Macroeconomic Effects and Policy Responses for the COVID-19 Crisis

Mari Megias:

Good day, everyone. I am Mari Megias in the Office of Alumni Relations and Research Development at Harvard Kennedy School, and I’m delighted to welcome you to this Wiener Conference Call. As we all continue to navigate the new normal brought on by the pandemic, we will be increasing opportunities for remote engagement with Harvard Kennedy School. So watch your email for more invitations to learn from HKS faculty. Also, given that we are all working remotely, we are running these conferences differently. So apologies in advance for any issues we may experience.

Today we are very fortunate to be joined by Dean Doug Elmendorf and his wife, Professor Karen Dynan. Doug Elmendorf is the dean of Harvard Kennedy School. He was previously the director of the Congressional Budget Office from January 2009 through March 2015. Before CBO, he was a senior fellow at the Brookings Institution, an assistant professor at Harvard, a senior economist at the White House’s Council of Economic Advisers, a deputy assistant secretary for economic policy at the Treasury Department, and an assistant director of the Division of Research and Statistics at the Federal Reserve Board.

Karen Dynan is professor of the practice in the Department of Economics at Harvard, and also teaches at the Kennedy School. She served as assistant secretary for economic policy and chief economist at the U.S. Department of the Treasury from 2014 to 2017, leading analysis of economic conditions and development of policies to address the nation’s economic challenges. Previously she was vice president and co-director of the Economic Studies Program at Brookings, a senior economist at the White House Council of Economic Advisers, and a senior member of the staff of the Federal Reserve Board, where she played a leadership role in macroeconomic forecasting, household finances, and the Fed’s response to the financial crisis.

We are so fortunate that Dean Elmendorf and Professor Dynan have chosen to share their expertise today with the Kennedy School’s alumni and friends. I’ll turn it over now to them both.

Doug Elmendorf: 

Thank you, Mari, very much. And thanks to all of you for joining us today. I want to start by expressing Karen’s and my hopes that you all are well, and that your friends and families are well. We recognize—to our own lives, and to the many members of the staff, and faculty, and student body of the Kennedy School today—just how trying this period is, the risks that we are all concerned about, the difficulties that we are facing. And our hearts go out to all of you who are struggling with particular problems. I also wrote to the Kennedy School community on campus a week or so ago, and emphasized my and Karen’s gratitude to the people who are on the front lines of trying to stop the spread of this disease and to develop treatments and vaccines against this disease, and the many people who have to be out in the world, interacting with others and getting things done, while some of us have been lucky enough, relatively speaking, to be able work out of our homes.

But we are delighted to have this chance to talk with you about how we see the economic challenges, and ways to address those challenges, and to hear your perspectives on these things as well. So Karen will say a few words, and I’ll say a few words, and then we’ll open this to your questions. Thank you again for joining us.

Karen Dynan: 

Thank you. It’s my pleasure to be here as well. I’m going to start by talking about what’s going on in the economy before Doug turns to policy. So my first point is that the pandemic is creating a deep global recession through a variety of channels. To start ... and this is the thinking early in the year, when it appeared that the virus was contained to parts of China. At that point, the main worries were reduced to export demand from China, and also supply chain disruption. So, worries that our manufacturers would not be able to get the intermediate parts they needed from Chinese suppliers. For the past few weeks, however, there’s been a cascade of additional, and much more significant, concerns in the United States and other countries.

So we’ve seen disruptions in financial markets. We’ve seen drops in asset prices. There has been an unprecedented drop in consumer demand for many services, as many people have been shut in their homes. Just to think about some numbers, the most affected industries in the services sector ... so, for example, travel, restaurants, entertainment and recreation. They represent something like 10 percent of U.S. GDP, so you can already see that just shutting off that part of the economy is going to have a massive impact on economic activity. There’s also been a sharp slowing in the production of many goods as employees can’t get to work. There’s been, because of this reduced demand, a closing or dramatic shrinking of many businesses and a surge in unemployment related to that.

So, for example, this morning we got a report that 6.6 million people filed for unemployment benefits last week. To give you an idea of how to think about those numbers, that’s 25 times as many people filing as we were getting in a normal week prior to pandemic. The numbers in today’s report, together with last week’s report, which showed more than three million applications... Those numbers alone imply a jump in the unemployment rate to 10 percent, which would put us close to the peak that we saw during the last recession. And really those numbers are just the start of the impact on employment, as there were a lot of workers laid off this week who weren’t counted. We’ll see them in numbers next Thursday. There have been workers who have been laid off who haven’t been able to file yet, and then there are a bunch of people who are effectively unemployed but not covered by UI benefits. So we’re going to see unemployment rates in the second quarter that are certainly in the double digits, but, again, like nothing that we have seen in recent history.

Altogether, in terms of GDP, we’re looking at an unprecedented decline in the second quarter. At an annual rate, I think we’re going to see a number that is at least a 30 percent decline in GDP. So that’s what’s happening now and in the near term. A key question is what the recovery is going to look like, and you’ve probably heard people talking about different scenarios that might occur. So there’s the scenario where we see a rapid snapback in economic activity that begins in a few weeks, maybe in May sometime. That’s kind of the V-shaped recession scenario that people talk about. But others are talking about a slower recovery. Sometimes we talk about that as kind of a U-shaped recession, where the economy recovers only gradually. Sometimes people think a better characterization of that sort of recession as kind of a Nike swoosh, where you get a deep decline at first and then a gradual recovery.

But I’m also getting questions about whether we’re going to see a Great Depression. I want to emphasize here that we’re in uncharted territory. Normally, we economists turn to theory in cases where we don’t have data to go off of. But theory relies on assumptions, and in this case there are at least four big unknowns that influence how this is going to play out in terms of the economy. So, the first of those unknowns is how contagious and lethal the virus is. That’s a question not really for economists. It’s for epidemiologists, but they themselves are hindered by a lack of adequate data when it comes to answering that question.

The second unknown is how effectively the shutdowns of commerce in different states and in different countries reduced the spread of the virus. The third unknown is how quickly do different countries build a capacity for testing, and tracking, and other means of reducing contagion so commerce can be restarted without generating a resurgence of the virus. And the fourth unknown is how much damage is being done to the economic structure in different countries during the shutdown. So, I’ve heard people talk about how this is kind of putting the economy into a coma on purpose, and we’ll be able to come back and resume activity from where it started. That idea is closely to the related to the idea that we’ll have a V-shaped recession. But really there are some significant issues about how much scarring we’re going to see that’s going to hinder the recovery.

I will say, all of these unknowns depend on the effectiveness of policy put in place. And the last one, about scarring, is particularly closely tied to economic policy. That’s where Doug’s going to go next. Before he does that, I just want to close by saying my best guess is that we’re looking at something that’s more like a U-shaped or a swoosh-shaped recession. I think we are going to get to the point where we can start reopening the economy in a matter of weeks, but that it’s going to be a gradual process from there, and we’re going to see kind of stop and go. We’re going to see setbacks as the virus reinfects more people, and we have to put more restrictions in place, and then those will be released. So I think it’s going to be a gradual recovery. I think we are also not going to escape some serious scarring for some households and some businesses, and that will also be something that holds the economy back later this year. But, with that, I’m going to turn things over to Doug.

Doug Elmendorf: 

Thank you, Karen. So, I think if one looks at the policies that have been put in place by the Federal Reserve Board, by the Congress and the administration, those policies fall into three buckets of issues. The first is to help households that are losing their incomes. And to help those households, the big stimulus package passed recently provides payments, as you heard, of $600 for a person or $1,200 for a couple. There’s also been, in that stimulus bill, a very large expansion of unemployment insurance benefits. So both the checks, the direct checks, to everyone, and these additional payments to people who lose their jobs, beyond what the unemployment insurance system normally provides, will put money into households’ hands, households that are losing their jobs or losing their businesses. Also important in helping households that are losing incomes is loan forbearance, and so proposals to let households put off paying the regular payments on their loans are very important as well. So those are a set of things that are being done to help households that have lost, or are in the process of losing, their incomes.

A whole second bucket of activity is to try to prevent other households from losing their incomes. And that matters both with households in the short term, but also, the more people that stay at work in some fashion and keep getting paid, the less will be the scarring that Karen talked about, and thus the quicker the rebound will be. So trying to keep workers in their jobs both reduces the short-term cost and shortens the duration of this hole in the economy. So a number of things happen to try to keep people in their jobs.

The Federal Reserve started this, lowering the federal funds rate initially, but then also standing back up a whole set of facilities, as the Fed terms them, that were used during the financial crisis and the Great Recession. These facilities are meant to keep credit flowing both domestically and overseas. So, enable businesses and households to keep the access to credit that they normally have. And without the Fed’s actions, then these channels of providing credit can freeze up, and that can be very, very damaging. So the Federal Reserve is doing a set of things to keep money flowing through the normal channels, and their actions seem to have been at least partly successful so far if one looks at the function of markets.

But, also in the category of people, keeping credit flowing is another very large piece of the stimulus legislation that was just passed, which is facilitating vastly more lending through the Small Business Administration. So the legislation for last week provides support for more than a tenfold expansion of Small Business Administration lending to help businesses obtain funds. But, additionally, these were not the traditional loans, which have to be paid back. These were loans for which the firms will not have to pay back if they maintain their payrolls and use the funds for payrolls, or rent, or other functions in business.

So it’s a big increase in the lending through banks, guaranteed by the Small Business Administration, but loans that can be automatically forgiven. That’s very important because for many of these businesses that are losing business during this period, they don’t have the capacity later to pay back. If your restaurant is closed for two months now, say, you will have somewhat more customers when you reopen, but you’re not going to make them all back. So a loan is not enough. A subsidy is really required. And so this new provision through the Small Business Administration provides that sort of subsidy.

So, again, the first bucket of policy actions was helping households that lose incomes. The second bucket is trying to keep workers at work, keep business structures in place during this sort of coma that Karen described. The third bucket of activities is to help some targeted institutions. That includes firms in particular sectors that have been especially hard-hit. It includes state and local governments, and maybe we should talk more about that. So, a set of money flowing out that way as well.

So those are the sorts of policies that have been put in place. I think the crucial issue at this point is how quickly those enacted policies can take effect. The Federal Reserve’s actions have essentially immediate effects. When they announce an increase in swap lines with foreign central banks to ease international finance, that matters right away. But the policies that were enacted in this big bill last week ... Those take some doing. Even the writing of checks to more than a hundred million households takes some time to pull off. This increase in lending guaranteed by the Small Business Administration is quite challenging. This involves new underwriting standards, new lending institutions, some new customers. Regulations are just being written. And so the ability of the government, and the private financial institutions with whom they are working, to implement this quickly is incredibly important.

As Karen noted, we saw twice as many new claims for unemployment insurance today, meaning last week, as were announced a week ago, which itself was off the charts in terms of the numbers. And every week that goes by without being able to hold the economic structure in place, the longer the downturn will be, and the harder it will be for people during the downturn. So execution, timely execution, of the policies that were enacted last week is especially important at this point.

All told from this, as Karen said, GDP had declined in the second quarter at an annualized rate of more than 30 percent. GDP probably declined in the first quarter of the year at a rate, people are estimating, between 5 and 10 percent. That itself would be a stunningly negative quarter except when we start talking about the second quarter. Karen and I think there can be a substantial rebound in the second half of the year that does not rely on finding a vaccine immediately or a perfect measure of control. But it does rely on governments, in this country and many others, developing the sort of testing capacity and tracking capacity that can identify people who get the illness and isolate them so other people feel comfortable going about their normal activities. But even with that kind of rebound in the second half of the year, GDP will probably be lower this year than it was last year. It will be lower at the end of this year than it was at the end of last year.

So let me stop there. And Karen and I are happy to take your questions now.

Q: There has been considerable discussion about the role the federal government is playing in providing liquidity to the market, shoring up the market for Treasury debt, and providing relief to key industries. I don’t see much discussion about the financial impact on states and localities. Many localities are already under heavy financial burdens, from everything from infrastructure needs, to unfunded pension liabilities, to heavy debt burdens. I would assume that we will see substantial service cuts, further infrastructure decay, and bond defaults in the near future, coupled with an inability to issue additional debt as bond ratings fall below investment grade. I especially worry about my home city of New York and the MTA. What can the federal government do on the state and local level?

Doug Elmendorf: Thank you, Meg, for that question. There are a couple things the federal government has done and something that it should do, I believe. The Federal Reserve Board is standing up a facility to provide greater liquidity in the market for state and local government securities. The Federal Reserve’s basic premise ... and this goes back to Walter Bagehot, who wrote about this in England 150 years ago ... is the Fed’s basic approach is to lend against good collateral. So it’s to provide liquidity, not to bail out insolvent institutions, and that’s very important. But the Federal Reserve can play an important role by maintaining the liquidity of markets, making sure that one can, in fact, sell a security, if one has it, at a reasonable price. And even just the provision of that liquidity can then calm other potential sellers in the market.

But that doesn’t really help the state and local governments that are actually going under water because of the challenges they face. And, as you know, the challenges are partly to respond to the pandemic ... is to expand greatly the public health measures that are being taken. But also this dramatic slowdown of the economy will cost state and local governments very large amounts of their revenue. So the last thing you’d want would be to have to have them cut back on the public health measures and other activities because of the cutbacks in revenue. Actually, and the one that was enacted last week include grants to state and local governments. But it’s a fairly widespread view, I think, now, or view that is expanding, that more should be done for state and local governments, and that will need to come through fiscal policy. There are different ways to do that. In a straightforward way, there are formulas you can use to allocate money across states and localities, but my view is that hundreds of billions of dollars more will need to be done.

Q: Yes. Hi. This is Chris. I’m a 2000 MPP grad, recently retired from the military. My wife and I both run our own businesses. We are both considered exceptions to the current ... at least, in Colorado, where I live ... the current policy for lockdown. My policy question, I guess, is directed at Doug, but it’s what are the policy criteria we are looking for to reinvigorate our economy? And what I’m really keying in on is, you said that second quarter recovery was not dependent on a vaccine that’s been developed and distributed. But what are the policy objectives we’re looking for to get our economy going again? And how are we balancing the impacts of things like increases in suicide, domestic violence, alcoholism, the social isolation, the social emotional development of our children who are not in school, against the lives lost and the medical capacity issues? Thank you.

Doug Elmendorf: Thank you, Chris. And all the best to you and your wife. There are both human and economic costs of the shutdowns that we’re seeing. Right? So, there’s a lot of production that’s not happening, and that has effects on people’s incomes and lives. But also there are direct human costs. People are not made to be alone. And there’s a lot of concern ... I think justified concern ... about suicides, about domestic violence, about people. We have a lot of loneliness in this country to start with. And, in fact, the World Health Organization has started to emphasize that we should not be using the term “social distancing.” We’re looking for physical distancing. We’re trying to maintain our social ties. So there are human and economic costs of the shutdowns that we’re seeing, and it is very important that we try to move out of those as quickly as we can.

The same time, if one moves out without some ability to limit the spread of the virus, then the economic evidence shows we will be worse off economically in the long run as well as being worse off in terms of our health. Analysis of the Spanish flu and other episodes showed that you really have to keep the spread of the disease under control. Among other things, you could just think about the fact that, whether the government says you can go out or not, people are afraid to go out because they’re afraid of getting a terrible disease. They’re not thinking, “Go out.” They’re not going to go and do the spending. And so we have to control the disease.

And hopefully a vaccine will come, but the crucial things, in the meantime, are to be able to test people, lots and lots of people, all the time. And then, so, when people are identified as being sick, then their contacts have to be notified, and they have to be isolated for the course of the disease. So, this requires vast amounts of testing and very sophisticated, well-staffed public health operation to trace the contacts, and then some enforcement, to be honest, to make sure the people who are infected then stay home or stay out of public places. We’ve expanded tests a lot in this country, but, as you know, we lagged way behind other countries, and most other countries aren’t studying appropriate examples either. So it’s not just the U.S. It’s around the world. We have to get a lot more testing, and we have to get this public health capacity. And that’s taking some time. And I think the time it takes to do that is really going to be the limiting factor on how quickly we can restore economic activity as well. Thank you.

Q: Hi. Steve, a mid-career MPA, 1987. I wonder if you just could think about the weakness of our global institutions. So many of the issues that we face today, including this pandemic, climate change, other issues like that, really depend on global responses, not local or national responses. So I wonder if you could just comment on what you see as sort of a framework for thinking about global responses to these kind of problems.

Karen Dynan: Yeah. I actually think there’s been considerable progress already in the G20, G7 framework. The lender of last resort activity, as we’ve seen these efforts by central banks to introduce liquidity into the system ... They actually have been quite impressive and have occurred quite quickly. And I say that from the standpoint of someone who was actually working at the Federal Reserve Board during the financial crisis. And we were trying to do the same sort of thing, and we didn’t know what we were doing, and a lot of things were kind of slow to get started, and we were making mistakes.

So, I actually think we already have one piece of evidence that there is some good work being done. At the same time, I think there’s lots more to do, and I would say one of the things I’ve been disappointed in is some of the ... kind of ... the squabbling that’s really just unproductive about how we’re going to frame this crisis. Are we going to call it a pandemic that’s associated with one area of one country? And that’s just been squabbling in an effort to shape the narrative and escape political blame. So that part has been disappointing. But I do think, underneath, countries have armies of talented technocrats that are working together to try to move the G20 forward. Our needs are going to differ across countries, but all countries need to be trying to do the same thing that Doug described happening in the United States.

We are trying to get out of this recession without scarring. We need serious thought about export restrictions and lifting tariffs. I know there are political economy arguments that get made as to why countries need to put export restrictions in place, but we need to really limit the amount of that that’s going on. Countries need to get together to provide more funding to institutions like the IMF because we’re going to see some countries really suffer major debt crises as a result of the pandemic. Countries need to get together to provide more funding to the WHO. So, in all those ways, I think, we have a start on global cooperation, and it’s very important that we have this global cooperation. But there’s much more to be done.

Q: Hi, professors. My name is Rajat. I’m calling from New Delhi, and I’m the adviser to the government in India. Now, my question is building upon to your previous comments, Professor Karen. While the emerging markets are also facing a burden, primarily because they’re going to have the very aggressive lockdowns, ranging from 21 days to a month, however, in this scenario, we do not have the luxury, which, perhaps, the European Central banks, or the Bank of England, or the U.S. Fed has to use their monetary policy levers to really revive the economy. And moreover, a lot of the institutions have largely remained silent, and we are not seeing any prominent leadership coming in from them in order to assist other economies as well. If things aren’t that bad in these emerging economies, yet there is lockdown, how do you see a recovery path and the global institutions assisting these countries to come out of a recession? Thank you.

Karen Dynan: So, I think it’s very important that, again, that we’re working together internationally to share the burden. I will just underscore the fact that it matters what’s going on in emerging market economies. It matters for the whole world. And we’ve seen that happen before, even when things seemed to be fine domestically. This happened in 2016, that there were things going on in emerging market economies, that were depressing activity there, that spilled over to parts of the United States economy and had very real effects on people and created hardship in parts of these countries. First of all, I think we should care about what’s going on around the world for humanitarian reasons, but even if we were only motivated out of our own self interest, that we and other advanced economies need to be thinking about what’s going on in other parts of the world and, again, shoring up the international institutions, like the IMF, that can provide support to these economies.

Doug Elmendorf: I would just add about the work of the Kennedy School, although Karen’s and my expertise is focused on the United States and other developed countries, we have colleagues at the Kennedy School who are offering important advice to economic leaders in the emerging markets, people like Ricardo Hausmann. We have colleagues who are offering advice to public leaders in emerging market countries. Matt Andrews, Jorrit de Jong and the Bloomberg Harvard City Leadership Initiative, and so on. So we are applying the Kennedy School’s expertise broadly. Also, I would just add, this matters for our own ability to attract students to the Kennedy School. An average graduating class at the Kennedy School has students from 90 different countries. We sent admission letters out last week. We’re now trying to recruit those students. And their ability to come from countries that are at different stages in dealing with this pandemic, and will face different challenges over the coming months, is very much on our minds in our management of the school itself. Thank you for the question.

Q: Hi. Karen, MPP 1972. Former New York Times reporter and editor. One of the parts of our economy is the underground economy, off the books. It’s about, I think estimates say, 10 or 12 percent of the economy. These are the most vulnerable people, and they seem the least likely to be helped by Washington’s efforts. Can you think of any way to help them, other than people giving to charities that will help them through food banks and other means?

Doug Elmendorf: Well, Karen, thank you for that question. It sounds like you must have been a classmate or almost a classmate of Larry Bacow’s at the Kennedy School. Glad to have you on the phone. You raise a very important question. In the long run, naturally, the answer is that we need to build a more robust safety net. And a particular hole in the safety net today is for people who are working in the informal economy. That’s a problem in many countries, but it’s particularly a problem given the way this country still hangs most of its health insurance on employers, and many other benefits to the workplace. And so this episode just highlights a known, existing problem, which is developing a social safety net that works in an economy with a lot of informal workers, a lot of gig workers. And we have not done a good job of that yet, and that’s what we need to do in the long run.

In the short run, I think that charity is very, very important. We had a phone call of Kennedy School faculty a couple weeks ago, and it was wonderful to hear all the ways in which our faculty, in addition to their professional work, are pitching in with local organizations, redirecting food, making masks, collecting equipment, and so on. And I wouldn’t underestimate the importance of that. Beyond that, I think the hope is that the efforts to strengthen other aspects of the economy will spill over to the workers you describe. Not fully, not in a way that I would wish for, but that the more that we maintain the economic structure, the more that businesses are continuing to pay their workers, the better that will be for everyone. And I recognize that that’s not a great answer. It is very difficult. People who are not sort of in the system in some way won’t get most of these checks. They’re not eligible for loans from the Small Business Administration. And they’re going to be particularly badly hit.

Karen Dynan: If I can just jump in, on policy, I do think we’ve taken some steps towards loan relief and loan forbearance. They’ve paused student loan payments until October. Probably a lot of these people don’t have student loans, or they wouldn’t be in the informal economy, but it is possible their children do. We have put halts on some types of foreclosures and evictions. I think a major area that we need to think about policy-wise, that really hasn’t been addressed, is whether there is something we can do in terms of relief for renters. And I don’t have the perfect solution to that, but I do wonder whether there needs to be some program like the one we have ... we’re trying to set up ... for small businesses, for landlords, where we provide them relief so they can provide forbearance to their renters.

Q: Hi. My name is Jim, I am an MPP ’94. I’m down in D.C. at the Energy Information Administration. And I really wanted to thank everyone for the work and support putting this call together. I think it’s really important. My question’s about the federal personal exemption in the tax code. It was suspended in the last major tax reform in 2017. And if that were reinstated, it would be a much bigger stimulus. And here’s a policy idea. If it was reinstated retroactive to last tax year, refunds could be processed through, basically, immediately.

Doug Elmendorf: Thank you, Jim for the question. Your idea, I think, would have some effect, but I think we can have a bigger effect by sending money more widely to taxpayers and to others. So the mechanism of taxpayers and their addresses being on record with the IRS is a very central mechanism to getting many of these checks out. And, I think, if more broad support is needed, then we should go back to that same list. One of the challenges, though, with the list is it leaves off quite a few people who don’t pay personal income tax. They may pay payroll tax, or they may be retired and just have income in retirement under the taxable level.

One very useful thing the administration just announced is that it would pay checks to Social Security beneficiaries, who are on another list the government has, even if they have not filed taxes. There was originally a concern they would have to file a return just to announce who they were, and they had not paid taxes, in order to get these checks. And the Treasury just announced that no, no, it would just send checks to those people. So I think the goal here is really to get the broadest list of people. Even then you’ll lose people in the informal economy, in some cases, but you want the broadest list of people to send money to for this general sort of support that you’re talking about. And then, I’d say, beyond that you want to provide support that keeps businesses in place and tries to help them in particular aspects of our economy, society, where the damage is particularly great.

Q: Hi. I’m Raghav. I’m a retired civil servant, secretary to the government, and MPA 1998. So, my question is essentially for Dean Elmendorf. Dean, you have closed down Harvard this semester and sent students back. What do you perceive is going to be the long-term impact on the education sector of what is happening? To what extent are you guys prepared to hold out? In case this goes beyond one semester, will you be able to take up all classes and replicate the equivalent of a class, a scenario in class experience, to the students for the full year? And what are the other implications that this will have on the education sector in the U.S. and, you perceive, elsewhere in the world?

Doug Elmendorf:  Thank you for that. To give credit where credit is due, it was Larry Bacow who had the wisdom and the courage to disperse the students here at the University and to send staff and faculty home, to work from home, as well. And his decision to do that, now several weeks ago, turns out to be playing a very important role in the health of this community. I think in the health of the greater Boston area as well. Many other universities have taken similar actions. Our initial focus, as you understand, was trying to shift to this remote learning and remote work by the faculty and staff. And we’ve done that in an almost shockingly successful way, in that we’ve offered hundreds of class sessions now, just from the Kennedy School. Thousands across the university, remotely. They seem to be working. I’m on Zoom calls almost all the time with faculty and staff as we continue to not only respond to the pandemic but also just advance all the other work that we’re doing.

But so far this has been a short-term problem with a short-term solution. And we are now focusing on much more. I’ve been on a couple of calls already today with colleagues here to think through our plans for the summer and the fall. And I’ve been in touch with other deans of Harvard schools and deans elsewhere, and they’re wrestling with similar questions. I think we can, and are, doing a fair bit online. We have built, over the last few years at the Kennedy School, an online Public Leadership Credential. This is a set of courses for mid-career students, essentially, that people can... These are not MOOCs. They are high-touch, high-quality courses, and indeed our arrangement is that if one takes all of those courses and does well in them, that one can apply to our mid-career residential program, and those courses will count against the number of courses you need for a degree.

We launched this effort four years ago now, in part to reach more mid-career students who couldn’t come to the Kennedy School for a full year, but also because I thought it was important for us to learn more about online learning, and one way to do that is to roll up your sleeves and get at it. And so that set of courses complements, now, a number of other courses, developed by individual faculty members at the School, that operate remotely. And at the moment, of course, all of our faculty members are teaching remotely and learning more about how to be effective teachers remotely. So we will continue to build on those initial steps.

In our summer programs, our mid-career students generally come to campus at the beginning of July. So that’s not very far off, and even the beginning of the academic year is not that many months off. And we are actively working to build our ability to deliver education remotely as long as that is necessary. I think we can be pretty effective at that, but I don’t think we can fully replicate the residential experience. And so trying to figure out how to use the remote learning as effectively as we can, but also recognize its limitations, is a challenge for us. And I think these are challenges that are faced quite widely. So, again, in my conversations with other deans at other schools, they are wrestling with this as well.

Somebody at Harvard, outside the Kennedy School, said that he thought that this experience would either advance remote learning by 10 years or set back remote learning by 10 years, depending on how well it comes off. And it’s still early days to form that judgment, but my job is not necessarily to predict the outcome exactly, as to be ready for different possibilities. And that means we have to keep developing our capacity to teach effectively when we can’t be together in person.

Q: Hi. My name is Miriam. I was a mid-career in 2014. I have two short questions. One is... I was speaking with a friend yesterday who really felt this was going to be a doomsday scenario. And I know that Karen mentioned one possible outcome is a Great Depression. My friend seemed to think the whole structure of the economy could change. And I wondered if you could kind of put probabilities on each of the outcomes that you briefly mentioned. And then, the second question is what is going to be the impact of the rupture of the economy on the segment of the U.S. population who are retired or who are soon planning to be retired? And would that affect how people think of pension plans in the future?

Karen Dynan: Sure. So, just on the different scenarios, I really do think the most likely scenario is something that’s more like a U. And I would put very low odds on this becoming a Great Depression. And couple of reasons for that, and one is that the economy was very strong, and many economies around the world were very strong, going into the pandemic. I mean, it’s just not the situation we were in a dozen years ago, when we went into the Great Recession. We had this kind of record low rate of unemployment. We didn’t have that kind of overbuilding of housing, or overbuilding of commercial real estate, or excessive leverage. And, for all those reasons, it should help us dig out of this hole more rapidly.

I would say the other thing is that the policy response really has been very aggressive. Monetary policy, as I said, they really have impressively tackled... They have more work to do, as we see more liquidity problems in the market, but they really have been very aggressive about it. And then fiscal policy... Just to give you an idea of the magnitude here, our economy is $21 trillion a year of GDP, and the package that was passed was $2 trillion. So, when you think about it, that is really enough to get us through several months of even a serious hit to economic activity. I was heartened by the way that we saw bipartisan cooperation... more so than we saw in the period following the Great Recession... to get the fiscal stimulus done. And I believe that if more needs to be done, I think it will be done on the fiscal front.

Q: Thank you. This is Jack, mid-career 1980. Just to continue what the previous question ... So, assuming the U-curve, and it’s the end of the year, and we’re starting to come out, there will then be attention, both economic and political, to the deficit and debt, which will become a little bit of a political football. But could you say a little bit about how we should think about that fiscal question as we pull out of this situation?

Doug Elmendorf:  Well, I’ve spent most of my professional career worrying about large budget deficits and growing government debt. But I’ve changed my views somewhat over the past few years, and I’ve changed my views because of the sharp decline in interest rates on federal government borrowing in this country and on the borrowing of national governments in many other countries. It really has been a striking decline, going back, now, really to 1990, in the interest rates that have to be paid by governments of countries with fundamentally sound economies and fundamentally sound policies. So, obviously some countries have had a lot of trouble borrowing over that period, but for the United States government, and for the governments of many countries, the cost of borrowing has declined quite a bit.

And I’m one of a number of economists who’ve written, some together with Karen, about the implications of that decline in interest rates, fiscal policy. And the basic implication is not just the government can borrow at a lower cost, but it should borrow more. But, differently, that our need to address the unsustainable path of our government debt under current policies is not an urgent need. We’ll ultimately have to do something to put that unsustainable path... That cannot rise forever, relative to the size of the economy. But reducing that debt is not an urgent issue.

That was the view I took, and you can see some of my comments about that on my web page at the Kennedy School. That was the view I was taking until a month ago. Now, two things have happened over this past month. One is that we see now a much greater increase in government debt this year than we expected. But the other reason, that we’ve seen a further decline in interest rates and much greater need for this fiscal stimulus. So I think that, at the end of the year, debt will be a lot bigger than it is now. It’s not just the $2 trillion of the package they passed. It’s the great shortfall in government revenue that will arise this year because of the recession. But I think we shouldn’t worry about that at the end of the year. The priority has to be keep the economy going, and our government will have quite a bit of capacity to keep borrowing, and I think it would be a big mistake if we were to pivot very quickly, when we first saw signs of economic recovery, toward a fiscal contraction. We did that as a country in 2011 and ’12, and it was a terrible mistake that prolonged the suffering of that last downturn.

Q: Doug, Karen, this is Sean Rush, class of 2007, mid-career. And my question is that, unlike the federal government, state governments constitutionally are not allowed to run a deficit. Do you foresee any state constitutional overrides of a temporary basis that would allow states to incur a deficit in the next year or two?

Doug Elmendorf: Good to hear from you, Sean. That’s a great question, that I had not thought about before you asked. I don’t think so, but it’s hard to know for sure. I think for many states there is some at least short-term wiggle room in those rules. It varies by state, but most of the rules, to my understanding, are about enacting budgets that will be in deficit in the future. States have some ability, in most cases, to run deficits in the short term. And I believe that the federal government will step up with substantially more aid. Now, if the federal government somehow does not do that, then I think things will be much, much harder at the state level, and then you probably would see attempts to override those constitutional provisions.

I think that the needs of state and local governments will become so apparent... and across the country. This is not just an isolated situation, right? Right now we think of New York being a particular hot spot, but also New Orleans, and also in Washington State, and in places in California, and so on. So I think that will turn out and will spread out, unfortunately, across the middle of the country and more to the south. And so I think there will be a widespread support for the federal government providing aid that does not try to solve all of states’ long-term fiscal problems. As you know, there are states that have huge unfunded pension liabilities. And I think there will not be an effort to solve all those problems. But there will be, I think, considerable money conveyed that will be set by formula in some way to correspond to the health care needs in this period and to the shortfalls in revenue. And I think that, and the flexibility in the state rules, will keep us largely clear of the constitutional issues.

But ... but. Yeah, there’s a but for all these points that Karen and I have been making ... is that very few people anticipated where we are today two months ago. And our ability to anticipate where we will be two months from now should be viewed with a similar degree of skepticism.

Mari Megias:

Great. Well, thank you very much. Apologies to those we did not get to. And I would just like to thank Professor Karen Dynan and Dean Doug Elmendorf for taking your calls this morning. And wanted to let you all know that our next call is going to be with Juliette Kayyem on Tuesday, April 7th, on the U.S. government’s disaster response. Thank you all very much, and have a great day.

Doug Elmendorf: Thank you, everybody.

Karen Dynan: Thank you.