Yes, the Unemployment Numbers Are Bad, but the Pain Might Be Relatively Short

“I do have hope that we can come out of it quickly,” says Stanford economist Edward Lazear.

April 10, 2020

| by Dylan Walsh

People who lost their jobs wait in line to file for unemployment following an outbreak of the coronavirus disease (COVID-19) at an Arkansas Workforce Center. Credit: Reuters/Nick Oxford

If workers are able to return to their jobs this summer, the economy could look normal again within 18 months, economist Edward Lazear says. | Reuters/Nick Oxford

Over the three-week period from March 16 to April 3, 16 million U.S. workers lost their jobs — more losses than the Great Recession produced over two years.

Timely, then, for the Hoover Institution to present “COVID-19 and Today’s Job Report,” an online briefing with Edward Lazear, the Davies Family Professor of Economics at Stanford Graduate School of Business, who served as chief economic advisor to President George W. Bush during the economic crisis of 2007–2008.

On April 3, in conversation with Hoover director Thomas Gilligan, Lazear walked through the near- and long-term economic implications of the COVID-19 pandemic.

To begin, he pointed out that job losses aren’t spread uniformly across sectors. The leisure and hospitality and transportation industries have been hit hardest. For education and professional services, the pandemic has so far been more of an inconvenience than a crushing blow.

That said, “leisure and hospitality is a big deal,” Lazear said. “Add in transportation and you’re talking about something like 22% of the labor force — a very big number.”

A Lingering Loss of Productivity

One immediate effect of these job losses is a concurrent loss in GDP. Lazear suggested that a drop in GDP of more than 20% would not be surprising. But often overlooked, and equally concerning, is the loss of productivity that lingers among adults who are out of work and children who are out of school. For every year that a child is in school or an adult is employed, productivity increases, on average, 8%. Losing three months of work or school, then, equates to a 2% loss in productivity.

“You’re talking about a pretty significant cut in people’s lives,” Lazear said.

But the news was not all grim. He was hopeful that the current recession, though deep, would be short-lived. Part of that optimism rests in understanding that it was caused by turning off supply, not demand. Once people return to work, supply should bounce back.

So if the coronavirus can be wrestled under control by June and people can resume work over the course of the summer, Lazear expects the economy could look normal again within 18 months. “That, of course, depends on identifying who is infected and separating those people from vulnerable segments of the population.”

It’s not as easy as turning a switch on, but it’s a lot easier to come out of something like this than coming out of the 2008 financial crisis.
Edward Lazear

He is also hopeful that recovery will be helped tremendously by the recent emergency support package passed by Congress. (The CARES Act, with its $2 trillion in aid, is the most well known of these, but there are two other related bills.)

Though statistics may currently seem grim, this is to be expected; the legislation is designed to encourage people and businesses to but the brakes on their normal day-to-day activities — and to support them while they huddle in place. In that sense, the striking rise in unemployment claims is a predictable part of the economic solution.

Efficiency vs. Fairness

Lazear acknowledged that the CARES Act has been the target of some legitimate criticism: It isn’t transparent enough, and it gives too much, too freely, to shareholders and CEOs. But he suggested that in the rush to create quick solutions for such a sudden economic crisis, mistakes are inevitable. That’s because finding an immediate fix takes precedence over a thoughtful analysis of competing claims for fairness and efficiency.

“When you’re in a crisis like this, I tend to focus more on the efficiency side than on the fairness side,” he said. When he reflects on how he helped craft the Economic Stimulus Act of 2008, he recognizes things that could have been done differently. But correct decisions are easier to find in retrospect.

“I’m much more concerned right now that businesses have the ability to withstand this shock,” he said, “even if it means that, after the fact, that we look back and say, ‘Gee, maybe that wasn’t such a great way to do it.’”

In the scheme of things, he is relatively unconcerned about how the CARES Act will increase American debt. Though $2 trillion is a gigantic sum, and though more spending will surely be needed, the contribution to debt of these expenditures ultimately pales in comparison to that of entitlements like Medicare and Social Security. Several trillion dollars of debt in response to COVID-19 is “bad news, no question,” Lazear said, “but that’s not going to be the problem we’re dealing with down the road.”

Diversify Vital Supply Chains

A proponent of open markets and low tariffs, Lazear described a critical supply chain weakness revealed by this crisis. While plenty of goods can be manufactured in many countries across Southeast Asia or India, COVID-19 has made it clear that the U.S. has an unsafe reliance on China for pharmaceuticals. This supply chain, he suggested, must be diversified among many countries “so we can’t be held hostage by a single country.”

Lazear reaffirmed his optimism that the economic crisis, though acute, will be relatively brief: “Because this recession is different from traditional recessions I do have the hope that we can come out of it quickly.”

He likened the pandemic’s inevitable conclusion to the end of World War II, when soldiers from overseas returned to the labor force in droves. “It’s not as easy as turning a switch on,” he said, “but it’s a lot easier to come out of something like this than coming out of the 2008 financial crisis.”

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