly, the federal government, the deficit is going to be running up as it always does in a recession. You're better off to be as aggressive as you can.
BT: You live in Princeton, New Jersey, but you're staying in Los Angles near your kids and grandkids. What's happening?
JG: It's interesting because young people are not bothered by this. They walk the streets, everything looks kind of normal, except more and more of the stores are closing so you can't get in.
Everybody has been told that this is the greatest hazard to older people. The main conversations are young people talking about, 'I don't want to be around my parents, I don't want to expose them to anything.' I'm 72. If you look at the numbers, flu season is risky for older people, too.
On the street after 9/11, everybody was connected. We all felt threatened. There was a bit of let's pull together; we're not going to let this disrupt us. This has a different feel. No one really feels in jeopardy. I think people are amazed that we're having to close everything in response to something we can't see. If we could see these little viruses running around, I suppose it would feel differently.
My daughter's friend drives for Uber, and he was sitting at LAX from 10 in the morning till evening, there was not a single ride. We're causing the economic disruption, and we're hoping that there's enough money we can spend to compensate people for this. It's just it's really hard to get it to the right people with the problem. I can't spend on the restaurants, and I can't spend at the bar, and I can't go to my gym. And those are the guys who need it.
BT: If you ran a restaurant, would you see it as a two-week thing or a six-month thing?
JG: I would say I'm going to pay you guys your normal pay as if you were here. And then I would figure out after the fact how to get out ahead. Because if you're a business owner, you can do something like that and you get the loyalty of people. Like, Cisco said, they're going to keep paying their hourly people. You make it a more pleasant place to work and people feel better about working in it. It gets around.
When you're faced with a thing like this, a flulike health crisis, it's not going to go forever. And so, it pays for you to try to take the long view and think about managing your workforce and keeping your people loyal. Because if it's really going to cost you a lot, you're going to get help anyway from the federal government — once we get everything put in place.
We have about 70 million people who are hourly workers. A lot of those guys work at restaurants and bars and the stadiums. If they earn minimum wage, call it 10 bucks an hour, just to compensate everybody who can't get to work their full pay, it might cost $5 billion a day. And if in a couple of weeks, in several weeks, we get this under control, it's not that onerous. And it limits the damage to the broad economy.
BT: Is it better to spend billions of dollars on pop-up hospitals than it is by sending checks to bartenders?
JG: You probably want both. That's what the first round has been, pumping money into the health care system. You want to give the health care system the maximum ability to solve the problem. But you also want to help the people that you're asking to not go to work.
Read more from Glassman online.
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