How public policy can help the U.S. economy recover

Senior Fellow at the Peterson Institute for International Economics Olivier Blanchard joins Yahoo Finance’s Heidi Chung to discuss the best roadmap for helping the economy recover amid the coronavirus.

Video Transcript

HEIDI CHUNG: But economies around the world have been getting hit hard by COVID-19. The NBER officially declaring that the US economy has been in a recession since February. Our next guest says that at the beginning of the lockdown, the focus was to protect the fragile firms and workers. But now, as the lockdown eases, it's time to change focus here from protection to allocation.

We're joined now by Olivier Blanchard, the senior fellow at the Peterson Institute for International Economics and the former economic counselor and director of the research department at the International Monetary Fund. We're also joined by Yahoo Finance's Brian Cheung. Olivier, can you explain-- let's start on what you mean when you say that the focus needs to shift from protection to allocation.


OLIVIER BLANCHARD: So the focus, when we went into lockdown, the idea was to protect people, so protection of firms, protection of workers was the priority. But now that we're exiting lockdown, there needs to be more movement. There needs to be reallocation. Some firms have to close. Some firms have to restructure. Some workers have to move.

So the kind of measures which were taken during lockdown have to be modified to basically allow these-- this movement to stop. But it's starting from a really tough position, which is unemployment is incredibly high. So putting somebody into employment is not very productive. Then they just stay there and not get a job. There's enormous uncertainty. We have no clue as to when there'll be a vaccine.

So all the things which have to do with physical distancing, which are major productivity shocks, say for restaurants or-- you know, may be there for 6 months, 12 months, 18 months. And then we don't know what they'll be after this. We have a sense that airlines will have to rethink business models, that they'll be-- you know, there'll be more Zoom and various technologies like this and more telecommuting. It has all kinds of implications. But we're basically starting from really high unemployment, really high uncertainty.

So you don't want to just let things to rip. If you did this, you'd get the large increase in unemployment. You'd get restaurants to close on a massive scale. And so what we have been doing is thinking about what's needed. And what's needed in-- you know, in three sentences is you want to protect workers, right? So basically, unemployment, if it's set to continue, they may not have to be as generous as they were. There were some excesses, clearly. But they have to be generous. So, you know, people who can't get jobs have to be protected.

And on the firm side, what we argue is that there's a need for wage subsidies. I mean, you think about, in the absence of wage subsidies, you may have most restaurants go bankrupt because, you know, they cannot survive. And then a year and a half from now, you have to open the whole restaurant industry. It makes no sense, right? And when the restaurants go bankrupt, people going to unemployment are completely unproductive until they get a job, which may be a long time.

So what we argue is wage subsidies for those sectors where physical distancing is really deadly, right? So wage subsidies to help them and then loan guarantees. Because at this stage, if you're a small firm and you go to a bank, basically they just have no clue as to what's going to happen, so we'll give you a really high interest rate, where the loan guarantee basically allows them to give you a decent rate so you can survive by borrowing at the low rates. So you have to do that.

And the last point is, even with all that, some firms are going to go bankrupt, right? They're going to need to restructure-- maybe close, maybe restructure-- the normal process, which is chapter 11 or chapter 7. It is really heavy.


OLIVIER BLANCHARD: So we'll basically offer something simpler.

BRIAN CHEUNG: Dr. Blanchard--

OLIVIER BLANCHARD: --I'll take questions from Brian or from you.

BRIAN CHEUNG: Yeah, I wanted to ask you, I mean, all those things-- you know, things like wage-- you know, protecting wages right now, I mean, that would require another round of fiscal stimulus here. And people have said, how can we spend all of this? Will that come with any consequences down the line? I remember being at your AEA presentation in Atlanta two years ago where you were saying that the dynamics between public debt and interest rates has changed with everything so low. Do you think the Overton window has changed on the willingness of government to spend? And on that point, do you think Congress really should be spending even something close to another $2 trillion, as was the case with the CARES Act?

OLIVIER BLANCHARD: So a few points-- the first one is wage subsidies may not be very costly. Because when you actually take somebody and get them from unemployment to work, you save on the unemployment benefits, which might be very substantial, and you get them to pay social insurance contributions. So on that, this is not a very crazy, expensive scheme, I think.

If we have to spend more money, either because of what I've said or just to sustain demand, we have to do it, right? Now, it's going to lead to an increase in debt. And as you said, I've said in the past, having a high level of debt when interest rates are zero is not very costly, right? The government just rolls over.

So the question there, are interest rates are going to remain very low for a long time? And here, the markets are absolutely sure that the answer is yes. But even if you don't trust the markets, there are all kinds of reasons to think that the cost of debt is going to be low. So yes, the priority at this stage has to be to be willing to spend.

Now, what I hate is the notion of committing to spend, say, $3 trillion more. That would be crazy because it may not be needed. We have to be ready to do it if it's needed. But these very large plans in which, you know, you spend money like there was no tomorrow--

HEIDI CHUNG: Professor--

OLIVIER BLANCHARD: --that's not the way to go.

HEIDI CHUNG: Professor, you mentioned debt, and I want to talk a little bit about that because a lot of companies have had to take on massive debt over the past couple of months in response to COVID-19. I'm curious what you think that means, I guess, for the overall economic recovery.

OLIVIER BLANCHARD: Yeah, so I think the issue here is you're going to have firms which are viable, in the sense-- you know, they can make profit. But they have had debt before, and they've had-- they have more debt now. So that's where, you know, conceptually, chapter 11 comes in, which is this firm should not die. This firm should be restructured. The debt should be decreased, right? And that's really important to do it right because if we screw up that one, it will be like the unemployment benefit checks, which don't come, right? You know, by the time things are done, there is no firm anymore.

So that's what we've been working on, which is you have to make restructuring simpler. And given that a lot of the liabilities of firms is basically deferred taxes, things that you owe to the government, then the state can play a role and basically facilitate the process. I'm not going to go into details because it gets technical and boring, but the idea is, let's restructure the firm so that those which have a future, you know, can then get that. And that's going to be the major challenge for the next two years, is my guess.

HEIDI CHUNG: Professor Olivier Blanchard, thank you so much for your insight. Senior fellow at the Peterson Institute for International Economics.