>> John Haskell: Welcome to
Conversations on the Future of Democracy, a series sponsored
by the John W. Kluge Center at the Library of Congress. My name is John Haskell,
Director of the Kluge Center. We wish to acknowledge the
Peter G. Peterson Foundation for co-sponsoring this event and for the continued
support they give the Library of Congress. Today our topic is Fiscal
Policy in the Wake of COVID-19. I'm joined by Jason
Fichtner, Senior Lecturer and Associate Director
of the Masters of International Economics
and Finance Program and Johns Hopkins
University's School of Advanced International
Studies. Previously, Jason was a
senior research fellow at the Mercatus Center at
George Mason University. He served in several positions at the Social Security
Administration, including acting deputy
commissioner of social security, chief economist, and
associate commissioner for retirement policy. He also served as
senior economist with Joint Economics Committee
in the United States Congress. Jason, welcome. >> Jason Fichtner: Thank
you for having me, John. I appreciate it. >> John Haskell: Well, we're
just going to launch right in and talk about the situation with the economy,
given the pandemic. The pandemic has thrown us into
a devastating economic downturn. How does this compare
to the Great Recession? Do kind of a compare
and contrast. >> Jason Fichtner: Well,
I'm often asked to do that comparison, and people
ask, "Are we in a recession? Are we in a depression?" and I think it's
important we start off with an old joke amongst
economists that a recession is when your neighbor loses his
or her job, and a depression is when you lose your job. And all joking aside though, at
the moment, I don't think we're in a depression, but we are
definitely experiencing a major economic downturn that is worse
than the 2008 Great Recession. And it's important to recognize that the current downturn
is caused by a health shock, a pandemic, and a government
policy response to the pandemic, as well as consumer
responses to the pandemic, where both the Great Recession
and Great Depression were caused by different economic factors. This downturn is definitely
different in the nature of how quickly economic
activity ceased and how quickly people were
separated from their jobs, either through layoffs
or through furloughs. And just to give you
some perspective on this, the unemployment rate during
the Great Depression reach 25%. During the Great
Recession of 2008, the unemployment
rate reached 10.6%, and under the current
recession, we hit a peak of 14.7% this past April. And now, we're somewhere
around 11 to 12%. Keep in mind that
the unemployment rate in February was 3.5%. We've lost as many jobs in the
past few months as we created in the last decade,
and don't forget, the speed at which
this happened. The unemployment
rate rose faster under the first few months
of the COVID health pandemic than in the entire two years
of the great recession. So, this has also created a
major administrative burden on the nation's unemployment
insurance system, where state-run systems
were never designed to handle this many claims in
such a short period of time. >> John Haskell: So, you mentioned unemployment
insurance. What has that achieved, and I
know there's a deadline coming up this month as
to the continuation of the current level
of benefits? What's going on with that? Is it important, in your view,
important to continue that level of benefits or should
changes be made? >> Jason Fichtner: The unemployment
insurance system is one of our great social safety nets. It actually is designed
in a typical manner of an insurance policy, and
when you think about insurance, and it's important that
we have this little, quick discussion of this. Insurance is there
for, basically, low probability but
high-cost events. You insure your house
against fire, your car against accidents. They're a very, very low
probability of happening, but when they do happen,
the cost is great. The same thing goes for
unemployment insurance. Most of us don't think
we're going to be unemployed at some point in our
lifetime, but if we are, the cost is very, very high. So, we do have some sort
of insurance policy for it. And doing this in a
social insurance scheme is very important. So, our UI system
needs to be strong. This was never designed for this
level of economic inactivity and this level of unemployment. And during the 2008
Great Recession, they expanded unemployment
by the number of weeks in which you qualified. Usually, you get 26 weeks of
unemployment if you're laid off. In a recession, that
can be expanded to 52 weeks for one year. During the Great Recession,
it was expanded to 99 weeks. So, almost two years
where someone could draw on unemployment benefits. Currently, as part
of the CARES Act, the unemployment insurance
benefit level was increased an across-the-board $600
supplemental weekly increase. That expires at the end of
this month, the end of July. The UI system will
still be there. The question is whether
or not you need to expand or continue the $600
weekly supplement. Under the current system, the
$600, though, we've been finding that about upwards of 2/3 of recipients are actually
earning more or taking home more with the unemployment insurance
benefit than were making in their previous job. That's 2/3 of people, then, who
have a disincentive to go back to work, and a lot of
people have been concerned, both employers and some
members of Congress, as well, about keeping those
benefit level so high that it creates a
disincentive to go back to work and may stall the
economy from recovering. So, I do think it's important that we don't just
shut them off. There are people who
need these benefits, but $600 may be too high. So, maybe we should just
about how we ramp them down. Go from say 600, to
400, to 300, 200, 100. Reduce the weekly benefit by
$100 or so or $200 every month or two, until they
basically expire at the end of the calendar year, and
then reassess where we are. If you're short for time
because Congress is on recess, and when they come back,
there's going to be a little bit of time before the
August recess. We could just do the expansion
for one or two months and see where we are in September. >> John Haskell: So,
in general, you know, one aspect of the
CARES Act had to do with unemployment insurance, and
the CARES Act was meant to deal with a lot of other things. So, from your perspective,
what was it meant to do, when you look at it in the big
picture, and is it working? >> Jason Fichtner: So,
it's also important to keep in context what not only the
CARES Act was and what it did but how different the policy
responses had to be from, say, the Great Recession of 2008. In the Great Recession, people
didn't have money to spend or didn't want to spend money. Rather, in the beginning
of this pandemic, people couldn't spend money, because businesses were
forced to shut down. This requires a different
policy responses, and the CARES Act was designed
to get money out quickly for those who needed it,
and the CARES Act is not without its faults, but the
idea was to act quickly, provide much-needed fiscal
support to those businesses and individuals who needed
it through loans, grants, direct payments, and support
for state and local governments. Again, not without some hiccups, and we talked some
at the UI system. I do think the expansion
was worthwhile. I also think something like the
Paycheck Protection Program, which again, had some hiccups, but I think was really
good policy and did work to keep businesses afloat
and people employed. But again, they weren't without
some unintended consequences, and those things need to
be discussed as we think about what to do going forward. >> John Haskell: You know,
none of us has a crystal ball, of course, but I'm curious what
you think the recovery might look like, or I guess, some would argue maybe
it's already beginning, but maybe not, particularly
if there's a second wave. So, what might the
recovery look like? In particular, you
made the comparison to the Great Recession
and the Depression. Since there are different
causes for this downturn, is the recovery going to
look substantially different? And of course, people
would be interested in knowing how long
you think it will take. Are jobs going to come back? I mean, I've just hit you with
about five different questions. >> Jason Fichtner: Yeah,
and again, I don't know if it's the old Yogi
Berra joke, but again, "Predictions are hard, especially when they're
about the future." But this is a really
key question, John, and I'm glad you've asked
it, because in some ways, we've already seen an
amazing rebound and recovery. Look at the stock market. It cratered by a third and
basically now is back up, and NASDAQ is at a new high. So, from the stock market
perspective, if you had gone to sleep for three
months and woke back up, you wouldn't have known
anything had happened. This looks like what's called
the so-called V-shaped recovery where you have a giant decline,
and then a spiked back up. But we're still also at
an unemployment rate today that is higher than the
peak of the Great Recession, and this gets back into
the jobs discussion. So, what I think the recovery
looks like from here is flat. Until we find either a treatment
or a cure/a vaccine for COVID, again, this is a
different sort of recession. It's caused by a pandemic, not
by other supply chain issues or irrational exuberance. This is a health crisis,
and until we solve that health crisis,
we can't move forward. And unfortunately, we've already
seen many businesses close down and go out of business, and many
of those won't be coming back. The Congressional Budget
Office recently came out with a report relating to the unemployment
won't recover for, basically, a full decade. And I'm kind of skeptical that a
vaccine will be widely available by the end of this
calendar year, and there's also a possibility that we may never
develop a vaccine, and there's an old saying
that you hope for the best but you plan for the worst, and
I think we should start think about what policies we need to
have in place if we're going to think now about
what this might be, if we are in a new normal. >> John Haskell: And that's
the question nobody wants to face, right? >> Jason Fichtner: Well,
no one wants to face it. That's exactly it, especially
with an election year coming up. But we need to start thinking
about what policies do we need to have in place if we're going
to be asked to live under COVID for one, two, three,
or five years? What does that mean for policy? And instead of thinking
just short-term gaps, let's start thinking about what
long-term policies we may need. So, we're not, you know, basically caught again flat
footed, and I think we're going to be in this position for
quite a while, unfortunately. >> John Haskell: So, to what
extent are the old jobs, the jobs that have been lost
to this point, not coming back, and is the recovery going to
happen in part because you types of work are going to be
available or developed? Is that a factor here
that might be different than other recessions? >> Jason Fichtner: Yeah, I do
think when we see old jobs go, new jobs come in, but it
takes a while for the economy to reassess and readjust
and for those old jobs, people who have those
old positions, to find new ones
and get retrained. I don't know what
they're going to be in. I also don't know, in
thinking about the old jobs. You know, a good example
is movie theaters. When are you going to be
comfortable, John, going back and just sitting in a
movie theater again? Is that going to be two months? Four months? Six? Ever? Are you just going to
watch things on Netflix and streaming from now on? And if those jobs go, I
don't think we replace those. What do those people who
work in those industries do? Where did they go? I don't have, again,
that crystal ball to see what jobs are coming, but I also think we're seeing
a change in the very nature, in some ways, of our work,
but that's not for everybody, and there's still some jobs,
I think, need to be site, but a lot of us have now
been working from home, and I think we're fortunate
enough that we can do so, that we're now seeing the
ability to work from home and be more productive, but that
still leaves a large portion of the population that can't. They're in service
industry jobs. They have to be on location,
and we need to think about what that means for their safety, for
their health, and how that means for the economy,
how we support them to make sure those jobs
can still get done, while reducing barriers
for entry for new jobs in new innovation and
creation by small businesses. >> John Haskell: You mentioned that the stock market
has essentially rebounded to the point, more or
less, like you said, the NASDAQ's had a record
high, and more or less, where it was before
we went into lockdown. What's going on there? I mean, the stock market clearly
doesn't reflect exactly current economic conditions. >> Jason Fichtner: We
should point out that since the market is finicky,
when we're taping this, it's at a high, and
then, given tomorrow, it could be low again, right? The interesting thing looking
at the market is it supposed to be a forward-looking
indicator. And so, again, whether
you believe that or not is another
question, but it's supposed to be forward-looking for
earnings and not a reflection of today but a reflection
of tomorrow. When looking at the NASDAQ, what's interesting is seeing
the stocks, the companies in those NASDAQ index that
have gone up, are companies like Facebook, Amazon,
and Google, that had done well
under the pandemic. In fact, have done very well. I mean, Amazon was
taking over before. I think now they're going to
be more than a major player. They're going to be
a primary player. People are now used to
ordering things on Amazon and having things delivered,
including groceries, because Amazon, you
know, basically, has ownership now of,
they own Whole Foods. So, they have delivery
sites for food. So, I think that
nature is changing, and that's why you see
the stock market so high. But I know a lot of people in the market say
how can the market be so high we still have
14% unemployment? And I think part of
that is a reaction to where there's an expression
of hope that there is going to be a vaccine sooner than
I might think is possible. And you do see how the market
tends to trend sometimes up or down a percentage
point or two every day when there is new news that, oh, there's been positive
results from a new trial. Oh, there's negative
results from a new trial. And it seems to trend that way. What I would say is what
this is hopeful for is that people think the
economy will recover. They just don't know when. And so, I think the
outlook is positive, but the timeline is uncertain. >> John Haskell: Yeah, so,
let's get to sort of somewhat of the changing gears. We haven't looked specifically
at deficit and debt numbers, and I was looking
them up this morning, at least what CBO projects for
fiscal year 2020 that we're in and the next fiscal
year, and we have numbers that we've never
seen, and what I did, they're projecting a $3.7
trillion deficit just this fiscal year. That's not very many years
ago when the size of -- really, very few years
ago, that was the size of the entire federal
government, you know, federal spending. And then, debt is
now over 100% of GDP. And so, this is a change. This is a lot higher
than we're used to. You know, I learned in economics
class that we should think about debt in relation to GDP. That it's the best way to gauge. That was the best way to gauge
whether debt was manageable. Should we be concerned
about this? What do you think
about all this? >> Jason Fichtner:
Well, I like the fact that you used the
term manageable, John, and I think that's
a great framework for how we should
discuss this is whether or not the debt level we have,
the deficits, are manageable for our economy today and going
forward, and as you mentioned, the US gross national debts. I'm using gross national
debt is now about $26 trillion
or 100% of GDP. >> John Haskell: Right. >> Jason Fichtner: Our
deficit is likely to be around $3.7 trillion, which you
said, which is the result both of more spending, but
also, reduction in revenue and a slowdown of the economy. So, GDP is getting smaller. CBO likes to look at
debt held by the public, which excludes bonds
that are held by the Social Security
trust funds, for example. And that's the number
you quoted, which CBO estimates we'll have
public that the GDP about 101%. This compares with 79%
at the end of 2019. And you ask, should we be
worried, and my answer is yes. Again, we haven't seen these
levels since World War II, and at the moment, we're
the global reserve currency. People still want
to hold US dollars. We also have a lot of cash
that's sitting on the sidelines. It's in bank accounts,
money market funds. It's not circulating,
per se, in the economy. It's just sort of
being held back, and that's keeping
inflation low. But at some point, I assume
those dollars will come back onto the market. They'll be competing
for goods and services, and inflation will come back. And it's also important
to note in the idea of management, can
we manage this? Is that there are other
countries, such as Japan, which have a much
higher debt-to-GDP ratio. They're over 200%, and
Japan does not seem to be in any immediate danger of
defaulting on their debt. But most Japanese debt is
held by Japanese nationals. When you look back at
the Greek debt crisis, so much of their debt
was held by foreigners. And a lot of our debt is
held by foreigners, too. So, it's important
to figure out whether or not we can sustain
this level much longer, and I'd also just keep in mind,
when we have this discussion of deficits and debt that you've
got to pay interest on the debt. There's an opportunity cost
in these interest payments. And before the end of
this decade, we're likely to see spending on
annual interest costs of around $1 trillion. And a trillion dollars a
year in interest costs, well, we spend a trillion dollars a
year now on Social Security. We spend a little less than a
trillion dollars on defense. So, the opportunity cost
of paying for that debt and managing that debt
will crowd out our ability to do other things, whether
that's education, healthcare, defense spending,
Social Security, any new policy proposals
people want to bring forward. We're going to be paying
interest on that debt, and that's at low
interest rates. If interest rates start to rise, then the interest payments
are going to rise, as well. So, I do think we have
to be really concerned about the deficit and debt
and not just gloss over it. >> John Haskell: Because,
you know, the old saw, when you cited World
War II was the last time that the gross debt as a
percentage of GDP was over 100%. The old saw was, hey, in
times of war that's okay, and maybe that applies
to pandemic, too. >> Jason Fichtner: So, it's
an interesting analogy and one that I don't want to put,
say, a war of the same footing as a pandemic, but I get
where it's coming from. So, in one sense, with a war, if you don't spend all the
resources that you need to win the war, then by the
opposite is you lose the war, and someone comes in and
makes life very bad for you or kills you, in which case,
you don't want to be dead. You spend all the
money you have. So, a war is much different. Pandemic has been related
to that saying, okay, well, if we don't get through the
pandemic, we all could die. But I'm not sure
that's exactly true. It doesn't mean you don't
spend money on the pandemic, and you know, there's sort of
a sort of a war to try to get through it, but this is one
in which a war could be won. We're not sure whether we're
going to defeat the pandemic and find a cure for COVID. We may have to live through it. And it also doesn't mean
that we should spend all of our resources
just to makes sure that this doesn't become
something that's permanent, if we can't fix it. And so, while I do think it's
important to spend money now, because it's the
other analogy that I like better as a forest fire. The first goal of, you know, a forest fire is you
put the fire out. The second thing is
how you pay for it? If you're sitting there
squabbling about how to pay for putting out a forest
fire, all of a sudden, the forest is going
to burn down. So, I think in that
sense, the pandemic analogy to war does hold, but it
can't hold to the point where you spend all your
resources fighting a pandemic that you lose the opportunity
costs of other things that are going on
in the economy, and this is a discussion that's
been had the last three months of whether we should've
shut down or not. Should we have been like Sweden,
which stayed relatively open and we let people
themselves figure out their comfort
level the economy? Or does the government
force us to shut down, and we basically
trade lives for jobs, and how many lives you say,
versus how many jobs, mortgages, retirement funds do you destroy? It's hard for people
to put this in context. They don't like discussing
lives. Some people say if
you can save one life, that's just what you should do. But as an economist, we're
not trained to think that way. We're trained to think about the
opportunity costs and trade offs that go into saving those lives. It's not an easy, and
there's no right answer, but it's a discussion we should
have, and that's, in some ways, the problem with
saying pandemic's a war; we should spend everything. We're not counting, then, the
lost jobs, the lost, you know, the mental health issues,
the retirement savings. People's careers,
their livelihood. Those are important, too, and those should be
part of the discussion. >> John Haskell:
Yeah, ultimately, it's a political question. I mean, and economist can
measure, I mean, literally, perhaps measure the
worth of a human life, but that's not what's going
to drive the decision. >> Jason Fichtner: Yeah, it's
political, but it's also, I would say, a social question,
because it's how do we want to spend our resources? And again, that goes
down to politics, and that's what we were sort of
having this conversation for is for a political environment. But you have to be able to
have an open conversation with society and the
voters for them to be able to understand what we're
actually talking about, and unfortunately, I think,
right now we see, you know, sometimes one-sided media
stories or one-sided discussions from different politicians,
whether they're governors of red states versus
blue states, their message seems
to be different. And so, we're seeing a hard time
trying to have a conversation with the facts and weighing
the pros and cons and the cost of doing one thing
versus the benefits and then having a
reasonable discussion. And, you know, having
a reasonable discussion and discourse is what
this country's supposed to be all about, and it's
getting harder and harder to do that without getting
shot down or shouted over by one side or the other. >> John Haskell: So,
getting back to the specific, this conversation we
were just happened about deficits and debt. There's a lot of people, and it
tends to be, right now, perhaps, on the left, who say we
shouldn't worry about deficits, and even, really, the debt then, because deficits
lead to more debt. That they don't really matter,
and I want to be evenhanded, because some years ago when
Dick Cheney was Vice-President of the United States, he said
he didn't worry about deficits because they were "big enough
to take care of themselves." And so, and he was
trying to be funny but the administration policy
might have even reflected that view. So, we've got people, maybe
particularly now on the left, really, nobody's really saying,
hey, let's balance the budget. So, nobody right now is
worried about deficits. Some people think it's
just not something that we need to worry about. What's your take on that? >> Jason Fichtner: Well,
I do think deficits and debt matters, period. That said, as you and I
have already talked about, we do have a health pandemic, we
do need to get it under control, and the analogy, I think
of the forest fire fits. When the forest fire is raging, your first step is
to put out the fire. Your first step to
put out the fire. Your second step is figuring
out how to pay for it. But there's no such
thing as a free lunch. At some point, you've got to
pay for the spending one way or the other, increasing
taxes, reduction in spending, or you're going to have a
reduction in economic growth as we keep borrowing
and don't pay for it. Again, to be evenhanded,
you know, I sort of see these discussion
these days when people say, "Well, tax cuts pay
for themselves." That's sort of this mantra
here sometimes on the right. That is not true. Some tax cuts may
pay for themselves. Most of them don't. There's also an inflection
point that matters, where the rate is starting from. Are you talking about
income taxes, capital gain taxes,
corporate taxes? There's a generality that
they all pay for themselves. It's foolish. On the left, this whole idea
of modern monetary theory, that we can just
keep printing money, and it won't cause inflation,
and we can just pay for things that way without
taxation or borrow and just print money
is also foolhardy. And so, we really
need to have, again, of real conversation going back
to the opportunity cost of debt and making sure we pay for
the things we suspended on and don't just take it off
on to the next generation. >> John Haskell: So, you got
into the question of the MMP, the modern monetary policy, because that's getting a
fair amount of attention now at elite levels, at
political levels. So, and you know, I've read
some things that you've written. You mentioned that you
don't think that although that may be a good description
of what happens, it's dangerous to think that you can just print
money to get out your problems. >> Jason Fichtner: Yeah, I
think history has shown us what happens when governments
just print money. It leads to hyperinflation and
the collapse of the economy, and I don't see that
changing under any sort of current environment
that we have now. This sort of seems
like everyone's trying, depending on the
problem you have in the current generation
you're in, or the current fiscal crisis,
someone's trying to find a way to have their spending
without paying for it. And again, I mention the Laffer
curve in supply side economics where he said you
can just cut taxes and the growth will
pay for itself. Well, great! Magic beans. This is all fantastic. Let's just cut taxes
and not worry about it. The left's answer is now
modern monetary theory that says don't worry
about losing taxes. We just need to print money. We don't even have to borrow it. We'll just print
it, and we can pay for all these social
programs we want. No inflation. Everything's fine. At the two extremes,
they're both wrong. We really need to have,
again, that conversation back in the middle again about
regular public finance and what it means to
have deficit spending. Who pays for it? What the distributional
costs are. The interest rates, how it will
eventually affect inflation, and what that means for economic
growth, and what it means for the potentially lower
economic quality-of-life for the future generations that
we are, basically, borrowing, say, for our own consumption
and then putting those costs onto them in the future. >> John Haskell: So, once
the economy's growing again, we hope sooner rather than
later, what do you think needs to be done to correct course,
in terms of getting the budget in a more manageable place? >> Jason Fichtner: So, you had
mentioned the generous support of the Peterson Foundation
for this. They also have generously
supported a variety of think tanks to
do budget exercises, including the Bipartisan
Policy Center did one, where I'm also a
fellow, and pre-pandemic, several think tanks came
out with various plans, and what was interesting is no
one basically can balance the budget anymore. The amount of revenue
you'd have to raise, the tax increases
required to do so, or the spending cuts required to
get us back in balance are now so draconian that
it's not possible in the 10-year budget
window anymore. At least I don't think it is. So, what that means is we have
to now have a longer term plan, 10, 15, 20 years, that
gets us back into some sort of manageable debt-to-GDP ratio,
may be somewhere around 70% debt to GDP, and to do that is going
to require both tax increases and spending reductions. And Washington's a
very interesting place. Only in Washington, because
of baseline spending, can you have a reduction
in growth of spending and someone call
it a spending cut. That's not what we
mean by spending cuts, but if we can find a way to
slow the growth of programs and spending and
that, over time, gets us to a reasonable budget,
then that's a good outcome. But again, that would
slowing the growth. Not necessarily "cuts." But from a baseline,
people consider that cuts. But we have to consider this, because we just can't let
it keep going like this, and we've also -- the pandemic's
a great example of this. We don't have the fiscal space
anymore for the next problem that we run into
that is unforeseen. Maybe it's a second
wave of the pandemic. Maybe it's an economic
recession caused by normal economic
business cycles. We don't have the fiscal space. At some point, people,
globally, are not going to want to take our debt, and again, I don't think we can
just print money. That's going to create
hyperinflation. So, we need to start managing
our budget for the long term, also to create the fiscal space
for expansions of programs, innovation, and to take care of
what might be the next recession that comes down the road. >> John Haskell: So, let's wrap with the last question
on what you think. And see, here we've had three or
four months since we were locked down in March, and the
government has moved in certain directions
with policy. What do you think is our
missed opportunity so far? What do you think the
policymakers and the Congress and the administration
have missed, and what's specific thing
should they think about now? >> Jason Fichtner: Well,
I think one of the things that is missing is a longer-term
discussion of what it means for policy if we are in
this type of environment for the next two or three years,
and that includes something like higher education and K-12. If we can't have students back
in the classroom for 12 months or longer, what does
that mean for policy? If we can't have restaurants,
bars, and businesses open, and we start seeing a massive
decline or a continuation of a lower revenue from sales
taxes for state and localities, their budgets are
going to be destroyed for a longer period of time. What does that mean for support? That's the sort of discussion that I think we're missing
is we're being so short term because a lot of people weren't
sure how long the pandemic was going to last. I mean, when we first
went to a shut down, in some people's minds, it
was two weeks, maybe a month. No one really was talking
about us being shut down for three months,
six months, or longer. And so, I think that was missed
opportunity was so focused on short-term, we didn't have
those long-term discussions. Well, we need to start
having those now. >> John Haskell: Jason, I
think you've done a great job of enlightening us on some of
the issues we've touched on, and we want to thank you
for being a contributor to our conversation on the
Future of Democracy Series here at the Library of Congress. We appreciate it,
and we wish you well. >> Jason Fichtner: Thank you. It was a pleasure being here.
