TweetInterview by Economychosun, South Korea, March 24, 2020 Q: I’d like to know your opinion on the global economic impact of the Covid-19 crisis. Do you think the recession is a fait accompli? JF: We are already in a global recession, even though it will take a bit longer for the most relevant economic statistics to confirm that. It is exceedingly rare that economists can make such a pronouncement in real time with any degree of confidence. But it is clear enough in this case. Q: How long do you think the recession will last? How big would be the recession impact? JF: The onset of the recession is very rapid, by historical standards. The loss in output will probably be deep. However, it is not inevitable that the recession should last a long time. If countries are able to fight
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Interview by Economychosun, South Korea, March 24, 2020
- Q: I’d like to know your opinion on the global economic impact of the Covid-19 crisis. Do you think the recession is a fait accompli?
JF: We are already in a global recession, even though it will take a bit longer for the most relevant economic statistics to confirm that. It is exceedingly rare that economists can make such a pronouncement in real time with any degree of confidence. But it is clear enough in this case.
- Q: How long do you think the recession will last? How big would be the recession impact?
JF: The onset of the recession is very rapid, by historical standards. The loss in output will probably be deep. However, it is not inevitable that the recession should last a long time. If countries are able to fight the coronavirus with very aggressive public health measures — as some East Asian countries have done — so that the rate of infections peaks later this year, there could be a V-shaped recovery.
- Q: How could you evaluate Fed and administration’s additional measures. Fed’s relaunch of crisis-era facility, 1.5 trillion fiscal stimulus. Do you think it is adequate?
JF: As with the response to the 2008 financial crisis, the Fed has done a good job with its very rapid, aggressive and innovative measures. The US fiscal response has been less satisfactory, as always, since it is a political process. Still, the Republicans are not opposing fiscal stimulus as they did in 2009. By historical standards, the fiscal response looks to be encouragingly strong. And the legislation pushed through by Speaker Nancy Pelosi was encouragingly rapid and well-targeted; it includes for example provisions for sick-leave pay, so that workers who feel that they might have the virus don’t have to leave home and go to work in order to pay their monthly bills.
- Q: There are also concerns that the 2008 financial crisis has begun again. If there is any difference between then and now, please explain.
JF: The 2020 coronavirus recession has some things in common with the 2008 financial crisis and recession. But there are a number of differences. The biggest difference, by far, is that the current episode is not just an adverse demand shock but also, at its core, an adverse supply shock. That means that no amount of monetary or fiscal stimulus can entirely prevent economic activity from falling. Workers and consumers are staying home, not primarily because of a lack of demand, but to avoid becoming the victims or conveyors of the virus.
- Q: There were two problems in the financial market in 2008: Bubbles and the poor health of financial institutions. Since then, the soundness of financial institutions has improved, but the assessment of bubbles is divided. What do you think?
JF: Even before the crisis hit, it seemed clear that the stock market was too high, the VIX was too low, and there was too much low-quality corporate debt. These “bubbles” could have ended abruptly even without the shock of the virus. But this shock is an extremely bad one. On the “plus” side, enough of the post-2008 reforms in the regulation of banks and other financial institutions withstood misguided efforts to roll them back, that our financial institutions entered this crisis in better shape than they entered the preceding crisis.
- Q: Do you think the Fed has more room to move? If so, how? For example, Dr. Bernanke and Dr. Yellen mentioned of central bank buying corporate bonds.
JF: The Fed has used up a lot of ammunition, but not quite all. There are still things they can do, even radical steps (like buying corporate bonds), that go beyond the response in 2008.
- Q: On the one hand, it is concerned that the U.S. fiscal deficit is already at a serious level. What will happen to the U.S. economy if further easing continues?
JF: It was insane of the Republicans to pass the massive tax cut of December 2017 and subsequent spending increases, at a time when the economy was at the peak of the business cycle and unemployment was at record lows. The predictable result, a trillion-dollar deficit, left less “fiscal space” for future stimulus when needed. Having said that, the US can get away with levels of the fiscal deficit and debt/GDP rati that most other countries cannot, because the dollar is the world’s #1 international currency and safe haven.
- Q: The plunge in oil prices also contributed to the financial market crash. If this variable is controlled, can the financial market crash be controlled, too?
JF: The fall in the price of oil, while causing severe problems for oil-producing firms and countries, is not a first-order cause of the economic crisis globally. I would not be in favor of trying to control the price of oil.