Amidst the recent economic fallout due to coronavirus, The Student interviewed Professors Shea and Yung of the Bates Economics department. The pair answered questions regarding their analysis of the virus’s economic impact, and how Bates students can be best prepared for a possible recession.
Some experts believe that although it is not likely that we will enter a recession, its effects would not last nearly as long as those of the Great Recession. Do you think this is true and does this mean that we don’t need to be that worried?
Shea: There is good reason to think that this recession will not be as severe as the Great Recession. In the run-up to the Great Recession, households and firms alike were highly indebted. When the financial crisis hit in 2008, they started reducing their debt. This process took years, which is why the recession was long and the recovery was initially so slow. This recession is exceptional. It has come on so quickly because the public health measures are having such a severe effect on consumption and investment. But there is no economic imbalance that should take years to correct. So, there is reason to be hopeful that the recovery might be very rapid once these public health measures are lifted.
Yung: When we try to foresee what a Covid-19 recession will look like; we try to look back in history to identify any parallels that can offer insight into today’s situation. The recession that comes to mind is the 1918 recession that followed the pandemic flu, in which 1/3 of the world population became infected and 5% died. This recession was deep but short-lived; it lasted 7 months. To provide some context, the average recession in the U.S. lasts about 13 months, and the Great Recession in 2008 lasted 18 months. In 2008, there were very large imbalances in the economy that took a very long time to correct. This recession would most likely be very different in nature and its extent will depend on the ability of countries to contain the epidemic and also the type of monetary and fiscal policies implemented to bring the economy back to full speed.
Should students be holding back from setting up investments? What should they do if they have already invested and their money is in stocks, not longer-term bonds?
Shea: We are in a period of significant volatility and that is going to continue until we know a lot more about how the virus plays out. We don’t know when things are going to be back to normal, or how bad the economic impact is going to be. As a result, small pieces of news or changes in sentiment are having big effects on asset prices. But students with investments should keep in mind that more volatility often translates to a higher expected return. If you have a long horizon and can accept the risk, then you might consider waiting it out.
Yung: Global stock markets have lost over $25 trillion over the past month and the S&P 500 saw the fastest decline in history, reflecting the sudden and world-wide nature of this health shock. This loss of wealth might not matter as much for the long-run investor, those who can wait for equity markets to go back up once financial markets normalize. However, this decline in equity markets can have important consequences for investors who were planning to withdraw their money earlier (think people who were planning to retire soon) and consumers whose savings are on 401 Ks.
How can we help small businesses and minimum-wage workers who are more likely to struggle during this period?
Shea: This is something that I worry about. This is going to be absolutely brutal for businesses and workers who don’t have much of a cushion to protect them from a sustained period without income. My concern is whether they have enough cash to get through this. I saw that people are buying gift certificates to their favorite restaurants, That is great. It gives them cash in the short-term. But ultimately, it is going to take a governmental solution. Extended unemployment is important for workers. Direct cash payments will also help, as will low interest loans to businesses. Encourage your representatives to support these measures, both for basic humanitarian reasons and to help with the eventual recovery. You will probably start hearing about the budget deficit again soon, And the U.S. does have a big debt problem- policy makers who promise that their favorite tax cut or spending program does not have to be paid for have done a lot of damage, and this has made it harder to act now. But the time to worry about this should be after this crisis has passed. For now, it is more important to provide an aggressive fiscal response.
Yung: This is by far the biggest worry economists have at the moment. Low income groups will be hit the hardest by the necessary containment strategies that are being implemented across the globe. While some businesses have the ability to work remotely, we need to consider the fact that not all workers have access to paid sick leave and some operations (like running a coffee shop) do not have that opportunity. How can we support those families whose income sources have been reduced or completely taken away? Given that countries have such different safety net programs, there might not be a one-size-fit-all approach to supporting businesses and households. Economists have drafted a proposal for the European Union that includes a coordinated approach to provide liquidity lifelines on a large scale and with urgency. Some other plans include $1,000 transfers and cease-of-rent or -mortgage payments while in lockdown, but whether that is enough or how exactly will be implemented is still uncertain.
Who is likely to be affected in the aftermath of the recession? Should students be worried about obtaining jobs after graduation?
Shea: It is true that certain groups tend to be harder hit by recessions than others. This includes lower income workers, but it also includes younger skilled workers trying to break into the workforce. How bad it is going to be again depends on the speed of the recovery. Everyone is thinking of the Great Recession because it is relatively recent. But if the policy response is well done, it could be more like 1982. That was a bad recession where unemployment went all the way to 11%. But there wasn’t a huge structural problem that needed to be fixed and, as a result, unemployment came down pretty quickly.
Yung: We will have to wait and see how things develop. It is difficult to imagine businesses and employers implementing their normal hiring plans at the moment, without knowing when they will be able to resume operations. Anecdotally, I can say that people close to me have been asked by their companies not to come to work for the foreseeable future but promised to contact them immediately as soon as they can re-open their business. I noticed that the term “unemployment” on google search has gone up considerably these past weeks, suggesting this is an issue that significantly worries people. Trying to identify ways to stay active and productive in this special time is going to be important: online classes, alternative work arrangements, and other creative ways to keep developing skillsets and build resumes during this period of uncertainty.