Chicago Booth Lecture Series Macroeconomic Effects of Covid-19

Kara Northcutt: Hey, everybody we'll get started in a few minutes. We'll just give everybody some time to log in. So welcome. Thrilled to have you with us today. Feel free to let us know in the Q and A where you're joining us from today. Love to know. I happen to be in Northwest Indiana, which is pretty close to Chicago. California, great. Welcome everybody who's just joining. We'll get started just a couple minutes after noon, but yeah, feel free to let us know where in the world you're joining us from today. It's always nice to see. Via the, we're using the Q and A function for this webinar. A couple California, Nigeria, fantastic. India. Locals, Chicago, great. Great, a lot joining us from India today, that's fantastic. All right, and again, for those who are just joining us, we'll start in maybe two or three minutes. I realize this is an hour long session session, so we'll keep it tight on time, but wanna give people a chance to join. So we'll start in maybe two or three minutes. DC, I miss DC. I go there so many times a year typically, and I'm like itching to get back to the east coast. Still see quite a few people flooding in. So, again, we'll get started soon. Popular session, obviously a hot and relevant topic right now. All right. It looks like we're getting close to what we expected. So we'll go ahead and get officially started. So welcome everybody. Good morning, afternoon, evening from where whenever you may be in the world. My name is Kara Northcutt. I am senior director of employer engagement and admissions at the University of Chicago Booth School of Business on behalf of the executive, full-time, evening and weekend admissions team, thrilled to welcome you to today's master class, the macroeconomic effects of COVID-19 with professor Veronica Guerrieri. Hopefully I'm saying that right. Feel free to submit questions throughout. We'll keep this like relatively informal. So Veronica will, I'll pose questions that you post in the Q and A as they come up with the topics that she's speaking about. So again, keep using the Q and a throughout, like to do this as interactive as we can. Today you'll experience two key components of the Chicago approach to business education. Our data driven and evidence based approach really helps you learn how to ask the right questions, take and really think more strategically and more analytically, which really prepares you and gives you the confidence to take on, you know, really significant business challenges you're dealing with today, and will deal with down the line throughout your career. Another key advantage and component of the Chicago approach is our supportive and collaborative community. At Booth, you join a group of current students, alumni, administrators, that were all here for you. We wanna make sure you have the best experience possible as a student and throughout as a Booth alumni. And an integral part of that community is, of course, our faculty. The same faculty teach across all of our MBA programs at Booth, and they truly become a part of your network as well. So we're really excited for you to get a bit of that experience. So professor Veronica joined Chicago Booth in 2006, and she's been a research associate of the National Bureau of Economic Research since 2013, has been a consultant at the Federal Reserve Bank of Chicago since 2014, has been a visiting professor at many prestigious universities, such as MIT and Yale, and a visiting scholar at the Federal Reserve Bank of Minneapolis. She focuses on areas, obviously, of macroeconomic, search theory, labor, financial market frictions, dynamic contracting, growth theory, et cetera, and teaches specific classes in macroeconomics and financial markets in the macro economy. So with that, it is my pleasure to turn it over to Veronica, thank you.

Veronica Guerrieri: Thanks a lot, Kara, for the kind introduction. And welcome everybody to the class. So given that I teach macro, I wanna give you just a brief overview of what the class is gonna be about. And then I'm gonna talk a little bit more specifically about the current economic outlook and the macroeconomic effect of the pandemic we are living in. So, what is macroeconomics about? Macroeconomics want to study the behavior of aggregate economic objects and the impact the different type of policies have on them. So what are aggregate economic objects? The most relevant key economic indicator that people look at to have an idea of the economic performance of a country is the level of economic activity that can be measured as GDP, which tell us how many goods and services are produced in a country. And macro studies, what happens to this production? What happens to economic activity? What happens to the income that comes from this economic activity? And we can think about two branches of macro. One is more focused on thinking what happened to GDP and economic activity over a more high frequency horizon. So thinking about like 3, 4, 6 months, a year, one year and a half. And so thinking why the economy sometimes go through period of contraction, like recessions, like the recession we are living in right now, and then this alternates with period of expansion. And so we have like fluctuations of the economy around some trend, and this is called business cycle. The other branch of macro is more focused on the longer period, on the longer term, and thinks more about what happens over 30 years, 40 years. And this is called economic growth. In that branch of macro, we are more interested in understanding why different countries achieve different level of GDP per capita, why some are growing so much faster, like China, India are. I see many people are from India here. So why these countries are growing so much faster than the US, for example, or other advanced economy, why the level of GDP per capita is still lower. Okay, and we will try to understand that. Two other important economic indicators that we typically look at on top of GDP are unemployment and inflation. And I'm gonna show you some feature about those in a second. And then another important task of macro is understanding what are the different type of macroeconomic policy that can help the economy to do better, to recover from recessions? And we classify policies into branch, again, monetary and fiscal policies. Monetary policies are all the type of policies that are decided by the monetary authority, the central bank of the country, in the US, the Federal Reserve Bank, the bank of Japan in Japan, the European Central Bank in Europe, any central bank of any country has monetary policy under control. And fiscal policy is all the type of policy that the government decide on. So we're talking about taxes, transfers, welfare programs, government spending, investing in infrastructure, investing in education, where education is public, for example, or investing in military, and the government itself, like the White House in the US. And then finally, the last thing we typically talk in the macro class is a bit about international perspective. Because we are living in a globalized economy, of course we wanna understand better how the economic outlook of each country interacts with the others and how different policy have feedback effect on other countries. And so how coordination is important, how we should be thinking differently about policy once we consider the feedback effect that we are gonna get from other countries reactions and so forth. Okay. So let me now briefly give you an overview of these three key macroeconomic indicator I've talked about, economic activity, unemployment and inflation. And then we're gonna go into talk more specifically about what's happening today. So this is a picture I'll show you, the blue line is the level of economic activity, as I mentioned. So it's GDP, it's the real GDP evaluated in 2012 dollars. And you can see that the blue line is an upward, clearly there is a positive trend. There has been a growth over a long period of time in the US economic outlook. And again, here I'm showing you everything for the US. The class is gonna be focused on advanced economy. And US is one leading example that I use throughout the class, but we will talk about many other countries. And in particular, we are gonna talk about different episodes in Europe, in China and India. And so we will also branch out to many different countries, but for today, I'm gonna focus on the US. So US has experienced an upward trend in economic activity. And so this is when we talk about growth. That's what we are talking about. Why there is this positive trend? Why GDP has been growing over time, over decades since 1970? And did this happened in other countries, at the same speed or different speed, and why? The other line, the red line, represent the percentage change in economic activity. So it tells us the growth level. Okay, and you can read the scale on the left panel here, and you can see that sometimes growth goes up. Sometimes it goes down. If you look the at the zero, sometimes it's positive, sometimes it's negative. And the gray shaded area represent the official recessions in the US. So in those periods, typically growth is negative. So in official recession, the rule of thumb to decide when the country is in a recession is typically two consecutive quarter of negative growth. It's not a rigid bill, because the committee of the NBR that decides how to date recessions use many indicators, but that's typically what happened. And you can see here, the dramatic drop in economic growth that we are experiencing now. It's really unprecedented if you look over the years since 1970, and even you can go back to the World War II basically, and we have never seen such a drop in economic outcome. So this is really something noticeable, not only for the US, but for all of the countries all over the world. So we wanna really understand what's going on. How can we help the economy recover? And to go back to this positive trend that the US has experienced so far. Now, this is a different way of looking at the outlook of the economy. Instead of focusing on the production of good and services, we can look at labor markets. So, as I said, like, if you produce more, you sell more, you get more income. And so of course profits are gonna go up, but also workers are gonna get their job, and their income is gonna go up. So during the recession, when production of goods and services is low, typically labor markets are more tight, because firms start firing more workers, they need less work. So they hire less. And you have spikes up in unemployment rate, okay. You can see in the current recession, again, an unprecedented spike in unemployment, up to 15 percentage points. But in any recession, all the gray set of values you see it growing in unemployment rate. Unemployment rate tells us how easy it is for workers to find a job when they're looking for one. And clearly it's harder when the economy is going through a contraction. The last economic indicator that we wanna typically have in mind when we look at the broad future of a country is inflation. So here, the blue line is the level of a price index, which is for this feature, the CPI. There are different types of price indexes that we can use to build inflation. And this is the one that is mostly used, the consumer price index. But any indicator that you use, you always have a similar picture. Price indexes have also gone up, which means that inflation, which is the growth rate of this price index, the red line here, it's typically positive. Okay. So the growth rate of price is positive, means prices have been going up. In fact, you can see that its typically above the zero, here, if you look at this table. Sometimes there are deflationary periods where inflation will go negative, but those are rare. And you see that inflation is very erratic. So there are situations, there are recessions where inflation spikes up, like at the end of the seventies. There are other recessions, like the Great Recession recently in 2007, 2009, and the current recession, where inflation has been going down. Okay, so here, the macro class, the model that we are gonna build in the class is gonna try to help us understanding what's different about different recession. Why in some recessions, inflation is going up, while in others it's going down? And this is very important when we think about policies, and when we think about what's gonna happen when we go forward when we recover, because we can have a very different economic outlook if inflation is gonna stay low, and we have a deflationary period, or if we are gonna have a spike in inflation, and we maybe are worried about inflationary spiral. And this is a very active debate now, because we have seen that inflation is actually catching up and stopped increasing in the last few months, while we see at the same time, still slack in the labor market. So one important question is, should we be worried about inflation going up or not? What's driving that? And to understand that, we need to understand how all the pieces of a macro model works, and being able to have a good picture of what the effects of different policy might be.

Kara: So we have a couple questions if you want me to ask them. The first one, and if it's something you'll get to later, you could put a pin in it, that's totally fine. The first one, what is your opinion regarding the FEDs current, extremely accommodated monetary policy? Do you think the FEDs should keep COVID emergency monetary policy this long?

Veronica: Yeah, so I think, and I'm gonna talk a little bit about monetary policy later, but I'm happy to anticipate here. I think the economy is still coming out from a dramatic contraction. Labor markets are still tight. So I think that the FED is being accommodating so far. I think that that has been the right call. That said, now things are getting better, slowly, but they are getting better. Inflation is picking up. So I forecast that in probably in the next FOMC meeting, and if not the next, for sure in the ones after that, the FED is gonna start rising interest rate. And I think rightly so, because there has been a big fiscal policy package that is gonna help accommodating the economy. So there is no need, in this moment, for an additional expansion of monetary policy. And I think inflation now starting to rise, it's definitely the right moment to start being a little bit more contractionary. And I expect the FED to do so. And I think markets expect that. So I think it wouldn't no big surprise if the next FOMC meeting that are gonna be in June, interest rate are gonna start rising a bit.

Kara: Yeah, there's a very related question. It says, yeah, do you see inflation being transitory or could be more persistent and exacerbate a bigger asset bubble than that of 2008? Do you have any thoughts on that?

Veronica: So I'm not, so I'll go back to that. I'll get back to that. In short, my short answer is that I'm not so worried yet about inflation, and I'll get back to that and why.

Veronica: And last, real quick is there, I'm so sorry. Go ahead, sorry.

Veronica: Although I think that inflation is starting rising, so I'm not saying that, but I'm not worried about the spiral at the moment. Yep.

Kara: One more quick one that's relevant. And then we can continue on. Is there a correlation between interest rates and unemployment rates?

Veronica: Well, there is in a sense that interest to the FED if the main commercial monetary policy is to try to affect the interest rate with a very short running interest rate. And of course, for example, in expansionary monetary policy, reduced interest rate. Why this is gonna affect unemployment? Well, because if interest rate go down, people tend to spend more, because they can borrow cheaper, or they can, I mean, saving has less reward. So you tend to consume and invest more. And so if that happen, you create more businesses, you create more production, and this keeps more jobs and loosen up labor markets.

Kara: Great, thank you. Yeah, continue on. And I'll let you know as others come up.

Veronica: Perfect. So how about briefly the goal of the course? So what we do in the macro class is building a unified macro model to account, basically for all these different patterns. Understanding the relationship between interest rate and unemployment rate, for example, is one of these questions. Understanding what's happening to inflation, how inflation interacts with the unemployment and so forth. And the model is gonna help us understanding the data, explaining the data, maybe make assumption for future data, and also to evaluate policy, which is important if you run a business to understand what's gonna happen to demand, for example, what's gonna happen to interest rates going forward. And so in order to build this model, we are gonna first build the supply side of the economy, understanding how production works, how labor markets work and what is behind growth. And then we are gonna build a demand side of the model, so understanding who is demanding those goods and services. There are producers, there are people who spend money in that, and these are consumers and investors. The consumption, investment, and government spending are the main forces of demand. And then we put together, we understand fiscal policy, monetary policy, and put everything together. And this is typically very illuminating. Finally you can understand better what you have understood at some degree, some pieces here and there, but the beauty of putting everything together and understanding all the mechanisms. I think it's something that is very useful and I highly recommend you to take the class. Okay, now let's go more specifically about the last four years or so. Actually three years or so, what happened after 2019? What was the trend before? What happened with the pandemic? So here is a picture of employment. This is private employment, and you can see that the pandemic has a huge effect on employment. We have seen the figure of unemployment rate. This is very close to that. You have a drop of 16 percentage point of employment, which is enormous. Like typically a drop in employment is 5-6%, never like 16%. And you see that there has been a recovering, recovery going after the last spring, but we are still roughly at 6%. So we are still now where we would be in a recession. So things are not fully recovered yet. And so the expectation is that the trend is positive. Things are getting better. But we're still way far from where we were before the recession hit. And then, an interesting feature about this pandemic and this recession is, well, let's look at employment across different sectors. And here, I'm showing you two sectors as an example, because one feature in my reading of the data, a defining feature of the pandemic, it is really its asymmetric nature. The fact that, for its own nature, the nature of the pandemic, of the fact that the virus spread by personal interaction, sectors that require more personal interaction are hit clearly, much more dramatically than other sectors that can produce without personal interaction, and so the fear of spreading the virus. So for example, if you look at sectors like leisure and hospitality, clearly these are the ones that have been hit most dramatically by the pandemic, back in the spring, like with a drop of 50 percentage points. Like if you look at sectors like professional services, that instead are type of services that can be provided over the internet, well then the drop is much less dramatic. It's still affected. So there are two feature of this graph that I think are important to take away. One is that the effect on different sector is very different, is very asymmetric. Some sectors have been hit much more than others. But even the sectors that do not require personal interaction, and so directly affected by the spreading of the virus, have been hit substantially. Because still these blue sectors has a drop of 10 percentage points on impact. Okay. And if you go look forward, we are still below, much less for some sectors than other clearly still, the leisure and hospitality, although are recovering fast, you can see the trends spiking up. Restaurants are doing particularly well now, but still there is a difference across the sectors. Now how about, and by the way, this is very different from the structural composition of other recessions. So typically what are the sectors that are mostly affected during recessions are the manufacturing, the one that produce durable goods. While in this recession, this is also being called a service recession, because services that are provided in person are clearly the ones that have been affected the most. Now, another way of looking at the heterogeneity of the impact of COVID, is if you split employment by the level of wage of the workers in that sector. And so you can see that, if you look at employment for the bottom wage quartile, the purple one, you have a much larger impact than if you look at the top wage quartile. So in general workers with lower wages have been hit more dramatically than workers with higher wages. And why is that, what's the overall picture? Well, the overall picture is that those services that require more personal interaction are particularly heavy in low skilled workers. And so that's why these two pictures are consistent with each other. Like if you look at the data more specifically, what's the composition of the workforce in sectors that require more personal interaction? Those are typically more biased towards unskilled workers. Okay. And so the workers who lost their income more are the poor ones, although maybe the consumers that have reduced their consumption more are not necessarily the poor ones, because for example, the richer households use the restaurants more, go to hotels more. So in fact, if you look at the consumption, you have a very different picture.

Kara: A quick question that's related. Are you concerned that the recent decline in employment due to COVID-19 may lead to long term decline in the labor force participation rate?

Veronica: So for sure that's a great question because of a very important indicator I haven't talked about, which is the participation rate. Unemployment rate can be low, but if participation rates spike up, still the labor market is in a bad shape. So it's very important to keep an eye on the participation rate, however, I'm not particularly, and for sure participation rate spiked up during the recession, because it was hard to find a job. So people just dropped out. And especially women, this has been a women recession in a sense, there's been no food for the little kids. So women with kids, many of them have dropped their work to stay with the kids. So there has been a lot of drop in participation also because of that, but I'm not so worried that this is something that is gonna be structural. I think this is temporary and very tightly linked to the health emergency. So I predict that when things are gonna get better, as they are right now, participation is gonna recover.

Kara: Okay, thanks.

Veronica: You're welcome. Okay. So here is another picture. And this is credit card spending. Okay. So it's just to give you a different view of this heterogeneity, we looked at it through the employment picture, now we look at it through the spending picture. So this is using credit card data. And look at different sectors. The left panel is focusing on essential sectors, as defined by the Cares Act. So the ones that have been targeted, allowed to operate during the peak of the pandemic. And these are the non-essential sectors, the ones that have been locked down more heavily during the peak of the pandemic. So you can see that, overall, the picture is lots of heterogeneity, but drop in everything. That's, again, the main picture. And again, if you look, for example, at accommodation, the light blue line here, you clearly have a much more dramatic drop in spending than if you look, for example, in retail, the purple one here, because retail can be conducted online. Or if you look at home improvement, of course there are some sectors that benefited from the pandemic because they produce goods that are more complementary, sorry, more substitute to goods that cannot be produced anymore. So if you cannot go on vacation, you maybe do build a swimming pool in your house. If you look at swimming pool businesses has spiked up during the recession. So there is a lot of heterogeneity in that dimension too. But still all sectors have been hit dramatically. So then, if this is the picture, how do we think about the pandemic? How do we think about in a macro model? So typically we will, in a macro model that we build that central bankers use, we like to split the picture of recession into recession that driven by supply side shock, like oil prices increased, and others that are driven by demand side shock. Like for example, a war. Go for war, and people are worried that there is uncertainty in economy. People are freaking out and stop consumer investing, all the credit crisis, the credit crunch during the financial crisis, people suddenly cannot spend anymore because they cannot borrow. So this is gonna drop consumption and investment. The pandemic is a little different. Why? I mean, the pandemic is a good example that help us understanding that this like dichotomic split between demand and supply is too simplistic if we wanna think about a broad macro overview of the economy. Because what is it, the pandemic? Is it a supply shock or is it a demand shock? Well, clearly there are elements of both. Clearly there are some sectors, we can think about the sectors where there is high personal interaction as sectors that suffer a supply shock, in the sense that, for example, the goods, going to the restaurant without getting sick is not available anymore for a while. But on the other hand, there has been effect in other that are not really linked to the technological side, and come from the fact that lots of people lost their job in those sectors with the supply shock. And then the fact that they lost their job induced them to spend more, also in other sectors, although there was no fear of getting infected. And so what I think is interesting about the pandemic is, think about the propagation of the shock from some sectors to the others. And for that, we need a multi-sector model. And I'm gonna give you a little overview of how these, what are the main forces that we have to think about and why policy is different, or we have to think differently about policy when we have in mind that the word is multi-sector rather than one sector as typical models think about. So let's see, for example, for simplicity, about two sectors. Sector A, that require personal interaction. And so it's a sector that potentially can generate spreading of the virus, the pandemic hit the economy. And sector B that does not require personal interaction. And so there are these two sectors in the economy. If there is no pandemic, everything works well. There are workers in sector A, workers in sector B. These workers get some income from sector A and sector B, and spend in both sector. Workers, sector B spending B and in A, and vice versa, worker sector A spend in A and in B. So everything works. But now the pandemic hit. How can you think about that in the model? Well, we can think, as an extreme, there is a complete shutdown of sector A. Say sector A are restaurants. On impact, the pandemic arrive, all restaurants have to close. Or even if you wanna think a little bit of the smoother version, a situation where there is no lockdown in place, maybe when the pandemic was still active before vaccination, even if some restaurants were open, people were worried to go to the restaurants for the fear of getting infected. So activity was low anyway. So this means that the workers in that sector lose their job. But if they're insured, that's not big problem, they can still spend in sector B. And workers in sector B can still spend in sector B, nobody's gonna spend in sector A anymore. And so here we get this heterogeneity, sector A suffer larger drop in activity and employment than sector B. But what happened to sector B? Because we have seen that all sectors suffer the drop in activity. So what happens there? Why sector B sees a drop in activity, if there is no fear of getting infected? And here it depends. I mean, if you go deeper into the definition of sectors and goods, you can see some goods that maybe have a, as I talked about home improvement or swimming pool, home swimming pool, they may actually see an increase in demand. But most sectors see a drop. Why? Well, it depends on the substitutability of the goods produced in sector B relative to sector A. If restaurants close, maybe you're gonna order a lot more takeout. So the takeout sector is gonna have an increase in demand. But on the other hand, maybe you buy less fancy clothes, because you're not going out, so you're not buying so many clothes, and the clothing retail sector is gonna suffer a drop in demand. So overall, the complementarity between sector B sector A seems large enough that there's been a drop in many sectors. But this is not only about complementarity. What else can happen that can generate a drop in B? Well, workers in sector A are not necessarily insured. If people who lose their job, they are not insured enough. They cannot borrow because credit markets are imperfect and they are the poorer workers, so they maybe have less access to credit market. Then they're gonna stop spending in B. So not only is sector B gonna suffer drop in demand, maybe cause some of the goods are gonna be substitute, sorry, compliment to the goods, like clothing, the goods that were produced in A, but now they may suffer in demand just because the workers in A suffer a drop in income and they cannot spend anymore. Okay, so this is an important channel quantitatively of the story. And another channel that I'm gonna briefly mention at the end is supply chains. The complementarity between good B and good A I've been talking about is mostly through preferences. How people enjoy consuming clothing together with going out to the restaurant. But there is another form of complementarity that comes from input output channels. So if restaurants closed, for example, they're not gonna repair the dishwasher anymore. So repairing dishwasher sector suffer a drop in demand, or they're gonna use less accounting services. So accounting services sector is gonna suffer a drop in demand. Okay.

Kara: There's a sector specific question I'll throw in really quickly. How do we interpret the massive demand in real estate sector in the post COVID era, in spite of the current recession and unemployment?

Veronica: So I think that, yeah, there is a lot, I mean, there is a lot of heterogeneity in location for the housing market. For example, looking at Chicago, clearly the downtown has suffered much bigger loss in house values than the suburbs or Lincoln park. But now everything is spiking back up. And clearly, one thing is that, one important factor is that interest rate are extremely low. And so to take a mortgage now is very convenient. And so this clearly has an effect on demand for housing and bring up housing prices. Now, should we be worried going forward? I think interest rates are gonna rise. And so this is gonna, in part, mitigate this big increase in house prices. It's also true that is a moment of big uncertainty. So stock market and other forms of savings are very uncertain. So houses seems a pretty safe and less affected source of investment relative to other sources. So that also is gonna go away. So of course we have always to keep an eye on bubbles, but that seems particularly linked to the health, to the uncertainty and the recession. I think that going forward, things are gonna be under control. Other questions?

Kara: Just ones we'll do toward the end, more general ones, but go, continue on.

Veronica: Perfect. Okay, so let's move on to policy then. So we see this big drop in employment activity, different sector, different speed. So what should we do? And so first of all, let's think about fiscal policy. So what the government can do, because we have seen massive fiscal policy in the US and in other countries. So why is that? What's the objective of these policies? Of course you don't wanna stimulate activity in restaurants, right? Because you know that this is gonna generate the spreading of the virus. So what is really the type of fiscal policy we wanna think about? And there are three main objective that fiscal policy in this setting can have. One is, it's true you don't wanna stimulate activity in restaurants, in this sector A, quote unquote. But it's true that sector B may suffer a inefficient drop in activity. So may see inefficient unemployment just because workers in sector A do not have enough money to buy goods there, because they don't have their income and they cannot borrow. So it's a friction in the market, in the credit market, that doesn't, the lack of insurance, that create inefficient losses in employment. And so if this is the case, then stimulating activity in sector B may actually be beneficial. And so there is need for stimulus. The other thing is that there is lack of social insurance. So there's a shock that is very asymmetric, and there is not enough insurance in place in the welfare system to preempt this type of shock. So what could we do? Well, fiscal policy can provide insurance. And for example, unemployment insurance is one simple form of trying to transfer resources to the workers that lost their job that are gonna be mostly concentrated in those sectors that have been heavily hit by the pandemic. But other types of subsidies too, like unemployment insurance is just one of the main form of insurance that is typically embedded in fiscal policies. And then there is a third thing that is, we have to be careful, after the experience of the Great Recession in 2008, 2009, we have seen a very slow recovery. Okay. What do we expect now? Do we expect a V-shape recovery, like a slow recovery? What is going on? It is gonna depend on also on how policy is gonna act. And one concern is that the slow recovery after the Great Recession was due to the fact that the households were highly indebted. And if households are highly indebted, it takes much longer because debt is slow to adjust, it's gonna take much longer for demand to pick up and activity to pick up. So again, targeted transfers to people that are hit more heavily is gonna help reducing the level of indebtedness of households. And so kind of speed up the recovery. Okay, so which type of policy can help? Well, there is a certain type of fiscal policy that is government spending, like building bridges, just building infrastructure, just spending money. Cause of course, if there is lack of demand by households, if the government come in and demand goods and services, this will naturally increase the level of activity and creates more jobs. Okay, so this is good, but it's gonna be good only for the first objective. This is gonna help stimulating activity in sector B, in a sector that you wanna stimulate. The one where there is an efficient drop in activity, but you're not gonna be able to reach those workers in sector A that are the ones that have been heavily hit by the pandemic. So a way, I dunno, if you're reading a newspaper, you probably have heard of the term that is fiscal multiplier. Fiscal multiplier tell us, if you put $1 in fiscal policy, building our infrastructure, how much you get in terms of economic activity? It's one to one, like you spend $1, you get $1 higher GDP, or you get more. And typically you get more, because if you create more jobs, then people who are unemployed, they can find a job and they get their income and they can spend more. But if the people who are unemployed here are people working in sectors that now cannot operate. Even if the income goes up, they're not the ones that are gonna find a job. And so they're gonna still keep the demand depressed. That's why targeted transfers is instead the more effective policy in this dimension. So you see, if the government spends by buying goods in B, it's gonna give more work to workers in B, and of course you can move from one sector to another. But we know that labor is slow to move, because you need to train workers. And so labor is not so fast in moving from one sector to another. Okay. So that's why instead, if you transfer income from the income created in that sector that is still operative to the workers in the sectors that are inactive, then you're gonna be able to stimulate demand in sector B, which is what you want. And at the same time, you're gonna provide social insurance, reduced level of indebtedness, and improve welfare. So this is just overview of the Biden relief package for $1.9 million, that has been recently implemented. And so here, I wanna just give you a sense of the different type of intervention as a part of the package. We have talked, for example, about unemployment insurance and targeted relief. That's what I said, that I believe it's more effective. And there is a large part of the package that is spent in that. There are individual rebates that are less targeted, because they are given to everybody, that of course are effective and are huge, but are less targeted. And so if you look at the multiplier estimates that tell us how much of these dollars spent are gonna translate into economic activity, you can see if you look at the mean number that individual rebates have a smaller multiplier than the unemployment insurance and targeted relief. Okay? So if you spend one dollar in targeted relief, you get 1.5 higher GDP. If you spend $1 in rebate, you get only 0.8 higher GDP. Why? Because people are gonna save some of that. And so they're not gonna consume everything, because some of these people are actually relatively well because they didn't lose their job. And so they're gonna save part of that, but if you give targeted relief to the people who really need money now, they're gonna spend them all. And they're gonna also generate more jobs and more activity because they're gonna stimulate the activity in sectors that can be active. Okay. And here you can see the total number in billions of dollar of the implied effect on demand. Of course, there is the healthcare intervention. That is very important given the nature of the job. Then there are other public investment and state and local aid, and this is the total sum of the package. So just to give you what I meant by targeted transfers are better than a stimulus. What I meant is this, there is a difference between output and social welfare. What does society care about in social welfare? So we care about the consumption of all the households today and going forward. So our expectation of our consumption going forward. Output will just tell us that the level of demand, of production, today. So there is a difference between the two. And you can see that this Rho here is the replacement rate of transfers. Once you increase the replacement rate of transfers, output, for a while, goes up, right? But then at some point, as you obtain full employment in sector B, you're done in terms of effect. But you can keep increasing Rho even farther, so targeted transfer even more, and still increase welfare. Why? Because relief is important, is still active given the size of the asymmetric nature of the shock. Because there are household that need to pay their mortgage, that need to pay their bills. And even if there is full activity, they may not have the money. Instead if they get the insurance and they get the transfers, they will we able to do that and improve their social welfare. So when we judge like the Biden package, for example, it's clearly big and there has been a lot of argument in favor and against, but one argument in favor. So I think it's big, but I'm in favor of that. And one of the main argument is that, even if things are recovering and we are closer to full employment, although we are still below, there is still a lot of slack. There is an additional important effect of this big package that is gonna be on welfare, given the asymmetric nature of the shock. And I think for that, having a large relief package is important. Okay. Another thing about fiscal policy is that, well, there is of course, an interaction between fiscal policy and lockdown policy. When now, fortunately we have the vaccine, so we don't have to think too much about that. But before the vaccine, there was a question of how do we, can we do lockdown policy? And of course the trade off is that you do lockdown policy, you are helping a dimension of not spreading, saving lives, but you are reducing the level of economic activity because the businesses are gonna close. Okay. So if you do fiscal policy together with lockdown policy, targeted transfer in particular, there is an additional advantage of targeted transfers that is, lockdown policy become less costly. Because now you know that if you lockdown some sectors, if you reach those workers in some other ways using transfers, well then the cost of the drop in demand coming from those workers is less dramatic. And so the lockdown policy is less costly in terms of effects, macroeconomic effects. And so it's more beneficial. And so you can do that and save lives together with keeping economic activity less hard. And so, for example here, I compare these again, transfers on the X axis. And then we are looking at a scenario where there is no social distancing, and a scenario where we have some lockdown policy or social distancing policy. And so of course, activity in the sectors that do not require personal interaction is gonna go up in both cases. But the question is, what's happening to output in the high contact sector? If we have no social distancing, the problem is that if we transfer money, we are gonna increase activity also in restaurants, also in sectors that are gonna generate more spreading of the virus. If instead you do it together with lockdown policy, there is not gonna be an increase of course, in activity, by definition in those sectors. And welfare can increase more. Because the problem is that here, welfare increased because of the economic side of it, but lots of people are gonna die. And so then the health dimension is gonna decrease the welfare overall of our economy. Instead here, if you do together, transfers and lockdown policy, welfare can increase both because of the economic activity and the saving lives through the lockdown policy. Okay. And clearly you can see that there are countries, like emerging countries like Latin America, that didn't have the fiscal space to do large fiscal policy packages, that could not do large lockdown policies. And so suffered much faster spreading of the virus than advanced economies that could do that. Here is a picture of the Cares Act at the beginning of the recession, back in April. This is so we have now data to look at the effect of that. And you can see that the Cares Act has been pretty effective. So giving lots of targeted transfers, cause the Cares Act had a big relief package, similar to the Biden plan, helped a lot. Here the blue line are the poor households, so the lowest quartile of income households, and the green one is a top quartile of income households. And you can see that, as I mentioned before, actually the rich are the one that suffer the biggest drop in consumption at the onset of the pandemic, because the rich are the ones that have a larger share of consumption into these goods that suddenly disappear, like restaurants, hotels, and so forth. But the poor, we know, are the ones that suffer more in terms of income. And so they're the ones that needed to be helped more if you wanted to stimulate demand in other sectors, because the rich are still gonna demand goods that are available in sectors that do not spread the virus because they do not suffer problems with income, but the poor actually would not. And so you see that the dash line here is the Cares Act, and you can see that this was pretty effective in stimulating consumption for both rich and poor, but much more to increase the consumption of the poor, which is a sign of targeted transfer, given that we know that those are the workers that suffer more in terms of income. So I see this picture as a success of the Cares Act. And if you wanna have another picture of success, in terms of effect on output, you can look at the US relatively to countries that didn't do as much relief package. And I'm Italian, so I'm gonna show you Italy as an example. Italy is the red line here, US is the blue one here, here the purple one is the average of OECD countries. You can see that this is GDP per capita on the left panel. There has been a drop in, of course, a huge drop of GDP per capita in the US, but there has been a much bigger drop in GDP per capita in Italy. And if you look at what happened to also disposable income, which means income after transfers and taxes. You can see that actually the US has an increase in disposable income, which means that it's a sign of lots of transfers happening. Where Italy suffered a reduction in disposable income as well, so there were some transfers in place, but not enough to overcome the effect of the pandemic. So the part that actually, the Cares Act and the other fiscal policy have been effective in not reducing the disposable income of households, had helped reducing the drop in GDP per capita at the onset of the pandemic. And you can look at other numbers. For example, here, if you look at growth projection, the US, this is from the World Economic Outlook. You can see that the US suffered only minus 3.5 and that's projected to go up a lot. If you look at other countries like Italy I was showing you is minus 9%, Spain, minus 11, France, minus eight. So there has been much more dramatic drop in real GDP than in the US. And this is due to differences in type of policies that have been implemented, both these kind, of course, also health related policies.

Kara: So there've been a couple questions specific to the stock market. So in like generally having, you know, stock market being generally bullish over the last year, and did this stimulus last year inflate the stock market instead of creating more economic activity around heavily impacted sectors? So any thoughts on kinda like, how the stock market was behaving over the last 14 months?

Veronica: So I think that, I mean, the stock market of course suffered the uncertainty that the economic outlook suffered. So nobody knew about when the vaccine would've been implemented, would the vaccine be effective, would the recovery come soon, later. So I think that this has been a moment, this has been a recession with a lot of uncertainty, and the stock market reflected that, basically. And of course there were good moments, where there were good news. There had been a lot of good news, especially in the US, and we can see that in the stock market. But there have been moments of a more gray perspective. And we have seen that in the stock market as well. So I think I haven't seen anything particularly irrational in the stock market, meaning it seems that the stock market has reflected the overall expectations about the future.

Kara: And then a quick one about targeted transfer, again, wouldn't targeted transfers make unemployed people reluctant to go back to work, which further increase unemployment? So currently in the US, this has been in the news quite a bit about certain industries not being able to hire. So it'd be great to get your thoughts on that. And there's a lot of speculation as to why behind that, but would love your thoughts.

Veronica: Yeah, certainly. So that's a very important question. So there is a typical concern about unemployment insurance. That is, of course, if you give unemployed people some transfers, or the more you give them, or the longer you give them transfers, they may look less hard for a job, because they get their income anyway. This is is called morass in economics terms. However, so this is why typically unemployment insurance is designed in a way that it lasts only six months, is a certain amount for six months and then it disappears, with idea that you have to look for a job, otherwise you're gonna get zero after that. But during recessions, typically unemployment benefit always extended, typically to two years in the us. And also sometimes the amount has changed. And in this case has been particularly used as a tool of relief. And so of course there are sectors that didn't have job creation. And so this unemployment benefit has been there, basically to keep a live relationship that we knew that for a while would not be ineffective. But again, so I think that the relief, so there are two things. One is that the relief part of that is important, meaning that by giving transfers to those people who didn't have a job, you are stimulating activity in sectors where you have potentially a job and you have unemployment. And so you're gonna have a good effect on the economy, on the general economy. And second, it's true that these sectors, this is a very special recession. So those sectors have been closed and were close for a while without knowing for how long, exactly because of the health emergency. So once we think that the health emergency disappears, and now we're seeing that it's gonna disappear. For example, restaurants, now restaurants spiked up. And now some restaurants have trouble finding actually workers, which is a great thing, meaning that, but on the other hand, sometimes keeping job matches help having a faster and speedy recovery. Now, there is another question, and this is something I actually wanna mention here because I'm running out of time. So I'm gonna talk about that. Which is, if we let keeping alive job by giving unemployment insurance or some form of subsidies for the businesses, is that bad, because we are kind of socialized economy and not let the economy change and transform? Well, sure, in part yes, because some job may disappear after the pandemic, because we innovated in some dimensions, smart working and so forth. But on the other hand, typically transformation, structural transformation happens in a more efficient way when we are in an expansion and not when we are in a deep recession. Because in a deep recession, the worry is that some businesses that potentially are viable are gonna die just because they don't have the liquidity that is necessary. While some others that maybe are not viable are gonna be alive, just because they have liquid assets. So that's why you wanna be careful. And probably in a massive reconstruction, like the one we have now actually, keeping a few jobs alive a few extra months is not as bad as in a regular time where we have an expansion. And I am out of time. So let me just mention on the monetary policy side, one thing that I promised at the beginning, which is what about monetary policy? I said that monetary policy right now is still expansive, meaning that the interest rates are still stuck at zero, have not been raised. I predict that they're gonna rise. And why is that? Well, because if you look at inflation, and you zoom in the picture I showed you before, you see that inflation, this is CPI, the level of price has accelerated recently. And so I'm sure that the FED is gonna keep that in mind. Now, keep looking at this future, of course, if you do a percentage change from today up to one year ago, you have a 4% inflation. But is this really what you wanna look at? Maybe you wanna look at the trend here relatively to the trend here, right? So I think the future is not as dramatic as 4%, if you do a percentage change by a year, it's gonna give you. Plus there is some difficulty in calculating inflation when some goods disappears, like they do during a recession. And because you have different signals from different sectors, we know that inflation is spiked up, particularly in some sectors that have been constrained because of the pandemic, but has been still very low in others. So we need to see once the pandemic is completely gonna go away, if this is gonna like reduce the inflation in those sectors. Any other questions? I think I'm done here in terms of time, but I'm happy to take a couple more questions.

Kara: Or if you had any other slides you wanted to finish up. Other just general questions under the theme of just the impact of emerging economies and economies like India that are, one person referred to India as a more informal economy. So yeah, that would hit a lot of the questions that came in. Kinda the impact, again, emerging countries and economies. That'd be great, and then we can finish off.

Veronica: In terms of the effect of the pandemic on the emerging countries? Sorry, I didn't understand the question.

Kara: Yes, yes. Sorry, there's been a variety that came in, but I think really what's going on in the US and how that could impact the economies of emerging economies.

Veronica: I mean, I think that there are a few things about emerging markets that are important. One, of course there is a problem in emerging markets, countries, typically of informal sectors being very active. And so when you have a large informal sector, clearly it's much harder to have a fiscal policy that reach those workers that typically were working and keeping high the demand and activity. And so this is why I think countries with large informal sectors are gonna suffer more, gonna have much more trouble in recovering and in getting up to speed if the vaccines are not gonna be effective fast enough. And then there is of course, a problem of interaction between countries. I mean, there are lots of problems here. Of course there is the problems of vaccine. How like, should we give? And that's a big economic problem. Like, should we help? Because we live in a globalized economy. So of course, if there is a spreading of the virus in some part of the country, then sooner or later it's gonna come to the advance countries. So even if you look at it from a more like individual perspective of the single advanced countries, clearly you have to keep in mind and have the objective function also, making sure that the pandemic is gonna disappear overall. So this is an important factor. Then of course, there is the other question that is, what is the effect of transmission of monetary policy from the US to the rest of the world? And this is another vibrant topic of discussion. Now interest rates are low, interest rates are probably gonna rise. And the problem is it's great for the US, because the US is doing good, but it's not gonna be good for other countries that are still not as far in the recovery path as the US, and then they are gonna see a rise in interest rates. And that is gonna be probably hurting some of these countries.

Kara: Yeah, yeah. You'll have, I'm sure, lots to keep focusing on over the next year, really, through all this. Well, we are at time, so I wanna be mindful and respectful of that. Professor Guerrieri, we cannot thank you enough for your insights and your expertise. This will be posted to our website, so many of you were asking if this is being recorded, and it was. It takes us a few days to get it up there. But any questions at all you have, of course, feel free to reach out to us on the admissions team. And we are more than happy to help, but thank you again, professor, we greatly appreciate your time and your insights. Thanks so much. And then thanks everybody else for joining us today.

Veronica: Thank you. Thanks a lot for being here and for the questions.

Kara: All right, thanks everybody. Goodbye.