The shocking rate of U.S. unemployment—officially 14.7 percent but perhaps as high as 20 percent—suggests an economic depression, possibly as deep and severe as the Great Depression itself. The numbers represent millions of families living with grave economic uncertainty. But the current unemployment rate does not have the same meaning that it normally would. In previous recessions, almost every newly unemployed person represented a job that no longer existed. That’s not the case today.
A significant share of today’s unemployed are furloughed workers, or contract workers seeing less demand, or laid-off workers whose employers will rehire them once they can reopen. By some estimates, 80 percent of the unemployed expect to be back at their old jobs one day soon. That may be too optimistic: economists at the University of Chicago estimate that 42 percent of the unemployment is permanent, meaning that almost half of the lost jobs aren’t coming back. After accounting for people who will likely go back to work, unemployment remains high, and at recessionary levels, but still doesn’t indicate a depression—yet.
Today’s unemployment is the result of a deliberate government emergency measure. For the sake of public health, the government shut down almost all social and economic activity. In a normal recession, economic activity decreases gradually; riding out the duration of the recession is what bring jobs back. Government policy can smooth out the rough edges, but the economic disease needs to run its course. In this case, the government intentionally suspended the economy. The recovery, or how fast the unemployment rate falls, depends on how fast we can reopen and what the government does along the way to encourage (or discourage) employment.
The duration of the shutdown is key. If a vaccine arrived tomorrow, and everyone got it, the government could switch the economy back on, and many—perhaps even 80 percent or more of the unemployed— would go back to their jobs. Pent-up demand would explode, we’d have a strong recovery, and the recession would end quickly. On the other extreme, if we stayed locked down until there’s a widely available vaccine— another year or two, even—many businesses would fold. Demand would crater because so few people would have jobs and money to spend. Skills would deteriorate, and some people would never go back to work. There would be massive economic destruction and unimaginable rates of unemployment. It would take many years to recover.
As states start to reopen, it’s likely that we’ll wind up somewhere between these two scenarios. Re-openings will be slow and uneven. Some states or regions will go too fast, risking future closures, and others too slow, risking needless economic damage. Even fast re-openings will see depressed economic activity. Re-opened businesses are at partial capacity, and some will continue to struggle. Unemployment will fall initially, as some people go back to work, but could then increase because of weak demand. The most realistic and hopeful scenario is that, as time goes on, people will become more comfortable, learn how to live with risk, and make responsible choices, while the virus stays at manageable levels until there is a vaccine. The economy will slowly recover.
The CARES Act and Federal Reserve policy attempted to keep the economy on life support during the shutdown through several means. Expanding unemployment compensation meant that more people still had income. The Paycheck Protection Program (PPP) extended forgivable loans to small businesses to encourage them to retain employees. The Fed has attempted to keep markets liquid so that large and medium-size firms and municipalities can access capital to stay afloat and keep people employed.
But the CARES Act was designed for a few months of lockdown—not a long, protracted reopening. With a partially open economy, the government must be mindful of how it provides incentives to unemployed people to stay home, if they are receiving more in benefits than they would for working. Getting the incentives right will be hard for lending programs, too. Some smaller businesses may buckle under the PPP’s confusing and changing terms of loan forgiveness. To get the loans forgiven, businesses apparently must devote 75 percent of the funds to payroll—but some small companies may have high fixed costs and lower labor costs. With demand probably depressed for several months, firms may need to reopen with fewer staff in order to stay viable. Restrictions on how money is spent will make it harder for them to adjust.
Facing less demand and a need to restructure, some larger firms will need support to prevent failure, too. “Corporations that lay off workers because of Covid shouldn’t be getting government money for Covid,” New York governor Andrew Cuomo argued. “If they don’t rehire the workers they laid off, they should have to return the money.” It’s not clear what Cuomo means by “return the money,” since corporations are mainly getting support in the form of loans, but his comments anticipate the kind of rhetoric we can expect—and the political challenges of offering businesses the support they need.
Keeping people on payrolls may have been the primary objective initially, when it seemed that the shutdown would be brief. But it makes less sense in the slow-reopening stage that is our current reality. Business survival is what matters. Loans or grants that hinder firms from adjusting to the new conditions will weaken them; businesses may be better off rejecting government support and laying off more workers.
A better policy would involve low-interest, guaranteed loans that don’t impose onerous requirements. The “Main Street-vs.-Wall Street-vs.-households” narrative is a false characterization—everyone is in this together. Restoring jobs will require healthy employers that can stay in business and adapt as the economy slowly revives. Double-digit unemployment normally means economic devastation, but if we can manage our way out of this economic stupor effectively, that doesn’t have to happen this time. If we get it right, unemployment could be below 5 percent by next year.