Many Economic Projections Are Too Optimistic

I would love if it were the case that we’d have a V-shaped recovery, but I’m not that optimistic, because I think the shocks that we have seen, both on the policy side and the health side, have much more fundamental impacts on economic behavior going forward than just something that is a bit of a flu that came through and then we can move on, or a bit of a policy change—we just sort of turned off the lights for a little bit, I can turn those lights back on. It’s not as simple as that.

I actually think that this is a more fundamental change in economic activity and economic behavior than after 9/11. I was working in the White House when the tragedy of 9/11 occurred. I was a member of the President’s Council of Economic Advisers, and we undertook a response to try to provide support to the airline industry. And there were also a number of other actions that were taken, like sending checks out to individual households. So there were a number of parallels, but if you look back to 9/11, you don’t see much of a long-term consequence in the economic data. Even after a month or two, things seemed to get on track relatively quickly.

I don’t think that’s going to be the case here because I think people’s behavior is really going to be fundamentally different. I think people are going to be much more reluctant to go out and do the activities that they used to do.

Obviously after 9/11, there was a lot of concern about the safety of air transportation. But we were able to overcome that relatively quickly and also able to avoid a major collapse of the airline industry. There were bankruptcies, there was support that was provided, but the airline industry didn’t stop flying, at least after the flight bans were lifted. And I think this is going to have something with longer legs.

I think there are going to be fewer people traveling, not just because of concerns about the airline industry, but there will be concerns about health, and also be policy issues. My guess is that there are going to be some types of quarantines or some types of travel prohibitions or travel restrictions that will be much longer lasting than just for a month or two.

Even if the number of cases goes down, even if the number of deaths goes down quite significantly, which I think will happen, I don’t think we’re going to see a dramatic policy change, and I don’t think we’re going to see this change in behavior.

One of the things that many economists were first talking about is this V-shaped recovery. We’ve had a sharp down—we turned the lights off. Sharp up—we’ll turn the lights back on. I don’t think it’s going to be exactly like that. And I think we really need to be planning for something that is going to have a broader dislocation for a longer period of time.

Many economists initially talked about freezing everything. So maybe we can just freeze people’s payments for a month. Maybe we can just freeze people so that they get their salaries for a month and then if we provide all that support, then we can just go back to business as usual. I don’t think it’s going to be business as usual, and I think we need to plan for that.

In normal circumstances, a lot of small and medium-sized enterprises don’t make it through the year. There’s a lot of churning that goes on, and that’s optimal. This is what entrepreneurship is about—people taking chances, people taking risks. You know, Amazon once started as a small company. Google once started as a small company, highly risky. Some of them make it, some of them don’t. You only need a few of the Amazons and Googles of the world to make up for many, many small enterprises that don’t make it.

I worry that policy is trying to freeze in place the way the world was before the shock happened. I think it was wise to try to provide support in the short run, to try to preserve jobs and to try to provide support for families and households as well as businesses. But after a month or two, I think we really have to make sure that we’re not trying to freeze in place a world that doesn’t exist and can’t exist going forward. If we try to do that, it’s going to make the recovery much more difficult.

We have to acknowledge that the world has changed. Many of the sectors will be different. The transportation and hospitality sectors will have some very long-term impacts on them. So I think it’s very important that policy now start to look at building a bridge to somewhere.

We had that temporary bridge, hoping that we could just go back to where we were. That’s not going to be the case. We have to look at how the roads have changed, how the directions have changed, and then have policy build the bridges to somewhere for the next step.