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A top Obama economist says there's 'a real danger' the looming coronavirus recession could be worse than the 2008 financial crisis

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Jason Furman

  • Obama’s former top economist is warning the economic crisis that results from the coronavirus could be worse than the 2008 financial disaster.
  • “There is a real danger that the economic crisis that comes out of this health crisis is worse than what we experienced in 2008,” Furman told Business Insider in an exclusive interview.
  • Business Insider talked to Furman about the likelihood of recession, and how long it could take for the economy to dig itself out into a state of recovery.
  • Visit Business Insider’s homepage for more stories.

The former top economist to President Obama is warning the coronavirus pandemic could throw the economy into a tailspin that’s significantly worse than the financial disaster in 2008 — and believes its almost certainly in recession already.

In the past seven days, stocks continued their free-fall and recorded its worst finish since the financial crisis. Congress is scrambling to construct a colossal federal rescue package that may carry a price tag surpassing $1 trillion as economists warn layoffs are soaring and entire industries could be demolished in the fallout. 

That type of chaos is familiar terrain for Jason Furman. Now at a professor at Harvard University, he helped shape the Obama administration’s $800 billion stimulus package during the recession in 2009. Furman was later appointed to head the Council of Economic Advisors.

Yet the situation now is remarkably different. Businesses across the nation have shuttered in a bid to slow the spread of infections. Around one in four Americans were urged to stay home Saturday, effectively freezing substantial economic activity.

Business Insider talked to Furman about a recession resulting from a virus that’s shut down vast sectors of the economy and sent unemployment claims skyrocketing. He also offered a forecast for how long the economic pain might last and what lawmakers in Washington should put into the stimulus bill taking shape.

The interview has been lightly edited for length and clarity. Questions are in bold and all responses are from Furman.

Congress is in the middle of designing a massive stimulus package to shore up an economy being ravaged by coronavirus. Many economists are saying we’re already in a recession. Could the situation we face be worse than the 2008 financial crisis?

There is a real danger that the economic crisis that comes out of this health crisis is worse than what we experienced in 2008. There is a complete shutdown of economic activity across the entire planet that happened in a synchronized fashion of a type we’ve never seen before. 

I don’t think though that the terrible scenarios are inevitable. It will depend on what happens with the pandemic and also on the economic policy response.

Read more: GOLDMAN SACHS: Buy these 15 cheap, cash-rich stocks in order to dominate the market, even as we barrel towards recession

We got unemployment data that showed 281,000 claims were filed in the week ending March 14. Goldman Sachs is forecasting that 2.25 million Americans will file for benefits this week. What do you make of those figures, and are we already in a recession?

The United States is almost certainly in a recession. The last week has to have been the sharpest deterioration of economic activity in a single week that we’ve ever experienced. And that was done on purpose in order to stop the spread of the virus, so that’s not a surprise. The really big question is how long it lasts.

That leads into my next question. How would you craft a legislative response that cushions the blow?

First, you want to start with some general principles. It’s better to be too big than too small. We don’t know what exactly will or won’t work, so you need to diversify your response. You need to have a response that continues and scales up as necessary.

Finally, if at all possible, keep it simple. It’s really hard to design programs in a hurry, it’s even harder to design it when the people doing so are teleworking and social distancing — and their children aren’t in school. So keeping it simple is really important.

In terms of fiscal stimulus, there are three broad uses of money. One is relief to individuals: You can do that through checks or unemployment insurance, nutritional assistance, paid leave. A second big bucket is continuity for businesses. Loans, grants, those various combinations.

The third bucket and the one I think has been most neglected to date is assistance to states and localities, which are going to see their revenues slammed at the same time expenditures they need to make are growing.

You’ve notably called for the federal government to send $1,000 checks to every American adult and help people weather the economic fallout from coronavirus. Why do you believe that’s an effective way of bolstering the economy?

Checks are an important part of the answer, but only one part. What makes them important is they are administratively feasible, the government can do it. They are broad in that they err on the side of ensure not missing people rather than erring on the side of missing people.

Read more: Bank of America lays out the 6 things that need to happen for the stock-market crash to truly end — and warns only 4 have occurred so far

They’re also scalable. You can make them larger if you need to. For all of these reasons, they’re critical for both social insurance in the short-run to protect people — and give people more spending power to help the economy grow out of this in the medium- and long-run.

Is it possible that checks may not reach people fast enough?

The faster you can get people money, the better. Unemployment insurance and nutritional assistance could be faster, but they miss a lot of people. The sooner the better for checks, but I wouldn’t say don’t do them, because it takes a month and a half.

People also have some ability to delay paying their bills. I hope there’s a lot of generosity in terms of late fees under the current circumstance. If you know a pot of money is coming a month and a half from now, I think that is a big relief in the situation we’re facing.

The Senate Republican plan released on Thursday includes a provision that would send $1,200 checks to taxpayers as long as they earn less than $99,000 a year. Is means-testing for the money a good idea?

It’s a good idea. My concern is that it would slow down delivery of the checks. In talking to people, and it appears Treasury knows the answer to this, and it thinks it won’t slow them down. Means-testing is completely appropriate.

How would you grade the Trump administration’s economic response? Letter grade?

Compared to historical precedent, they’ve been fast. Compared to what’s needed, they’ve been behind the curve and slow — five days behind which is an eternity in the current situation.

Can I give them a letter grade? A lot of universities are shifting to pass/fail this semester, and they’re on track to pass.

How concerned are you that gig workers and hourly-wage earners will catch the worst of the economic fallout we’re seeing? What can government do to alleviate the pain? 

The United States went into this crisis with an inadequate social safety net. It didn’t have great portable benefits for gig workers, it didn’t have a paid leave system. Unemployment insurance has the lowest coverage rate its had in a half-century.

Read more: ‘We have not had a single loser’: An investment chief who’s earned up to 90% per trade during the coronavirus crash breaks down his strategy — and explains why it will profit through the election

Right now, there’s not a lot of great mechanisms for getting to among others, gig workers. That’s part of the motivation for the checks — that will go to everyone. I’m not sure there’s something else you can specifically design, but I’d be thrilled if people prove me wrong.

We’ve been advised by public health experts to stay home for the immediate future. How long can the economy weather a shutdown of public life as we’ve known it?

I think if the shutdown gets much past two months, I would have exponentially increasing worries about the long-term impact on the economy. But that’s why an even bigger, sharper shutdown than we’ve had already is an investment in buying time so we need less of a shutdown later.

Do you believe the economy has the power to rebound quickly, as Trump has said recently in press conferences?

A lot of economists talk about a V-shaped recovery — you go down quickly, you go up quickly. That is generally not the way business cycles work. Generally you go down a lot faster than you go up, and that’s because there’s a lot of asymmetries in the economy.

If a worker gets fired, it takes time for them to get rehired. If a business goes bankrupt, it takes time for a business to reconstitute relationships that enable them to grow and thrive. For those reasons, large shocks to the economy tend to persist and last. I wouldn’t count on a V-shaped recovery.

The best argument for a V-shaped recovery is the massive amount of support the economy is in the process of getting. That gives us a better shot at a rapid recovery. But it wouldn’t be safe to assume one will happen.

You were part of the team that crafted the Obama administration’s response in 2009 at the height of the recession. What lessons should policymakers draw from that era as they design a stimulus package that could very well surpass it in size and scope this time?

Go big, go broad, go simple. I think those are some of the most important guiding principles. Make sure to stay at it as long as the economy needs it.

One of the problems in the response last time is that many in Congress, especially Republicans, just grew tired of fiscal stimulus and we stopped it too soon. I would not like to see that happen this time.

Read more: ‘Massive implications’: One market bear breaks down how the Fed’s unprecedented actions before the coronavirus turmoil may have opened the door to a 72% crash

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