Faculty Viewpoints: The Macroeconomic Outlook

By Dylan Walsh

First came the coronavirus, next came lockdown, and then came the vertiginous rise in unemployment claims. The week ending March 14 saw 281,000 new claims—pretty standard; the following week that figure rose to 3.3 million; the week after that, 6.6 million. When unemployment has surged like this in the past, the claims—and the wave of disruption that they represent—have historically rolled in over a period of months or fiscal quarters, not days or weeks.

How will this economic earthquake unfold? In an online event hosted by Yale SOM’s Economic Development Club, Peter Schott and Lorenzo Caliendo, both professors of economics at Yale SOM, walked through some of the macroeconomic implications of the COVID-19 pandemic.

Schott started by looking backwards: how might the past help contextualize what we’re seeing now, and what kind of recession might we be facing? Over the last several decades, he said, “the closest analog is natural disaster,” but even this is only loosely informative. After Hurricane Katrina hit in 2005, for instance, the country saw a similar spike in unemployment claims, but these were locally concentrated. “Now, of course, this is happening not only across all U.S. states, but across most of the developed world, and soon most of the developing world.” The scale, Schott suggested, is unprecedented in modern times.

Given that scale, governments needs to step up and provide as much financial support as possible, essentially making it possible to hit the pause button and freeze everything in place so the economy can rebound once restrictions are lifted. Schott noted, in particular, the importance of preventing firms from making irreversible changes, like declaring bankruptcy, that diminish chances of quickly returning to normal.

“In a way, we were lucky we had the Great Recession just over a decade ago, as all kinds of new monetary policies were invented in order to keep things moving during a crisis like this,” he said. The federal government is pumping money into the economy to keep firms afloat. The “same thing has to be done on the labor side, and so I see the fiscal stimulus package thus far as an attempt to keep workers floating.”

The potential duration of the coronavirus, though, complicates this mild optimism. Using current figures about rates of infection, Caliendo used an epidemiological model to understand what might be required to “flatten the curve”—that is, limit the spread of COVID-19 enough to avoid overburdening the healthcare system. He found that this depends of the rate of propagation of COVID-19, which we don’t yet understand well, and the effect of social distancing policies.

One can imagine ongoing federal policies for a few months that keep businesses from bankruptcy and workers from poverty, Caliendo said. “But a year? Or two years? That’s not sustainable for many economies,” he said. “We’re now heading into a long period of time where we don’t know clearly when it ends.”

One of the key challenges has been a lack of good data and the accompanying uncertainty that this generates. To highlight just one among many issues, Schott noted that if public health experts don’t know much about the mortality rate of the coronavirus, they know even less about “deaths of despair”—suicide, substance abuse—from sharp disruptions in the labor market. “There are health consequences either way, but we don’t have the data to make decisions in an informed way,” he said. “We know among the things we need to prepare for moving forward is having data, having research, that helps with this.”

Both Schott and Caliendo also discussed potential changes to global political and economic systems that could result from COVID-19. One bleaker outcome, said Schott, could be a balkanized world in which nations tightly control borders and restrict travel. A more hopeful view—and one which Schott gave some credibility—sees a move toward greater solidarity. He sees this wartime effect in his own neighborhood. “And one interesting political economy question is the extent to which this travels beyond the local community,” he said. “A positive response to all this would be that we pull our collective world-act together, that this results in more cooperation.”

Caliendo, too, concluded with reflection on how the specific policies put in place now, and over the next several months, could trigger long-term shifts in the state of the world. “I think this is going to change the way we interact. This is going to change the way we actually consume natural resources. And I think this could change the way we conceive life and time,” he said. “This is much larger than what we originally expected.”