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An economic crisis like we’ve never seen

Annie Lowrey explains what the coronavirus means for the US economy — and how we can respond — on The Ezra Klein Show.

The famous Charging Bull Statue is seen lonely at the Financial District in New York.
The famous Charging Bull Statue is seen lonely at the Financial District in New York on March 22, 2020.
Photo by Tayfun Coskun/Anadolu Agency via Getty Images

“What is happening,” writes Annie Lowrey, “is a shock to the American economy more sudden and severe than anyone alive has ever experienced.”

It’s also different from what anyone alive has ever experienced. For many of us, the Great Recession is the closest analog — but it’s not analogous at all. There, the economy’s potential was unchanged, but financial markets were in crisis. Here, we are purposefully freezing economic activity in order to slow a public health crisis. Early data suggests the economic crisis is going to far exceed any single week or quarter of the financial crisis. Multiple economists have told me that the nearest analogy to what we’re going through is the economy during World War II.

I have a secret advantage when trying to understand moments of economic upheaval. I’m married to Annie Lowrey. I can give you the bio — staff writer at the Atlantic, author of Give People Money (which is proving particularly prophetic and influential right now) — but suffice to say she’s one of the clearest and most brilliant economic thinkers I know. Her viral piece on the affordability crisis is crucial for understanding what the economy really looked like before Covid-19, and she’s been doing some of the best work on the way Covid-19 will worsen the economic problems we had and create a slew of new ones.

But this conversation on The Ezra Klein Show isn’t just about crisis. It’s also a conversation about how to respond. I wouldn’t call it hopeful — we’re not there yet. But constructive.

Here’s a lightly edited transcript of part of our conversation, which we released this week on The Ezra Klein Show.

Ezra Klein

Let’s say we were recording this a month ago and I asked you about what was happening in the economy. At that time, the headline numbers looked good, unemployment was pretty low, and Donald Trump was saying it’s the greatest economy ever. On the other hand, there were a lot of folks who couldn’t pay their bills. How would you describe the state of the economy before all this began?

Annie Lowrey

It’s interesting. The economy never really caught fire, but it did keep on growing steadily for a decade. What that left us with was an economy that looked good in terms of headline numbers but with a lot of weakness underneath. Productivity growth was terrible. We had a really great unemployment number, but we had large numbers of people who weren’t even trying to work. And we also had a lot of financial strain among families. And a main reason for that is that the costs of health care, education, childcare, and housing grew faster than wages did for a really long time.

If you look at housing, the cost of housing outpaced wage gains even in places like San Francisco where wages were going up really fast. So it became unaffordable for people to live in those cities. And we actually saw the cost of housing outpacing wage gains in rural areas, too. So the share of Americans who are “rent burdened” [paying more than 30 percent of their income on rent] is really high.

You also saw increases in the cost of families’ health care plans, deductibles, and out-of-pocket costs grow faster than both GDP growth and wage growth. The share of private health plans that have deductibles has gone up to something like 80 percent. And the average deductible is like $2,000 a year. And two-thirds of American bankruptcies still involve medical debts.

So what you have in the United States is a shitty equilibrium — that’s a technical term. For a lot of families, until your kid is five, it’s up to you to figure out how to pay for their childcare. You’re going to pay a tremendous amount for your health care, and you’re not going to really get much actual insurance out of it. We’ve made higher education extremely expensive, which leaves people with a really heavy debt burden and a collapsing wealth premium.

Ezra Klein

The reason I want to have this part of the conversation first is because the affordability crisis sets the stage for where we are going now. I think most people understand coronavirus as a public health problem. You’ve been covering the economic dimension of it. So why is coronavirus an economic crisis not just an epidemiological one?

Annie Lowrey

I think this is primarily a health crisis — and I think also a personal crisis for people. We’re seeing some of our most vulnerable get mowed down; it’s horrifying. And the economic crisis is downstream of that. In order to get control of the pandemic, we need to basically shut the economy down. We need everybody to stop moving and doing stuff. And we need to absorb a huge amount of short-term economic pain that’s going to help us get control of that public health crisis.

So around the world, we are seeing a cataclysm unlike anything I’ve ever seen before. It’s like a two-month-long hurricane everywhere. And right now, it’s looking like in the second quarter of 2020, the economy is going to contract 10 percent in the United States [In the days between recording this conversation and releasing it, the estimate of the Q2 drop rose to -24 percent, which is horrifying — Ezra]. That is probably the sharpest drop since World War II. It’s twice as much as during the worst parts of the Great Recession.

Ezra Klein

Recent recessions have been corrections from an asset price bubble. The correction happens, financial markets freak out, and that makes it hard for businesses to get loans, which hurts the economy. I have never seen a recession in this country where we are telling people to just stop a lot of their economic activity. How does that make it different?

Annie Lowrey

It’s really different. So most recessions happen endogenously: something within the economy — a correction of an asset price bubble or some other kind of imbalance — triggers a recession. This is exogenous: It’s coming from totally outside the economy, and it’s just hitting the economy like a comet. So there is no “correction” — there’s just seizure.

So let’s say that you are a small business, like a restaurant or a startup. During a normal recession, you might have this seizure of economic activity, and you end up as collateral damage. But maybe that’s because there was no actually no good market for what you were selling, and so when the recession comes, you die. The concern with this coronavirus recession is that everything is collateral damage. There’s no Schumpeterian creative destruction happening here. A lot of businesses without help are just going to die.

Ezra Klein

I think it’s really important that we don’t think of the economic questions here as somehow separate from the public health epidemiological ones. As far as I can tell, they are actually two sides of the same coin. If you’re telling people to socially distance — for instance, telling people to close restaurants or operate at half-capacity — the question is whether or not it is economically possible for people to follow it.

For social distancing to work, you need a very high level of social solidarity. But social solidarity can’t just go in one direction. If you’re a restaurant or bar owner or a physical therapist and nobody’s coming in anymore because of social distancing, your business closes. That’s going to change the entire course of your life. So, we have to make it economically possible for people to social distance. I was just talking to Tom Inglesby at Johns Hopkins, and he said something that has stuck with me: “It’s not just that it’s not right to ask people to sacrifice if we’re not going to make it economical possible for them — it won’t work.”

Annie Lowrey

I think that that’s right. And I think that when you’re thinking about the scope of the possible, you have to remember that we know a tremendous amount about fighting recessions. Economic policy is not going to make everybody whole, but we can do a tremendous amount to make sure that we have a really strong snap back from this.

Ezra Klein

Speaking of what we can do, you wrote a book called Give People Money. Everybody should read it. This is one of the first crises where I’ve really seen like a “give people money” set of strategies emerging. So make the case: Why should we just give people money as opposed to just the things we’ve done before, like expand existing programs like unemployment insurance and SNAP [the food stamp program]?

Annie Lowrey

In a crisis like this, there’s not some underlying problem in the economy that needs to be fixed. There’s just this crazy shock. We are looking at like a literal decimation of the economy. And deciding who is in pain and who needs help takes time. So the idea with this cash policy is to get people cash as quickly as possible. Just send it and people will spend it on whatever it is that they need to spend it on. Households can pull that money together. They’re going to make sure that their mortgage or rent gets paid, that they have groceries, that they keep their lights on, that they can buy broadband, that they can obey the quarantine measures that might come in place.

Why not just do this through SNAP or unemployment insurance? Let’s take unemployment insurance. Only certain workers who have been paying into unemployment get unemployment insurance. So if you are a self-employed person or do gig work, you’re not covered by that. Expanding unemployment insurance doesn’t help those people. It’s the same case with SNAP. There are qualification standards for SNAP, and if you don’t meet those standards, you don’t get SNAP. And you can only spend SNAP money on food with pretty tight restrictions even on what food you can buy. My favorite example is in a lot of states you can only buy domestically produced cheese. You can’t use it on diapers. You can’t use it to keep your lights on.

This is the beauty of cash: You don’t have to figure out people’s needs. People know their needs. So, you just trust them to do the right thing with the money. And we know what they do with the money: By and large, they just buy more of what they were buying before — more groceries, more gas for their car, more stuff for their kids, more clothes. We’ve shown again and again that when you give people cash in all sorts of different contexts and all sorts of different ways, they don’t misuse the money.

You can listen to the full episode by subscribing to The Ezra Klein Show on Apple Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

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