>> 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.