Global Economic Prospects: COVID-19 and Labor

MarketsJason Furman

| Peterson Institute for International Economics | 1750 Massachusetts Avenue, NW | Washington, DC 20036 | www.piie.com10/8/2020

Outline

1. The Initial Fiscal Response and Current Nonresponse

2. Two Labor Market Policy Debates

3. The Future of Fiscal Policy

210/8/2020

Outline

1. The Initial Fiscal Response and Current Nonresponse

2. Two Labor Market Policy Debates

3. The Future of Fiscal Policy

310/8/2020

Largest discretionary fiscal response to an economic crisis, more like World War II

410/8/2020

Note: Calendar year basis for 2010 and 2020.Source: Calculations based on Council of Economic Advisers (2014); Congressional Budget Office; Office of Management and Budget; Bureau of Economic Analysis.

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1943 2010 2020

Discretionary Fiscal Stimulus as a Percent of GDPPercent of GDP

510/8/2020

Note: As of August 25.Source: Evercore ISI.

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Spain France Italy Japan EuroArea

UnitedKingdom

UnitedStates

Germany

International Fiscal Response to COVID-19Percent of 2019 GDP

Substantial fiscal response in advanced economies, especially United States and Germany

Unprecedented policy response:GDP downUnprecedented policy response:GDP down while disposable income up

610/8/2020

Source: Bureau of Economic Analysis; Macrobond; author’s calculations.

-10-8-6-4-202468

1012

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22018 2019 2020

GDP

Percent Change in Real GDP and Real Disposable Personal Income

Percent Change from Previous Quarter

-10-8-6-4-202468

1012

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22018 2019 2020

GDPDisposable Personal Income

Percent Change in Real GDP and Real Disposable Personal Income

Percent Change from Previous Quarter

V-shaped recovery in retail sales

710/8/2020

Source: Federal Reserve Bank of St. Louis; Macrobond; author’s calculations.

70

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110

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Real Retail and Food Services SalesIndex (Peak =100)

Months from Peak

Jan-2020

Nov-2007

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100

110

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Real Retail and Food Services SalesIndex (Peak =100)

Months from Peak

Jan-2020

Consumption declines smallest for those in lower-income areas (Opportunity Insights)

810/8/2020

Source: Opportunity Insights.

Low Income ZIP

Middle Income ZIP

High Income ZIP

Sep-20

-40

-35

-30

-25

-20

-15

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0

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Jan 20 Mar 20 May 20 Jul 20 Sep 20

Consumer Spending by Consumer ZIP IncomePercent Change vs. January 4-31; 7 day moving average

The macroeconomic effect of the lapse in expanded unemployment insurance benefits

910/8/2020

Source: Council of Economic Advisers; Congressional Budget Office; author’s calculations

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42020 2021

Quarterly Effect of Eliminating $600 Additional Unemployment Compensation on GDP

Percent of GDP

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42020 2021

Quarterly Effect of Eliminating $600 Additional Unemployment Compensation on Employment

Millions of Jobs

Large revenue declines in states, without assistance to help in 2021 and 2022

1010/8/2020

Source: Auerbach, Gale and Sheiner (2020).

2020 2021 2022

Projected Declines in Revenues $155b $167b $145b

Personal Income Tax Revenues 22 37 40Corporate Income Tax Revenues 2 29 14Sales Tax Revenues 49 45 46Other Taxes and Fees 82 55 45

Additional Demands on Spending ? ? ?

State Aid $212b $19b $9b

Coronavirus Relief Fund 150K-12 Aid 13Transit 25Medicaid (Excess over additional Spending) 24 19 9

Effects of Pandemic on State and Local Fiscal Outlook, Excluding Higher Ed and Hospitals

What stimulus is needed now in the United States?

1110/8/2020

1. When? Two months ago.

2. How long? As long as it takes—ideally with triggers

3. How much per month?• Top-down models based on output gap: $36 billion to $270 billion

• Bottom-up models to protect people/states/health: $235 billion (roughly the largest magnitude you get with this approach)

Outline

1. The Initial Fiscal Response and Current Nonresponse

2. Two Labor Market Policy Debates

3. The Future of Fiscal Policy

1210/8/2020

#1. Unemployment insurance vs. job protection• “U.S. Model”: Workers furloughed, receive public benefits—

replacement rate was > 100 percent for the majority of workers.

• “European Model”: Workers paid by business (sometimes < 100 percent) and business partially reimbursed by government (usually < 100 percent).

• Many arguments for the superiority of the European model in preventing mass unemployment.

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Commonalities and differences

1410/8/2020

Commonalities• Non-working are compensated and employers have little/no cost.

• Employers that can return to economic viability will be able to reactivate their employees and employers that are not viable cannot reactive employees.

Commonalities• Non-working are compensated and employers have little/no cost.

• Employers that can return to economic viability will be able to reactivate their employees and employers that are not viable cannot reactive employees.

Advantages of U.S. Approach Advantages of European ApproachLower cost for employers Less disruptive for employees

Commonalities• Non-working are compensated and employers have little/no cost.

• Employers that can return to economic viability will be able to reactivate their employees and employers that are not viable cannot reactive employees.

Advantages of U.S. Approach Advantages of European ApproachLower cost for employers Less disruptive for employees

More leverage for employees to refuse to return to work

More leverage for employers to force a return to work

Commonalities• Non-working are compensated and employers have little/no cost.

• Employers that can return to economic viability will be able to reactivate their employees and employers that are not viable cannot reactive employees.

Advantages of U.S. Approach Advantages of European ApproachLower cost for employers Less disruptive for employees

More leverage for employees to refuse to return to work

More leverage for employers to force a return to work

Handles reallocation better Possibly higher job attachment

Unemployment rate changes have been similar when temporary layoffs excluded

1510/8/2020

Note: Most recent data from September for Ireland and United States; August for others. Source: Organisation for Economic Co-operation and Development; Bureau of Labor Statistics; Macrobond; author’s calculations.

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Change in Unemployment Rate in Advanced OECD Countries, February 2020–Most Recent

Percent of Labor Force

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Change in Unemployment Rate in Advanced OECD Countries, February 2020–Most Recent

Percent of Labor Force

Temporary Layoffs

#2. $600 per week unemployment insurance vs. less• With $600/week addition:

• Median replacement rate was ~150%

• More than 20 percent of workers were getting a replacement rate of 200%+

• Two opposing effects (in theory):

• Increase consumer spending (good for the economy)

• Reduce labor supply (bad for the economy)

1610/8/2020

See clear evidence of more consumer spending due to benefits

1710/8/2020

Source: JP Morgan Chase Institute (2020).

Do not see clear evidence of an employment disincentives of more generous benefits

1810/8/2020

Source: Altonji et al. (2020).

Does this mean the United States should restore the $600 per week?

1. The evidence from April/May is not completely clear.

2. Part of the lack of an effect may have been the expectation that the $600 would not be continued.

3. External validity: The labor market in December very different from the one in April.

1910/8/2020

Outline

1. The Initial Fiscal Response and Current Nonresponse

2. Two Labor Market Policy Debates

3. The Future of Fiscal Policy

2010/8/2020

Debt increasing everywhere…

2110/8/2020

Source: International Monetary Fund, Fiscal Monitor.

October 2019

Forecast

April 2020

ForecastCanada 26 41France 90 107Germany 38 49Italy 122 143Japan 154 169United Kingdom 75 86United States 84 107

IMF Projection of General Government Net Debt as a Percent

of GDP, 2020

…But debt/GDP is a problematic metric

2210/8/2020

DebtGDP

Stock

Backward looking

Flow

NPV of U.S. GDP is $3.9 quadrillion (SS Trustees) or ∞ (if r<g).

Medium-term fiscal plans must reflect the long-term & broad-based decline in interest rates

2310/8/2020

Note: Inflation measured by one-year changes in the core consumer price index (core personal consumption expenditures for United States).Source: Calculations based on Bank of Canada; Statistics Canada; Eurostat; Japanese Statistics Bureau; U.S. Bureau of Economic Analysis; Macrobond.

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1985 1990 1995 2000 2005 2010 2015 2020

Canada FranceGermany ItalyUnited Kingdom JapanUnited States

Real Ten-Year Benchmark RatePercent

U.S. debt up but… interest payments downU.S. debt up but… interest payments down

2410/8/2020

Source: Congressional Budget Office.

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2019 2020 2021 2022 2023

Debt Held by the Public (Left Scale)

Federal Debt and Net Interest PaymentsDebt, Billions of Dollars

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Debt Held by the Public (Left Scale)Net Interest Payments (Right Scale)

Federal Debt and Net Interest PaymentsDebt, Billions of Dollars Net Interest, Billions of Dollars

In fact, debt service has trended down relative to the economy most everywhere

2510/8/2020

Source: International Monetary Fund, World Economic Outlook and Fiscal Monitor; author’s calculations.

Canada

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2020

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1980 1985 1990 1995 2000 2005 2010 2015 2020

General Government Debt ServicePercent of GDP

And debt service is projected to stay low for another decade

2610/8/2020

Source: Calculations based on Congressional Budget Office; Office of Management and Budget; Bureau of Economic Analysis; Macrobond.

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1940 1950 1960 1970 1980 1990 2000 2010 2020 2030

U.S. Federal Real Net Interest PaymentsPercent of GDP

Historical

Pre-COVID CBO Baseline with Tax Cuts Permanent

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1940 1950 1960 1970 1980 1990 2000 2010 2020 2030

U.S. Federal Real Net Interest PaymentsPercent of GDP

Historical

Pre-COVID CBO Baseline with Tax Cuts Permanent

Post-COVID CBO Baseline with Tax Cuts Permanent and

$1.5t Additional Stimulus

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1940 1950 1960 1970 1980 1990 2000 2010 2020 2030

U.S. Federal Real Net Interest PaymentsPercent of GDP

Historical

Pre-COVID CBO Baseline with Tax Cuts Permanent

Post-COVID CBO Baseline with Tax Cuts Permanent and

$1.5t Additional Stimulus

What would it take to stabilize the debt?

2710/8/2020

Source: International Monetary Fund; author’s calculations.

Primary Balance in 2019

Canada France Germany Italy Japan UK United States

-0.2% -1.6% 2.0% 1.6% -2.6% -0.7% -3.6%

Primary balance needed to stabilize at different debt levels

Debt Goal If g – r = 1.5 If g – r = -0.575% -1.1% 0.4% 150% -2.2% 0.8%250% -3.8% 1.3%

What should our debt goal be?

2810/8/2020