Nicholas Bloom, an economics professor at Stanford University’s School of Humanities and Sciences and senior fellow at the Stanford Institute for Economic Policy Research, recently spoke with Manhattan Institute vice president Brandon Fuller about the economic consequences of the Covid-19 pandemic. Bloom has coauthored a National Bureau of Economic Research working paper, “Covid-Induced Economic Uncertainty,” with Scott Baker of Northwestern University, Steven Davis of the University of Chicago, and Stephen Terry of Boston University. Below is an edited version of the discussion.
Brandon Fuller: In your coauthored NBER paper, you quantify the sharp rise in economic uncertainty caused by the Covid-19 pandemic over the past several weeks and use this to estimate the likely impact of the pandemic on economic output through 2020. Why is economic uncertainty important for forecasting the trajectory of GDP?
Nicholas Bloom: High uncertainty turns out to kill economic growth. Businesses become more cautious and hold back on investment and hiring, and consumers pause on spending. But this is exactly what we need for a rapid recovery from the Covid-19 crisis. Unfortunately, this uncertainty is a major enemy of growth—it’s holding back the rebound. The best way to tackle this is to stabilize policy and politics—the more predictable Washington becomes, the better—and find a medical solution to Covid-19.
Fuller: Given that the Covid-19 crisis came on very quickly, what indicators were you able to rely upon for the purpose of measuring uncertainty—and what do they tell us about the impact of the pandemic?
Bloom: Covid-19 was completely unprecedented in the speed with which it hit the U.S. economy. February recorded the lowest level of unemployment in 60 years, at 3.5 percent, but by the end of April, unemployment will likely hit 15 percent—the highest rate in 80 years. This is more than a recession; it is a natural disaster. Indeed, the impact on unemployment in Louisiana looks almost identical to that in the first three weeks after Hurricane Katrina in 2005. To track this recession, we need indicators that are available in real time, that can be measured on a daily basis. We have two great measures for uncertainty. One is called the VIX index, a forward-looking measure of expected volatility on the S&P 500 index. In February, before the crisis, it averaged 15, but in March, it peaked at over 80, indicating a more than fivefold increase in uncertainty. The VIX has thankfully fallen back down to 40 in April, though this is still almost three times its long-run average.
The other great measure is the Economic Policy Uncertainty index. The EPU index measures the share of newspaper articles in about 2,000 daily U.S. papers (local and national) that discuss uncertainty in economic policy. Benchmarked to a long-run average of 100, the EPU index spiked to over 600 in March—again showing massive increases in uncertainty.
Overall, these measures show that there’s still great uncertainty over the medical impact of Covid-19, the public-health and economic-policy responses, and how firms and consumers will react. Indeed, about the only thing certain at this point is that uncertainty is extremely high.
Fuller: When you and your coauthors used the uncertainty measures to model the likely macroeconomic consequences of the virus, what did you find?
Bloom: Using these measures, we predict that U.S. growth will drop by 11 percent by the end of 2020, which would be the largest drop in GDP growth since the Great Depression and far above the 5 percent drop in output of the Great Recession. Indeed, some are calling this the Greater Recession, highlighting how it is the worst economic collapse in the lifetimes of most living Americans. While our forecasts initially seemed pessimistic compared with those of other economists, the consensus has now moved more negative. The IMF estimates now resemble our forecasts—a huge drop in activity in 2020 and a slow recovery in 2021 and 2022. So, my advice is to hunker down for a major recession and slow recovery. I think the talk of a V-shaped recession—a quick drop and rebound—is overly optimistic.
Fuller: You note in the working paper that your estimate likely understates the true effect of the pandemic on growth. Why?
Bloom: Three factors. First, innovation is being stifled in the U.S. On the campuses of Stanford, MIT, Harvard, and other leading research universities, labs are being closed unless they’re working on Covid-19. Similarly, in companies across the U.S., engineering facilities and labs have been shut down and research teams are constrained to their homes. Second, taxes are going to rise in the future given the incredible increases in government debt. Finally, reductions in trade and immigration will choke what has long been a key driver of U.S. growth. Immigrants founded more than half of Silicon Valley’s startups and won half of all Nobel Prizes in the U.S. After the Great Depression, the U.S. shut down trade and anti-immigration sentiment grew, which worsened the collapse. I worry this is happening again.
Fuller: What does your estimate of the economic effects of Covid-19 suggest about the post-pandemic recovery?
Bloom: The recovery will be U-shaped. I think it will take until 2022 to recover to our current level of output and even longer for unemployment to drop back down to its February levels. It took 10 years to create 22 million jobs to March of 2020, but just one month to destroy perhaps 22 million jobs since mid-March.
Fuller: How can the U.S. quicken the pace of recovery? What public-health and economic measures should we be considering at the local, state, and national levels to reduce uncertainty and accelerate growth?
Bloom: This is a hard question because it’s a tradeoff. To reduce the economic cost, we would probably need to return to work earlier. To reduce the medical cost of Covid-19, we would lock down for longer. You might argue that saving lives always take priority, but even here there are tradeoffs. It’s well known that job loss and bankruptcy lead to sharply higher mortality rates, typically deaths of despair (alcohol, drugs, and suicide). Recessions push up mortality. By extending the lockdown, we save lives from Covid-19 but probably increase mortality from other causes. I think the response is more local and fluctuating—relax when infection rates drop and tighten when they rise.
Finally, it’s also important to point out that the politics of this are tricky. The people making decisions—our politicians, CEOs, mayors, and so on—all tend to be older, with salaried jobs, and living in their own homes. And so, they gain the most from the lockdown in terms of reduced mortality, and probably lose the least in that they have guaranteed employment and housing. By contrast, the young, living in rentals and working part-time or contract jobs, gain the least; their mortality rates are lower, but they pay the highest economic cost. There is a major friction between the older, richer decision makers in society and the younger, poorer groups that are paying the economic price of the lockdown.
Fuller: What are the longer-term effects that you anticipate as a result of the pandemic?
Bloom: I fear that the prominence of the city, and particularly city centers, will decline. The 1980s were the nadir of the city centers—the middle class had fled to the suburbs, and city centers were seen as dangerous, run-down, and in decline. But in subsequent decades, the city has flourished, so that now central New York and San Francisco are the most expensive places in the U.S. to live. I worry that this has ended for two reasons. First, the pandemic has made us much more aware of the need to reduce density—particularly indoor density. That means avoiding the subway, elevators, shared offices, and communal living. Second, working from home is here to stay, and with it, the need to live close to the office will diminish. I doubt that many firms will allow people to work from home for five days a week, but two or three days a week will be common. And many of us will wonder: if we need to be in the office for only half the week, why not live further out, where housing is cheaper?
The one obvious upside: this could result in a big leap forward in affordable living. Suddenly, city centers will become less expensive, even as the push by developers to build more apartments will end. City centers may revert back to their status of the early 2000s—moderately expensive, a lot quieter, and with a far broader social mix.
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