Lori Walsh: Americans watch the devastating economic impact of the pandemic disruption even as they live it, but what we really want to know is what's happening here at home and what's about to happen. Joe Santos is professor of Economics and Dykhouse Scholar of Money, Banking and Regulation in the Ness School of Management and Economics at SDSU. You can follow along at his blog schooled.blog.com and he joins us now on the phone. Hey Joe, welcome back.
Joe Santos: Hi Lori. Thank you.
Lori Walsh: How are you feeling?
Joe Santos: Oh, I'm feeling very well, thank you. And you?
Lori Walsh: Good, good. Every day that we're feeling well is a good day. Right?
Joe Santos: It's a good day. That's exactly right.
Lori Walsh: And yet there are things that we're not feeling so great about, including the economy right now. And I joke ruefully about that. Obviously, it's not funny, but how big is this stimulus package that we're looking at? Let's talk about the big picture first and then break it down to what it looks like in South Dakota and why that matters.
Joe Santos: Sure. So the stimulus package is, I'm sure everyone has heard this $2 trillion number, so that's roughly the amount of the stimulus that the package will allow. This is probably not the last stimulus package we're going to see. In fact, the way that most, I think, in Congress are thinking about this right now is they're seem to be distinguishing between what they call stabilization and stimulus. And what they've done at this point, to this point, is really stabilization.
They're trying to engineer a slow, gradual decline in economic activity, if at all possible. And they have determined that at this moment roughly 10% of GDP, that's what $2 trillion is versus, say a $20 trillion economy, is perhaps what we need for probably the next four to eight weeks. So if this were to drag on beyond two months, I think it's the general consensus at this point that, again, there'd have to be an additional package. Hopefully, at that point we would be stimulating the economy, that is, trying to essentially jump start it, since what we have essentially done now is shut it down, and not additional stabilization. But of course, we don't know how that's going to play out exactly.
I should say this is very much unchartered water for policy makers all over the planet. This is, and in textbooks and macroeconomics we often talk about what we call an exogenous shock, something coming from outside the system that buffets the economy and then the economy deals with it and policy makers deal with the economy. This is the textbook definition. It's epidemiological in nature. It's not a crash of the financial crisis. It's not some sort of a problem in the banking system. It is very much from outside the economy. And so policy makers are dealing with something that they have not really had to deal with before. And so we're using the term unprecedented a lot, but it really, I think, is appropriate in this case.
Lori Walsh: Here's my question about that. And when we talk, hospitals have planned for pandemics and governments have planned for pandemics. Was this a matter of imagination? Were there any models that were run, what-if scenarios, macroeconomic researchers saying, "What if this happened?" Are we starting from scratch or is there some kind of, "We knew this was possible," scenario?
Joe Santos: Sure. That's a really good question. Folks have performed some studies. There is a Congressional Budget Office study that apparently, I say apparently, was done. I wasn't aware of it at the time. It was 2005. Who was thinking about policy responses to pandemics? But as I understand it, that's been dusted off and folks are looking at some of the numbers there. The estimates right now are quite dramatic. So there's a little bit of bad news/good news, but remind me to get back to the good news. But last week we saw that the number of individuals filing for unemployment claims jumped to about 3.2 million. Now, just some context, throughout the month leading up to March, the number was always a 200, 300,000-ish number. It went to 3.2 million. So that is an enormous jump in jobless claims.
We have to expect that we're going to see those claims work themselves through the real economy and turn into actual unemployment statistics and the commensurate declines in economic output. Most economists are talking about things like 10 or 12% reduction in GDP next quarter. That's enormous as a decline in economic output. But again, if we look around television photos, images of main streets and so on, it's not hard to understand how we arrive at that number. We are trying, for epidemiological reasons of course, but essentially trying to shut down social engagement, which is the medium for economic activity. So while it's not our intention, of course, we are essentially intentionally shutting down the economy.
And this is a little bit like rebooting that computer. You're always worried, "Will it actually restart?" We've never shut it down and attempted to restart it. But, of course, the longer it is shut down, the more economic loss we will endure. So these numbers, the projections of economic loss are very, very large. Again, the order of 10%, not, say 1% per quarter on an annualized basis, that's a very large decline in economic activity. Similarly, we have estimates, again based on the jobless claims for unemployment insurance, that the labor market will similarly deteriorate rather dramatically. So all of this is very sudden and very pronounced in terms of economic losses. I should say though, the good news-
Lori Walsh: The good news, please.
Joe Santos: ... I think it's important ... Yeah, I think it's important to keep in mind, again, this is an epidemiological shock. This is not a fraying of the financial system. This isn't a fundamental breakdown in our rule of law, in the way we govern ourselves and so on. I think about this in terms of, let's say baking. We still have all of the ingredients. Some of the ingredients are susceptible to virus, so we need to contain our activity in the way we're containing it, but we still have labor. We still have capital. We have entrepreneurial spirit. So we have all of the ingredients, and of course we still have the recipes. We haven't forgotten how to build a 737. Right? We haven't forgotten how to concoct penicillin. You can go on and on and on. We haven't lost indoor plumbing. All of these innovations, the ingredients, the recipes, including the rule of law, the motivation for innovation, property rights, independent court systems, these are all still in place.
But we hit the kill switch, again, for reasons that had only indirectly to do with the economy. And so presumably when we turn that back on, we would expect that individuals could interact with capital again. They can dream. They can innovate. They can rely on a court system. They can rely on bankruptcy codes and so on, the sorts of things, patent protections that will again, spur innovation and economic activity. So the fact that this is an epidemiological shock is, on the one hand, perhaps terrifying, horror movie-esque, but it also means that the economic system in which we operate is intact.
There are comparisons to the Great Depression in terms of the scale and so on. And I don't know that that will bear itself out. But I will say one way in which this is not like the Great Depression is that at the moment we're not questioning the viability of free enterprise capitalism. This is not a moment where we have given up on the economic system. We have deliberately stalled it. That is a fundamental difference with, say the 1920s and '30s and '40s and the alternative systems of governance that erupted during that period. This is not a philosophical questioning of our economic system. It's the realization that we simply can't interact because we'll infect each other. That's a fundamental difference that I think is important to keep in mind.
Lori Walsh: That makes me feel a lot better, actually, too.
Joe Santos: Well, good.
Lori Walsh: ... like when somebody has a rare disease. You say, "This is so fascinating," if it's not happening to you. From a textbook standpoint, won't this be fascinating in 100 years, to look back and see what we did? And I really wish we didn't have to live through it and figure it out as we go. Let's talk about the state of South Dakota because you say, in this school.blog.com piece, "All economics is local."
Joe Santos: Yeah. So I thought it would be interesting to weave this in a bit. I don't want to make too much of it, but macroeconomists and Morning Macro as a result, have spent a lot of time thinking about, talking about the general features of the macroeconomy. Right? This is what our folks who tune in hear about all the time. It's the unemployment rate. It's gross domestic product. It's income. You're never getting too granular. You're not specifying what a particular industry is experiencing or, in the case of this blog post, what a particular state is experiencing.
Nevertheless, there is a significant amount of variation of economic diversity in the country, of course. And here I mean diversity, we can talk about this in many contexts, here I'm referring to simply the fact that each of the 50 states tends to experience an economic downturn and an expansion from a downturn, just the business cycle in general, in its own way. And I think that's something to consider, particularly when we talk about policy responses to economic crises and in particular this economic crisis. So if states do not all experience increases in unemployment the same way or decreases during the expansion and so on and so forth, then it would seem reasonable that economic policy should also be directed in ways that reflect the uniqueness of the states. Right?
So if we look at the last recession, we've talked a lot about it and the expansion thereafter, the state of South Dakota did not experience that in quite the same way the national economy did, certainly didn't experience it the way Michigan did, in which case, the state of Michigan suffered losses that were greater than the nation as a whole and greater than South Dakota as an individual state. So likewise, it's reasonable, I think, to presume that this economic downturn, we will have it, will also affect states differently. And you're hearing some folks in different states, governors, the governor of New York, Andrew Cuomo, for example, and I'm not taking a position one way the other here, but arguing that the current stimulus package is not sensitive to the unique challenges that the state of New York is experiencing right now.
So the punchline, then, is it probably makes sense to think maybe more about fiscal policy, I know we've been on this rant now for a couple of episodes, fiscal policy than monetary policy because fiscal policy, generally speaking, can be a bit more granular. You can augment unemployment insurance for workers based on each state's unemployment conditions. Monetary policy at the very conventional level, you lower interest rates. That's a shotgun blast. That doesn't necessarily address the concerns of one state or another.
So yeah, I think it's important to recognize that while of course it makes sense to study the general features of the economy, the Great Depression taught us we should do that, go up to 50,000 feet and look down, we should also be mindful of the fact that no two states will experience the business cycle imprecise precisely the same way. And so if we are interested in implementing policy to address economic contractions, let's say, the policy should address the uniqueness of each state's circumstance.
Lori Walsh: Give me some examples of what's unique in South Dakota that needs to be addressed.
Joe Santos: Sure. I don't know how this will play out in South Dakota. But it's possible, for example, perhaps if the healthcare system is stressed or, I suspect, the state budgetary position is compromised because of the need to not only support healthcare but to perhaps to support education for various sorts of sick leave and unemployment insurance, depending on what the features of those stresses look like, it may make sense, for example, for the stimulus bill, and the current one does this to some extent and I just argue we should continue to do this sort of thing, to focus on those state-specific challenges and perhaps backfill budgets accordingly. And again, the $2 trillion does a bit of this. Whether or not it's sufficiently sensitive to the economic situation the state experiences is another matter, how the virus and its effects on the economy affects agricultural commodity prices.
And again, I don't have a forecast to share. I'd be lying if I said I did. But those are the sorts of, say unique circumstances in a agricultural economy like South Dakota's that may differ, will differ dramatically than, I don't know, perhaps the economic consequences and so needs of Connecticut. And so again, this is where I think a more discriminating policy approach may make a bit more sense. And I should say, this wasn't me dreaming this up for the blog, though there's a bit of that that goes on. But this is, I'd say, a growing movement in macroeconomics. To be fair, macroeconomists have always been aware, of course, that they're averaging over the state activity. But more recently there's an increasing chorus of voices saying, again, in particularly in the context of fiscal policy and support to households in particular, that that probably should be more state-dependent than it currently tends to be or at least be thought of as more state-dependent than we tend to think of it.
Lori Walsh: Lawmakers are convening today for a veto day and one of the tasks at hand is to really look at the state budget. Are state revenues part of that stimulus package or that stabilization package that Congress passed? What happens to the state budget? Because there are a whole lot of services that are dependent upon it.
Joe Santos: Yeah, that's right. And so there is, again, the numbers all become blurry, I know, but I believe it's about a hundred billion of the two point something trillion for state government. The idea is that this will, in effect, backfill the budgetary positions of the states in order to fill these voids that you've just discussed in, say the context of South Dakota but these voids that we expect to see throughout the country. So again, that's the textbook example, I think, of the approach we need to be thinking about that is, generally speaking, fiscal policy that can be rather precise in the way it is implemented. And I suspect we'll see more precision in what I suspect will be a fourth stimulus bill, perhaps sometime in April.
This bill was passed rather quickly and it's anyone's guess as to exactly how it will play out and be implemented and what its effects will be. I think some folks who have spoken on the crafting of it have admitted that this was obviously done over a very short period of time and that the next one perhaps could be more precise and more state-specific and so on. But yes, there is a wedge, if you will, in the pie of the $2 trillion in this package that is directed to support states. Again though, whether it's enough for each state and each state's circumstance, I'm thinking right now, we'll say Louisiana in the case of just how the virus seems to be affecting that state and perhaps Michigan because of Detroit and so on, as just we're seeing things evolve there, we may have to redirect.
But there was a lot of monetary policy talk last week as well, all sorts of interesting new operations. And again, I'm just drawing the contrast that though that is entirely effective, there really is no counterpart as to monetary policy, the counterpart to this sort of precision that fiscal policy could afford.
Lori Walsh: Much more to talk about, but we'll have to do it in our next conversation. It's time to let you go for now. Joe Santos, thank you so much for being here. We appreciate your time.
Joe Santos: Thank you, Lori.