Jason Furman was a top economic adviser to President Barack Obama, serving as deputy director of the National Economics Council from 2009 to 2013, and as chair of the Council of Economic Advisers from 2013 to 2017. He played a key role in designing the administration’s response to the financial crisis and Great Recession. He’s now a professor at Harvard’s Kennedy School of Government.
I’ve spoken with Furman often over the years, and to put it bluntly, I’ve never heard him as alarmed as on Thursday. He believes the coronavirus could do more damage to the economy than the financial crisis did, and that policymakers aren’t even close to designing a large enough response. In addition, the virus is moving much faster than the financial crisis did, and the government officials who will need to respond to it are in danger of being infected by it.
A transcript of our conversation, lightly edited for length and clarity, follows.
Looking at the financial markets and economic data, how much does this feel like 2008 to you?
At this point, this feels much worse than 2008. Lehman Brothers was quite bad, but it was the culmination of a sequence of things that had happened over 14 months. This hit all at once.
There were a lot of people lucky and privileged enough that they didn’t reduce their spending in 2008. But everyone is doing it now. I was in a restaurant yesterday, possibly for the last time for a while. I was in a taxi, possibly the last time for a while. There are entire industries I interact with where I’m realizing: “This may be the last time I’m paying you for a while.” That didn’t happen in 2008. When you start to think about all of that, it just gives you a feeling for the enormity of this economically.
If two months from now we go back to normal, I think we’d be okay. If this lasts six months or longer — and I think that’s the more likely scenario — all of that just compounds. Even if you discover a cure in December, you still have people out of jobs, broken balance sheets, bankrupt companies that won’t be particularly eager to hire.
The economic effects might outlast the health effects.
Financial crises are fundamentally about uncertainty. Markets think an asset costs this much, but they’re wrong, and chaos ensues. This feels much more tangible: People are getting sick, or are afraid of getting sick, and so they’re staying home, or they’re not allowed to come into work, or they’re losing their jobs because their customers are gone. How different is that in its economic effects?
In a financial crisis, there are multiple equilibriums. if you can stop the panic by guaranteeing markets or injecting capital, you can even get the opposite as money floods back into the market. Here, there’s a deadly germ out there and you don’t want to go near it for your sake and your community’s sake. There’s only one equilibrium: It’s economic inactivity until the danger passes.
The 2007-2008 recession was about a collapse in consumer demand, which, in theory at least, you could solve by giving people more money so they could spend it and bring demand back up. I’ve heard economists argue that this is different: There’s a demand-side problem here, but it’s a supply-side shock where people can’t go to work to supply their labor, where businesses can’t supply their goods, where people won’t travel, and that’s harder to solve. Do you think the supply/demand distinction is useful?
I don’t think so. The reason economists sometimes like to distinguish between them is if you try to solve a demand problem and it’s really a supply problem, you’ll run up against a capacity constraint and generate inflation. Right now, expected inflation has fallen to about 1 percent over the next decade. If this is completely a supply problem, demand-side measures won’t help, but they won’t have bad effects either. I’m not at all worried about inflation being too high. So the normal reason not to do demand-side policy doesn’t apply here.
So what would you do if you could design the response?
Absolutely everything related to health — testing, hospital beds, ventilators, research. Anything anyone wants, spend the money on it.
Number two, I would do every targeted measure that we can think of. Do as much as possible using existing structures and previous laws. For paid leave, you need to invent something new because there is no structure there. But for almost everything else, you can use unemployment insurance, the SNAP program, Medicaid.
Once you get through everything on health and everything targeted, you still have two problems: One is you potentially have tens of millions of people in great need who aren’t eligible for one of those programs. Second, the total amount, even if you max out on health and targeted, just isn’t as large as what could be helpful economically. So the third thing I’d do is get people cash.
My number one choice would be a flat amount per adult, half that per child. A week ago, I thought $1,000 per adult, $500 per child. Now I’d double or triple that. Get them the check within three months, or less. And make clear that if the economy is in bad shape at the end of the year we’ll do it again, and keep doing it.
My second choice would be something like Making Work Pay, which is similar to giving everybody a check, but the money dribbles out over time, so it’s not ideal. My distant third choice would be a payroll tax holiday. It’s a distant third because it gives a lot more money to high-income households and it doesn’t give anything to people who don’t get a paycheck, so I think we can do better than that. But I’d vote for it if it’s the only game in town.
You were part of the team that responded to the financial crisis in 2009. What did you learn from that experience that policymakers should keep in mind now?
First, just don’t be too finicky about clever design and targeting. It’s really hard to get that right and you’ll end up missing a lot of people that really need what you want. I saw this in all sorts of programs, of which housing was the most notorious example. And trying to design highly targeted programs will be much harder now because Congress is legislating at a much faster pace than in 2008 and 2009.
Second, our Overton windows move much more slowly than events. People don’t remember, but in the fall of 2008, people thought a $300-500 billion stimulus was almost unimaginably large. Now people look back at the $800 billion stimulus, which I still think was the most we could get from Congress at the time, and say it was too small. In some ways, that was a collective failure of imagination.
The third thing isn’t a lesson so much as something to grapple with: How much do you want to maximize your solution to the crisis at hand, and how much do you want to use it as an opportunity to make changes you’ve long wanted? High-speed rail was meant to be a visionary program out of the Recovery Act; I think it was mostly a failure. But some of the clean energy programs were much more successful. Right now, I’d err on the side of focusing on this threat, just given how much damage it could do to the country, but I certainly would be thrilled if the US permanently gets a paid leave system out of this.
And let me add one more thing: It’s not clear at what point Congress will stop even being able to function fully in terms of staff. And the Trump administration, at the best of times, isn’t the best implementer of government programs. You have to be really aware of the limits of what can be done right now.
One of the big questions in 2009 was how to size the stimulus. It was famously based on a calculation by Christina Romer and Jared Bernstein that used early economic data and ended up being way too optimistic. But right now we have much, much less economic data to go off of. So how would you tell Congress to think about the size of the package they need to pass?
There are three levels of radical uncertainty here. One is the disease. The second is how the disease affects the economy. The third is how policy affects the economy. In the face of that, you need to ask: What’s the cost of doing too much and what’s the cost of doing too little? I think it’s incredibly asymmetric, particularly when the real interest rate is negative: You can effectively give people $1,000 today at the inflation-adjusted cost of $900 a decade from now. So I’m not worried about doing too much.
Now, that doesn’t give you a number. It doesn’t tell you $500 billion or $5 trillion. Economies can absorb 2 or 3 percent of GDP a year in a normal downturn. Maybe in this one, you need even more. I don’t know.
We’ve been talking mostly about fiscal policy, but what should the Federal Reserve be doing?
I think the Fed should be doing everything it can. It looks like they’ll cut interest rates to zero next week. They’re significantly expanding their balance sheet. I think there are some things progressives might get squeamish about, too. They need to do what’s called regulatory forbearance, which means they’re not worrying that much about the lending standards of banks.
One good thing is the banks came into this with a lot of capital — not as much as I’d like, but still a lot. That capital is there for a flood. This is a flood. They need to spend down that capital. Banks are super important because businesses are going to need more cash than they have on hand in the coming months. The way to get over that is lending. So the Fed has a super-important role in supporting that.
One last thing, and this is more political. You were coordinating economic policy on the Obama campaign in 2008. The economy was in crisis, and you were running against the party that held the White House at the time. What advice do you have for whatever campaign ends up running against Donald Trump this year, as they navigate both being the opposition party but also trying to be responsible amidst a disaster?
Obama was running against a president who was incredibly unpopular — and then something terrible happened in the economy. That unpopular president put forward the most unpopular economic legislation of my lifetime, TARP. Obama then had a choice: He could’ve pounded away at it, opposed it. But he didn’t.
I remember at the time being really frightened that I was working with him on supporting TARP, and that I might be involved in a colossal mistake and he would lose the election. John McCain was often more critical of it than he was. But Obama was incredibly consistent: He was talking to Paulson [then the Treasury secretary], he was talking to [then-Fed Chair Ben] Bernanke. I did debate prep with him in Michigan, and he would take breaks from debate prep to call members of Congress and get them to vote for TARP. I remember a call with advisers who suggested leaking something about Hank Paulson, and he said, “It’s hard enough for him to prevent a second Great Depression without us making it harder.”
I don’t know if he did it just because he’s a responsible person or because he had a political instinct, but it was the exact right political decision. It was a dress rehearsal for the presidency, and people liked what they saw from him better than they liked what they saw from John McCain.