Insights / Podcast episodeMay 05, 2020

Episode 3: The Case for Optimism

Is there any room for optimism amid an economic shock of this magnitude? Austan Goolsbee offers insights from past economic crises and a path forward for balancing trade-offs between public health and the economy. His colleague Steve Davis explores the reallocation of jobs as a result of the current shock, and the potential long-term economic consequences.

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Unedited Transcript

TESS VIGELAND: These days, it’s disorienting and overwhelming to fully appreciate the scale of volatility in our economy and the scope of the disruption from COVID-19. Managing all this uncertainty is a tremendous challenge. But if we start asking how this is different from past economic calamities and we take a look at what’s actually happening with new jobs and new businesses–

EDUARDO PORTER: Is there a case to be made for some sort of optimism in all of this?

TESS VIGELAND: Optimism sounds crazy at this point. There’s been so much loss, so much tragedy for so many. But in this episode, we talk with two economists who are viewing this pandemic through a lens of history and data. And we’ll hear them out about where we might find some less scary places to look for reassurance.

This is Pandemic Economics, a podcast about the global impact of COVID-19 from Stitcher and the Becker Friedman Institute for Economics. I’m Tess Vigeland.

EDUARDO PORTER: And I’m Eduardo Porter. We’ve been invited to have this series of conversations with University of Chicago economists.

TESS VIGELAND: In today’s episode, we’ll speak with Austan Goolsbee and Steve Davis about what we know and have learned from previous crises.

EDUARDO PORTER: When I spoke with Austan Goolsbee, I wondered whether this triggered some kind of flashback to 2008 for him.

I’ve heard you say that the economic shock from COVID is likely to be greater than the Great Recession. And as head of President Obama’s council of economic advisors, you know that pretty well. But I wonder if you’re being too optimistic. Looking at the employment stats of the last few weeks, this seems more like on the scale of the Great Depression of the 1930s, no?

AUSTAN GOOLSBEE: Look, it might be bigger than the Depression. Our big challenge in 2008 and 2009 was to prevent that financial crisis from becoming a depression. The challenge here is to prevent what is the nastiest hopefully short-term thing to ever happen to the economy to prevent it from turning into a regular business cycle because if it does, that’s definitely not good. And it looks a lot more like 1929 than it does like a regular recession.

In just the naked mathematical terms, if, let’s say, the unemployment rate goes to 15%, normally in a business cycle, the unemployment rate can only come down about 1 to 1 and 1/2 percentage points a year. So if we were at 15% unemployment, we’re going to be a decade before we get back to anything that looks like the job market before COVID was there.


AUSTAN GOOLSBEE: It doesn’t have to be true. Let’s say in three weeks, somebody came up with a vaccine or a treatment. And we could all just kind of go back to doing what we were doing before COVID arrived. Then this wouldn’t be like a normal business cycle. And you could see the unemployment rate plunging almost as rapidly as it went up.

Our task is to keep this thing both on the medical side and, by consequence, on the economic side to keep this a temporary phenomenon and not let it turn into regular business cycle recession. Because if it becomes that, we could be years and even decades getting back to something that we would call “normal”. There are many reasons to be pessimistic.

That said, as I look at it, we’re not that far from a path which I would call the “optimistic scenario,” which is to say, it’s not just theory. There are multiple countries around the world, including Korea and Taiwan, which have shown that you don’t actually need even to get the vaccine to at least have your economies start to come back and to get out of lockdown. You just have to do enough testing that the only people that have to go into lockdown are the people who have the disease and are infectious.

But if you go to Korea, they’ve now gone back to school. So the kids are back to school. The employers are ramping back up. And it’s all because they’ve been able to do the testing and to get a handle on the virus. So as I say, the number-one rule of virus economics is to get control of the spread of that virus for the economy to come back.

EDUARDO PORTER: So listen, let me just put my pessimism there to face off with your optimism here. Recessions– normal, garden variety recessions– are classified as V’s, where you bounce back quickly, U’s, where you fall, drag around the bottom for a bit, and only later move back up, or L’s, where you just fall into a hole and never get out of it.

I wonder if this kind of economic crisis or shock is going to be different in that– I mean, even in countries where they seem to have overcome the first shock of COVID, there’s this expectation that the virus is going to keep coming back, at least until societies achieve some sort of herd immunity. And so it’s not like you’re going to be able to get rid of this thing, but that you’re going to go through kind of iterations of the social distancing strategies over a period of years. And so I was thinking that would lead to a new type of letter for this type of economics, like a W or something.

AUSTAN GOOLSBEE: Like a Bart Simpson’s head, like [MUMBLING]. It’s just going to go up and down like the top of Bart Simpson’s head. Well, look, maybe. If you look at garden variety recessions, U’s and V’s are recession shapes. And depressions are kind of L shapes. What turns a recession into a depression, in my definition, is the financial system collapses. And the normal self-correcting mechanism of the business cycle no longer exists. You kinda go down, and you stay down.

And normally, without that financial mechanism, the more intense the drop, the more pent-up demand there is and the more it comes booming back. So I guess I’m going to persuade you not to be as pessimistic as you are. Because if you think that the coronavirus is like a regular business cycle, then the intensity and speed at which we went down would likely mean that we could at least come back at a pretty fast rate, even if it didn’t get us back to where we were before.

And the second thing I will say is if the economy and the players in it had some clarity over these rebounds by looking at other countries, let’s say, we saw– you come out of lock down. Then one month later, you have to go into lockdown for three weeks. And then you can come out of lockdown. And then a month later, you got to go into lockdown again.

During the week and the weekend, where economic output goes down pretty significantly on the weekends, by design– but that’s fully anticipated. And everybody knows that. And it doesn’t destroy the economy. If you have a handle on, what are the magnitude and how frequently does it happen, you can correct. That would certainly be better than where we’re at now, which is, we don’t know how long this is going to last. I do think we will learn a lot as it goes along.

EDUARDO PORTER: Yeah. That’s a really interesting thought because a lot of this is about expectation, setting expectations, and dealing with uncertainty.

AUSTAN GOOLSBEE: These are very specific uncertainties, very specific like, how long until they get a vaccine? We don’t know. What is the mortality rate of this disease? We don’t know. What is the baseline infection rate? So there are a series of things that matter a lot to both, what should the policy be, and, how long should we think this is going to be going on, before we can get out of lockdown.

But those uncertainties are at least sufficiently specific that I think it can open the door to at least an optimistic case. It is conceivable that if we can get off our duffs and do a substantial ramp up of testing and increase the production of whatever– of chemical reagents and of ventilators and medical equipment and blah, blah, blah– though the magnitude of this thing is big, there’s at least a chance of success.

EDUARDO PORTER: We have no precedent for this moment– I mean, maybe the Spanish flu. But maybe that’s not even the right precedent. And I wonder, how does one navigate moments without precedent? Because so much policymaking tends to be about, well, what did we do when we were in a similar moment in the past?

AUSTAN GOOLSBEE: I think the only way to confront or deal with this thing are to learn some lessons of past crises. But mostly, I think it’s to try to think through the logic of this virus and pandemic itself. Unfortunately, the epidemiologists are telling us that we shouldn’t think of this pandemic as being isolated and unique, that we’re probably going to face pandemics again in the future.

So I do think precedent setting ought to be the order of the day rather than trying to decide, is this more like the recession of 2008 or the recession of 1974? That’s the wrong way to approach it.

EDUARDO PORTER: Can we use some of the same tools from standard recession toolkits that we use in other recessions? Or do we need a whole new set? Do we need to think of entirely different interventions?

AUSTAN GOOLSBEE: Yeah. We probably need some of both. I’ve kind of been more on the lines of, let’s not just go back and do the same stuff we always do. Right out of the gate, the CARES Act is $2 trillion, which kudos pose to Congress for in a two-week period passing the biggest bill that has ever been passed. Fine. It’s good that they did that.

The fact that many people describe it– in some of the policies, they call it “stimulus”– I think is a mistake. It’s almost dangerous because stimulus does not work. Traditional stimulus does not work if you do not have control of the virus, period. That’s back to my rule number one of virus economics. You could give people a tax cut. They will not spend the money unless the virus is under control. They will save the money.

The right answer are things that are about forbearance. They’re about making sure that people don’t starve, that they don’t get infected. They don’t get their gas shut off, that companies that are viable in the medium and long run don’t run out of money and have to liquidate so that when we all go under the rock– a tornado passes by– we can come back out again. I think we want to be thinking along those lines. And that’s different than what we’ve done in the past.


TESS VIGELAND: After the break, I’ll speak to Steve Davis, who, like Austan Goolsbee, will compare this economic moment to other moments in history. And we’ll look at a few numbers that reveal some mildly bright spots in how businesses are responding. Stick around for more Pandemic Economics.

Eduardo, in your conversation with Austan Goolsbee, I was struck by his idea that with virus control and predictability, the damage could be, if not contained, then at least at a point where recovery takes less than years.

EDUARDO PORTER: It’s not a very popular thought. It’s not one that I hear very often. In fact, I haven’t heard it at all other than that conversation. Don’t jump out the window just yet.

You can build a case that this recession will be more manageable than others because of its weird nature. This is a unique event. And we really would rather this stay unique and not devolve into the kind of you know financial calamity and economic calamity that other recessions have brought about because it would be just so much more devastating.

TESS VIGELAND: And I’m going to have this conversation with Steve Davis, who I think might make you feel a little bit better. There are– I won’t call them “silver linings” in all of this because I don’t think that exists in a pandemic, really. But there are some maybe brighter spots within the economy in terms of the fact that there are actually jobs being created right now in something– what he calls a “reallocation” of the labor market across the economy.

Steve, you are something of a specialist in uncertainty. You’ve been studying business uncertainty for a really long time. And I know we’re still quite early in this economic cataclysm. But do you have any sense of perspective yet on how this compares to, say, the 2008 financial crisis, post-9/11, or even going back to the rise of the Great Depression, other times when we thought, OK, this is going to change everything, at least in terms of how businesses are acting and what they’re saying?

STEVE DAVIS: Well, as everyone knows, we are living through an extraordinary, uncertain time. And I have been trying to put numbers around how much uncertainty we face today and at various times in the past.

With a couple of these ways, we can go back all the way to, say, 1900. One way is to look at newspapers and to essentially count the number of newspaper articles or the fraction of newspaper articles in leading newspapers that express anxieties and concerns about people’s sense of how uncertain the economic environment is.

And if you do that going all the way back to 1900, you find that the period from kind of late March to right now is one of the most uncertain economic times– this is economic uncertainty we’re measuring– in the past 120 years. So by that measure, it looks quite extraordinary.

Another measure that you can use that you can go all the way back to 1900 with is to look at measures of stock market volatility. And the idea is that in an uncertain environment, news is arriving that causes the market to move up and down a lot. And you can quantify stock market volatility as a proxy for economic uncertainty in various ways.

One way to do that– very simple, easy to understand– is just to calculate the number of days, say, in a month in which the stock market moved a lot, up or down. When we use 2 and 1/2% as a threshold for a big move. And by that measure, number of big daily stock market jumps in a month, there were more such jumps in March than any other month in the past 120 years.

TESS VIGELAND: And we had several where it was far more than 2%.

STEVE DAVIS: Oh, yeah, far more. And you can take kind of a more sophisticated approach and do something like calculate what economists and financial economists think about as overall market volatility over, say, the past 14 days or the past 30 days, capturing all the daily market moves, not just the big jumps.

And by that metric, too, what you find is that the period from late February onwards is right up there with early 1930s and the stock market crash of 1929 and the very sharp-lived, short period of stock market volatility, short-lived crashed in 1987. So it’s one of the big three in the last 120 years. Those are two or three methods that allow you to go all the way back to 1900.

But I’ve also been doing survey-based research that is much newer. But it asks businesses how much uncertainty they perceive in their own outlook. The idea there is, well, businesses may not know a lot about the whole economy. But they know a lot about their own business.

So we ask them questions about what they expect to happen to their sales growth and their employment growth over the next year. And then we ask them, well, how much uncertainty do you have about that? So by that measure, too, the period in March and April really is the highest in the short history of our series that goes back to late 2016.

So we have lots of different ways to look at uncertainty. And they all kind of tell us this is not only a period of extraordinary uncertainty. But it’s really historically high economic uncertainty levels facing business– and households, of course.

TESS VIGELAND: So it’s fair to say that this is indeed a time when we are very rightly thinking, OK, this is going to potentially change everything.

STEVE DAVIS: That’s right, and in many, many ways.

TESS VIGELAND: Well, let’s turn to your latest research for one of those ways, which looks at the phenomenon of reallocation in the economy because of the virus. And this is basically the shifting of resources, of jobs, of spending. And I’d like to start with labor reallocation. We all know about the staggering job losses, more than 30 million people filing for unemployment so far. But walk us through what you found about jobs being created.


STEVE DAVIS: So in the April wave of the survey of business uncertainty, we asked firms directly about their staffing decisions in response to the COVID-19 shock. We asked them about both their layoffs, but also about their new hires. And what we found was pretty interesting.

First and not at all surprising, they laid off a lot of workers. But second, more surprising and something that’s been missed by the news coverage for the most part, they also hired a lot of new workers. And to boil this down into simple, easy-to-understand numbers, we found that on average for the firms in the survey, they hired about three new workers for every 10 workers they laid off.

So they laid off a lot of workers. But they also hired quite a few new workers. And that’s consistent with the larger theme of our research that says there’s an important reallocative component to the COVID-19 shock.

Let me just give a little sense of what we mean by this reallocation shock. So in very simple terms, it means we should not expect the economy to go back after the pandemic to where it was before the pandemic in terms of its structure, in terms of where the jobs are.

Now, some of the jobs– probably most of them if we resolve this pandemic and the economic lockdown in the next few months– most of the jobs will come back. But many of them won’t. And that’s what I mean by the reallocation shock.

It’s perhaps easiest to understand this idea with some examples. So I’ll start with a very easy, everyday example that gives you an idea of the concept. Since the pandemic erupted, nobody goes to sit-down, dine-in restaurants, partly because of the economic lockdown. But even if we didn’t have the lockdown, most people would be reluctant to go into a restaurant with closely packed patrons.

On the other hand, companies that kinda make their business model around takeout and delivery services– many of those are having booming demand. So Domino’s Pizza, Papa John’s– they’re hiring tens of thousands of new employees because demand is off the chart. So that’s an example of what I mean by a reallocation shock within, say, the restaurant industry.

Now, of course, once the pandemic settles down and people feel a bit more comfortable, things will partly reverse. But they’ll only partly reverse because some people will remain quite leery. But the point there is that we’re not going to go all the way back to where we were. So there’s going to be lots of restructuring in the economy.

Businesses are learning they can get a lot done without traveling through Zoom meetings and so on. So that’s going to have profound effects on the hospitality industry, the travel industry. These are all examples of how the economy’s not going to go all the way back in terms of its structure to where we were before the pandemic.

TESS VIGELAND: Can you give us an example– or maybe a few– of how all this reallocation is being affected by current policy responses?

STEVE DAVIS: I’ll start with an important part of the Coronavirus Aid and Relief Act that Congress passed. Let’s talk about unemployment benefits. It basically relaxed the eligibility criteria so that independent contractors and gig workers, for example, and even self-employed workers in some cases could obtain unemployment and benefits. That’s a change from past practice. I think that makes a lot of sense.

Another aspect of the act, which I think was a mistake, is that the federal government added $600 per week to the amount that unemployed workers would otherwise receive. That extra $600 was just across the board to everybody regardless of how much the person earned on their previous job, regardless of whether they had previously been working part-time or full-time, regardless of how much they could earn on their old job if they went back to it. Well, you don’t need to have a PhD in economics to understand that’s a strong disincentive to going back to work.

TESS VIGELAND: You also mentioned a very interesting angle on this, which is that some companies are working with each other to rehire within their industries. Can you tell us more about that?

STEVE DAVIS: Yeah. You know I mentioned earlier Domino’s Pizza and Papa John’s. But there are other companies, like Amazon, CVS Health Care, like Walmart, that are hiring in some cases more than 100,000 workers within the space of a few weeks because they’re experiencing such a big boost in the demand for their services.

There are other firms that are just seeing demand at least temporarily fall to close to zero– hotels, large dine-in restaurant chains, and so on. And of course, these employers are trying to help their laid-off employees, their furloughed employees find new employment in the interim. And so that’s given rise to these partnerships.

So Kroger Foods has a partnership of this sort. Hilton Hotels is involved in one of these partnerships because, obviously, they’ve got thousands and thousands of employees who now don’t have an income from a job. Even Uber has gotten into this business.

So the concern about face-to-face interactions and just the general reduction in travel and mobility has decimated the demand for Uber drivers. So now when Uber drivers log in to their account, they see, well, you can get a temporary job at 7-Eleven or some other place and so on. So it’s nice to see the private sector step in and try to meet some of this short-term demand.


TESS VIGELAND: You also say in the paper that there are new businesses that are being created out of this crisis or at least during this crisis. And I guess that’s the question. Is this a kind of “necessity is the mother of invention” type of shift related directly to the pandemic? Or are these businesses that would have been created anyway?

STEVE DAVIS: I think mostly the latter but some of the former as well. And there are, as we just talked about, these businesses that have booming demand. And there are even now tens of thousands of applications for new businesses every week in the United States. So let me tell you how this works and where that comes from.

So if you want to start a new business that hires employees, you’ve got to apply with the Internal Revenue Service for a new employer identification number. So the Census Bureau, one of our major statistical agencies, has a new series in which every week they put out numbers of applications for new businesses that historically are of the type that hire employees in the near future.

So we can do this week by week in 2020. And through basically mid March, it’s running at about the same level as the same week in 2019. And then it drops off in mid March. But it drops off by about a third. That’s a big drop-off. But what it means is that new business formation even now is still running at about 2/3 of the level it did a year ago.

TESS VIGELAND: That seems very surprising.

STEVE DAVIS: I think it is surprising to many people. And the bad news is new business formation is down by a third. Well, that’s bad because that means many fewer new businesses, many fewer new jobs and new businesses. The good news is, though, there’s still a lot of business formation activity going on.

TESS VIGELAND: In the middle of a pandemic.

And I think it’s important to point out that both Austan and Steve reiterated time and time again that all of this depends on public health and testing. And unless and until there is testing, you can’t have any certainty at any point in time.

EDUARDO PORTER: The idea that certainty is important for businesses, that uncertainty is a problem for them, that they’ll invest less and they’ll employ less and so on in states of uncertainty– anything that creates more certainty about the evolution of this pandemic and how it will affect consumer demand and otherwise affect their supply chain and their businesses is really important. And clearly, testing is the one kind of thing that can do most to reduce uncertainty to tell us what’s actually going on.

TESS VIGELAND: Right, even in an era where uncertainty is a certainty.


Next time on Pandemic Economics, we talk with Steve Levitt about the danger of assuming there will be widespread COVID testing and that everyone will clamor to get one.

STEVE LEVITT: We’re talking about 22 million Americans a week who the government is somehow going to compel to do something they don’t want to do. You can’t just put out a program and say, 22 million people will be tested. And if we have enough tests, then we’re fine. Just having testing capability and telling people to get tested– I guarantee you that is not going to solve our problem. If we don’t get the incentives right, everything else is going to go for naught.

TESS VIGELAND: But he’s got some ideas for how we might solve that problem with random cash. Join us next time on Pandemic Economics.

EDUARDO PORTER: Pandemic Economics is produced by the University of Chicago’s Becker Friedman Institute. Our producers are Kaitlyn Nicholas, Dana Bialek, and Devin Robins. Our executive producer is Ellen Horne. Production and original music by Story Mechanics.

TESS VIGELAND: Pandemic Economics is part of the University of Chicago Podcast Network.

EDUARDO PORTER: I’m Eduardo Porter.

TESS VIGELAND: And I’m Tess Vigeland. Thanks for listening, and we’ll see you next time.