Bill Kerr: Welcome to the Managing the Future of Work podcast from Harvard Business School. I’m your host, Bill Kerr. This episode is one of a series of special dispatches on the sweeping effect that Covid-19 is having on society, the economy, and the future of work. In addition to our regular podcast episodes, we’ll be bringing you shorter and more frequent interviews with business leaders, policy makers, and leading scholars on the coronavirus. My guest today is Justin Wolfers, an economist and professor at the University of Michigan. Justin is deeply connected and influential in US policy circles through the Brookings Institution and also the Peterson Institute for International Economics, and he has a popular column on economics in The New York Times. Justin has been in the weeds of the economic data for Covid-19 and will be speaking with us about the unemployment data and other economic news. Welcome, Justin.

Justin Wolfers: Pleasure to be here.

Kerr: Justin, you are asking—or maybe even the appropriate word here is answering—what I think is literally the $2 [trillion] to $4 trillion dollar question right now. So I’m going to say, it’s April 10, late in the afternoon, as we record this. What is the unemployment rate?

Wolfers: So on April 2, I came up with an estimate I published in the Times of about 13 percent. Fast forward a week, and then we saw another big week of initial unemployment claims. We also saw that hiring has fallen off a cliff, perhaps even faster than we’d anticipated. So I had said that unemployment was rising about half a percentage point per day. So if you go forward 10 days, then we’re up five points, to 18 percent. And I had probably underestimated the speed of things, so it’s quite possible we’re close to 20 percent today. And if your listeners are waiting another day or two to listen, it could be up to 21 percent or 22 percent.

Kerr: Yeah. I think Monday’s the most likely release date. So you’re saying it could break 20 percent probably by when this podcast comes out.

Wolfers: I should be clear about what I mean by that, which is, what I’m trying to measure what the unemployment rate is today. That will never, ever be measured, not by the Bureau of Labor Statistics. It will never be confirmed by anyone. It’s one of those unusually safe places to be an economist, which is, you can’t prove me wrong. The other thing to realize, though, actually the real unemployment numbers will come out in a couple weeks after that. There’s a big unknown in all of this, which is how the pandemic economy will be reflected in those numbers, because lots of us—well, you are I are working from home right now, but we have lots of friends who are at home who are not working. Some are furloughed, some have lost their jobs altogether. But in order to be counted by the Bureau of Labor Statistics as unemployed, you have to be searching for work. Now that’s a very difficult thing to do—one, at a time when you can’t leave your house, and two, at a time where it’s absolutely crystal clear that no one is hiring, anyway. So how all of this plays out in the unemployment statistics is unclear. But what is absolutely clear is that the number of people working is dramatically down.

Kerr: Yeah. The discouraged worker phenomenon is going to be a very important thing for us to follow. But given that this is kind of an official statistic—unemployment’s something that we do measure and we put a lot of resources to it—what makes it so hard to keep closer tabs on this? I mean, you’re doing the very best to kind of give us a real-time estimate. But why is it so hard to measure it?

Wolfers: Let me go back and answer a slightly different question, which is, why has no one wanted to measure it at more high frequency? It turns out economics—the ups and downs of the business cycle—normally play out over periods of months, quarters, and years. Even the Great Recession, the financial crisis, which was one of the most terrifying rapid descents of my lifetime, played out over time. People were still arguing as late as August 2008 whether the economy was in recession. It had already been in recession for nine months by that point. So normally, month to month, the economy doesn’t move much, in which case, we don’t need to measure it much from day to day or from week to week. This time, it’s different. This time it’s different because normally what happens is, it can be hard for businesses to tell where they just saw one month’s bad numbers, or whether it’s something deeper because it’s hard to know. Did I have a bad month because my customers are on holidays, because a competitor lowered their prices, or because the general economy’s cratering? And so it takes a long time for information to filter out and for them to then make decisions about whether to lay off their workers. But this time it’s different because we’ve got a referee on the playing field, who basically blew the whistle and said, “Come one, everyone off the economic playing field.” It’s a synchronized downturn of the likes we’ve never seen before, and so that’s the sense in which the unemployment rate can move more in two days than it typically moves over a year. And it is because of that very centralized nature of the downturn. So the question you started with was, could we do a better job measuring unemployment at more than a monthly frequency? It’s an incredibly expensive endeavor to calculate the unemployment rate each month. We could run the surveys, and do them every week, but that’s just going to be four times as expensive.

Kerr: Another thing that we’ve heard—and I’d love your confirmation or impressions around this—is that some of the even unemployment insurance offices were never designed to handle this pace of claims. And so we’re perhaps under-measuring or under-realizing the extent of the trauma because people can’t even get in there to say that they are unemployed.

Wolfers: Yeah. So I want to distinguish [whether] the official unemployment rate that’s gone up had anything to do with whether you’re receiving unemployment insurance. It comes from surveys where we ask people if they have a job or not. But because we don’t have good data from those surveys right now—we’re all relying on counts of how many people have collected unemployment, applied for unemployment insurance each week. And it’s absolutely true; the rate at which people are applying for unemployment insurance right now is not only higher than it’s ever been in US history, it’s somewhere between 5 and 10 times higher than it’s ever been in US history. We simply don’t have systems built to process this many people. And so phone lines are down. Websites are crashing. And at this point, the only thing we know is how many people have successfully applied for benefits, not how many people were trying, which would be a truer indicator of real unemployment.

Kerr: We’re going to mostly talk about unemployment, but I’d love to maybe take a slight detour here before we go into the consequences. And you’ve also been looking at other data to try to get real-time measures. I think electricity is one of those. Talk about how you and other watchers of this space are trying to build your own kind of real-time capabilities to measure the economy.

Wolfers: So this comes back to the problem I was describing before, which is, this is the first recession in US history which has happened at this rate. And so as I said, there’s as much happening in two days as normally happens in a year, which means the number of economic indicators we’d normally get every year, we’d like to see over two days, and the problem is, we don’t have any. So Steve Cicala is an economist at University of Chicago, and he had the bright idea of, why don’t we track electricity use? Because when you shut down your office building, when you shut down a store, when you shut down a factory, it’s going to take a long time for the government to measure that, but the power company sees it straight away. It turns out, it’s actually a very old idea. A friend who’s an economic historian tells me that during the Great Depression, the economist department was publishing electricity use data every week. Economists who’ve thought that China was making up its GDP data would always confirm it by checking electricity use. And so it’s thought to be a very good indicator of what’s going on with the economy. And so Steve is able to produce these numbers every day. And he’s been able to produce them almost straight away. What they tell us is that, at this point, economic activity has fallen as much in the last three weeks as it had fallen in total over the Great Recession, the 2008 financial crisis. So it’s certainly a deep recession. I think the thing that really matters is, how long does this recession last? Is this going to be another three weeks, or is it another three months, or another three years? And so we’re all going to be very eagerly watching for a bottom. And again, we’re going to need high-frequency data to tell us, and this is what’s useful here. There is a whole little industry of people on Wall Street who are trying to come up with bespoke indicators of the economy. They’ll look at things like restaurant bookings through Yelp or movie ticket sales. The problem with that is, of course, is we know that no one’s going to restaurants. The restaurants are closed. They’re not allowed. We know that vast tracks of the service economy is shut down. The question is, we need indicators that are economy-wide, and I think that’s what’s useful about this.

Kerr: So I wanted to take your unemployment statistics and walk through, or break apart, a few different things that we could be concerned about. And let’s begin with just the absolute level, and what we’ll call a 20 percent now. It’s an enormous number either way. It’s arguably the highest since at least the Great Depression. And we could probably spend four or five hours on this podcast talking about all the worries that come with that high of just an absolute level of unemployment. What are kind of the two or three top things that you focus on or would worry about in that level?

Wolfers: Let me actually surprise you and start with what I think is good news.

Kerr: We could all use some of that right now.

Wolfers: Yeah. And I think we want to put this number in perspective, because when you say that the unemployment rate is as high as it’s ever been since the Great Depression and it may end up going higher, it sounds terrifying. Look, the truth is a lot of people who we’re counting as unemployed are on temporary layoff, and they expect to get their jobs back as soon as the bug is behind us and we’re all allowed out of our homes and into our offices. So for a large chunk of people, this is very, very clearly very temporary, and we hope maybe just one, two, for unemployed. If we don’t do well with the bug, three months, and they’re back to work. That’s a level of reassurance we didn’t have during past recessions, where people were getting fired, their companies were collapsing. There was just no way back. So that’s sort of the good news side of it. Let me tell you the bad news side, because that’s what you asked. We economists are meant to be dismal. The surveys asking Americans, “If you had a major emergency, could you come up with $500, or $1,000, or $2,000?” show tremendous numbers of people don’t have cash reserves, they don’t have a rainy-day fund. And this is actually not just working-class folks. This is middle-class and oftentimes even upper-middle-class folks. So they might own a home, but have no way of getting $1,000. Now, if you’ve just lost your job, you’re out of cash. Now, fortunately, we have unemployment insurance, which helps a lot of people out. But the American social safety is a very, very porous social safety net. The government’s not very good at getting checks to people. They can’t do it quickly. Some people fall through the cracks. They don’t qualify for the programs. Their earnings weren’t high enough last year, and so on. For those people, they are really at a point where there’s no cash coming in, nothing in the bank account. And I worry literally about food security, about them going hungry. I think that’s shaped a lot of the government’s fiscal response, which is, to a degree that I think we’ve never seen before, we could see large numbers of Americans struggling to put food on the table.

Kerr: Great, or obviously, that’s very challenging. And the other one you hear a lot about is making rent and housing. But food security would be the more direct and sensitive. You’ve talked about the pace of change in the labor market, the collapse—although with the notion that it could rebound also pretty quickly—as being unprecedented. Are there extra issues that arise with having the pace of deterioration being at this rate, that between now and next Monday when we release this podcast, we could add another two percentage points onto the unemployment rate? And then the second part of this would be, if people are furloughed, do you envision a scenario where the rebound is as quick as it is the collapse right now? Or should we expect that to play out over a longer horizon?

Wolfers: Let me start with that second question. And when I forget to answer the first question, just ask it again.

Kerr: Yes.

Wolfers: The question is: Should we expect to see the economy snap back as soon as the virus is beaten? And it’s by any measure the most important question in all of macroeconomics, indeed in all of economics right now. And I think that any economist who thinks they know what’s going to happen is suffering delusions of overconfidence. I can tell two stories, either of which I can convince myself of believing. Let me tell you the good news story. It’s not unusual to suddenly shut down an economy for a couple of months, and then have everyone go straight back to work and output an employment regime that really [inaudible]. This is what happens in Paris every summer. It starts to get warm. Everyone leaves town. The Parisian economy basically shuts down. The streets are empty. The stores are empty. Many of them are closed. A couple of months go by. The good weather happens. Everyone’s enjoying the French countryside. Now we’re not enjoying the French countryside. But effectively, the weather blows the whistle and tells everyone to come back onto the playing field. They all go back to Paris. They all start working, and Paris’s GDP, employment, goes straight back to where they were before. So it’s not that I’m forecasting that, but the point is, economies are able to take a pause then get back to work. In fact, they do it every year. So that’s the good news story, and that’s what we’re hoping for. If you look at a lot of the forecasts from private-sector and Wall Street economists, they actually look a lot like that. I think they’re a little bit optimistic. By a little bit, I mean a lot. But most of them have the second quarter as being a rapid shutdown of the economy. But actually, they have the economy starting to grow again by the third quarter and growing consistently after that. That is a very different proposition than any previous recessions we’ve had, where again they normally play out over years and take a long time to recover. So look, that’s the happy possibility. Let me tell you the unhappy possibility. In three months’ time—and let’s say we get a lot of the policy right—so in three months’ time, the government says, “We’ve beaten the bug.” So first of all, we’ve succeeded on public health. And the second thing, let’s assume, and I’m not sure we can do this, that the government has a lot of credibility and can say to people, “Look, the economy’s open again. You’ll be safe.” One of my biggest fears is that we won’t believe them. Well, but we get there and a lot of businesses have had to try and pay rent through the entire period. They’re now out of cash. Many of them have gone bankrupt. There’s nothing they can do. Households have had to put food on the table. They’re now completely out of cash reserves. So a lot of businesses may not be there, which means a lot of jobs may not be there. And so it’s not ... Everyone’s ready to go back to work, but then consumers are going to suddenly say, “By [inaudible], the most important thing I can do for my family right now is build up a rainy-day fund of about three to four months’ worth of savings,” which means they’re not going to spend a penny. So people aren’t spending. Companies aren’t producing. Because companies aren’t producing, they’re not hiring. And that dynamic, if that’s the dynamic when the virus is beaten, could start a prolonged, very deep, and much more traditional recession. That would be a case where people weren’t spending, so firms weren’t producing. And firms weren’t producing, so people aren’t spending. That’s exactly how most recessions play out. So we could move from this unusual shock to a much more standard downturn. I think that’s what people are really worried about.

Kerr: And recognizing that nobody has the crystal ball or the experience with some of these measurements, do you, Justin, have a sense of how long we can stay in this almost medically induced coma before you start to shift out of the happy Paris-leaves-town-for-August-and-then-comes-back scenario?

Wolfers: So part of it does depend on the government’s policy response. I think to the extent that we’re able to keep small businesses—all businesses—alive, that’s really important. To the extent we’re able to keep workers connected to their employers so that when the bug’s over, we all know which workplace to go back to, to the extent that we can keep households eating, and their balance sheets strong and healthy, all of that is going to be helpful. And then the one thing that I didn’t say much about a moment ago is one of my great fears is the only thing you have—and the only thing you need in a crisis—is credibility, because when the government tells us it’s safe to go back to work, if we don’t believe them, then that’s just going to prolong things for months and months and months and months. And I obviously have deep fears that the government hasn’t done a lot to cultivate a lot of credibility on that. In my case, my state governor has done a wonderful job. And I’ll listen to her advice. But I worry a lot about politicization of the disease and how that could stop things. But what really matters, given the pace that the economy’s cratering right now, one really important thing is just how long we continue to crater for, because if it stops in two weeks, sure, things are bad, but they’re not terrifying. If it keeps going for another month or another two months, we move from these first-round effects to second-round effects. That’s when you start to really worry about our capacity to recover.

Kerr: Maybe on those policy lines—other than working to establish better credibility and with reflection of the CARES Act and so forth—are there some things that you would emphasize to people in DC as ways that they can immediately try to help the situation further?

Wolfers: Look, I was really encouraged by the CARES Act. It was a response that was serious—proportionate to the seriousness of the moment. I would urge everyone to be ready to ... That act was passed at a point where we knew almost nothing about the future. Given that, if it turns out the future’s worse, we should do more. And if it turns out the future’s better, maybe we can pull back a little. So you don’t want to be married to a plan that was conceived in a moment of immense uncertainty. I think there’s one absolute policy no-brainer, which is state and local governments. Almost all of these guys have balanced budget rules. Their revenues—if you’re a state that’s dependent on sales tax or even on income tax for revenue—their revenues have cratered. States provide a lot of our social safety nets, so their expenditures have risen dramatically. They have to balance their budgets year by year, so that means that they’ll start to take those rules seriously, probably in late 2020. We’re starting to see a little bit of it now. So just as we come out of quarantine, and we hope that the economy bounces back, if we don’t do anything, the states are going to have to start firing teachers and firefighters. And that, in itself, will be a major recession re-impulse at the very moment that we don’t want one. So the absolute no-brainer is that we should shovel cash to state and local governments to basically make up for all the revenue that they’re losing. The states can’t do it themselves because the balanced budget rules say they have to have income and expenditures equal. The only ones who can help them here are the federal government. And the federal government can borrow at very low rates right now, and basically needs to undo the hole that’s been caused in those budgets.

Kerr: Justin, thanks so much for joining us today. I think you have both updated our numbers and also given us both some of those good news—as well as also some of the more pessimistic—perspectives that we need to keep an eye out. We appreciate you joining us.

Wolfers: Thanks.

Kerr: Thank you for listening to this special episode of the Managing the Future of Work podcast. To find out more about our project on the future of work and for more information on the coronavirus’s impact, visit our website at hbs.edu/managing-the-future-of-work and sign up for our newsletter.