Why economy is going to reach a 'Wile E. Coyote moment’: Economist

Economic Policy Institute Senior Economist Robert Scott joins Yahoo Finance’s Zack Guzman to discuss the his outlook on the economy as states slowly begin to reopen.

Video Transcript

ZACK GUZMAN: Well, welcome back to live coverage here on Yahoo Finance. I'm Zack Guzman. We still have the S&P trading back above the 3,000 level enjoying about a 2% rally to kick off the shortened trading week. We'll keep you up to date on those moves.

But meantime, more and more states continue to move full steam ahead with reopening plans over the long weekend. Not sure if you were out and about, but if you were, a lot being made about the return from customers to businesses here. Concerns there about health risks, which we'll dig into later on in the show. But a lot being watched there as people return to work.

Now the question becomes what the next wave of stimulus might look like as people do return to work and why potentially it is a very necessary thing when we think about the long-run economic impacts.

And for more on that, we're joined by Robert Scott. He's the Senior Economist at think tank Economic Policy Institute, EPI, and he joins us right now. Mr. Scott, appreciate you joining us.

First off, I mean, when we look at this, we were just discussing the bear-bull kind of a push here when we think about the intense, amazing record level of stimulus being thrown out there at a record level of unemployment here. What's your take on the way that more stimulus might be necessary as we move further and further along? because right now it seems like Republicans are not necessarily in that camp.

ROBERT SCOTT: Well, we've already seen roughly 36 million people file for unemployment under traditional unemployment or the new expanded unemployment compensation. We think that's an undercount. Goldman Sachs predicts that unemployment is going to reach 30% in May and June. We'll see those numbers first come out in the June unemployment report next week. They're going to be really horrific.

And we're seeing-- we expect GDP, as you mentioned earlier, to fall at perhaps as much as a 40% clip in the second quarter. And yet the economy has been sustained by all these stimulus payments that you're talking about. And those payments are all going to end roughly July 31 unless something else is done to extend the relief, and the economy is going to reach what I call a Wily E. Coyote movement-- moment. We're going to be running out off the edge of the cliff and facing, I think, an imminent collapse.

So that's my concern going forward. We also know that states and local governments are facing a trillion-dollar shortfall in revenues over the next year and a half through 2021. Those two things are really going to weigh heavily on the economy going forward.

ZACK GUZMAN: Yeah, I mean, I want to stick with that idea of what might be necessary here because we got the update from White House economic advisor Larry Kudlow telling Fox News a little bit earlier that he doesn't necessarily see support there, at least among Republicans, for that extension to the federal unemployment benefit, that $600 that comes on top of state's unemployment benefits there. What's your take on that? Because as you said, it makes August very important when we think about going out there without that blanket support. What might be necessary here for Republicans and Democrats to agree upon?

Interesting to hear Kudlow mentioning potentially a bonus to get back to work in the next round of stimulus. Do you see that being a compromise that the Democrats could reach?

ROBERT SCOTT: Well, I think that's one possibility. I think relief is essential. We need something to get us through the remainder of the current Trump administration-- that is through the end of the year-- to provide the relief that workers need in whatever form it takes.

I think, frankly, the Trump administration is combining-- would like to combine incentive in terms of this bonus payment you're talking about, paying people off for the $600 compensation through the end of-- a week compensation through the end of July, frankly combined with threatening to starve people by cutting off those unemployment benefits come July 31 to force them to go back to work.

The problem is that a very large number of the small businesses that sustain a big part of private-sector unemployment have probably already gone under. Half of small business is projected to be out of business within six months under the current crisis. So the jobs aren't going to be there at the end of July, and that's the core problem.

ZACK GUZMAN: Yeah, I mean, when you talk about that jobs number that we're going to get here-- as you mentioned, the expectation is there potentially a 30% unemployment rate. People have been talking about something even worse, maybe a little bit better. We'll see what happens. But when you look at that, it does kind of create a problem when we think about the lagging data that we're seeing and how quickly, if you believe what we're hearing, these businesses reopening and returning to business as usual.

I mean, how hard does it make it to actually frame something around this recovery, or is it just the case that you should always err on the side of perhaps being too stimulative and then having to deal with problems when we think about the issues that we're here when we first saw this downturn about people not hitting rent payments, not hitting mortgage payments, and all the economic issues that could come and might actually be worse, as the president says, than the health issues themselves?

ROBERT SCOTT: Well, we certainly know that probably a third of the workforce is out of work right now. It's historic unemployment worse than the Great Depression in the 1930s. We've never seen this before in anyone's living memory in our economy.

So we need to provide that relief, and I think it's certainly a situation where we need to err on the side of caution. It's much better to provide too much relief than too little. There's no shortage of stimulus in the economy right now. In fact, we're going to need a major recovery plan once we get through the pandemic crisis to rebuild the economy. We're going to have to make major new investments in things like infrastructure, clean energy, and I think we're also going to have to reassess and rebalance our trade.

All of those will help rebuild the economy. But we have to build a bridge to get from here to there, and that bridge is expanded relief and unemployment compensation.

ZACK GUZMAN: Yeah, right now that bridge not necessarily being built between Republicans and Democrats still negotiating and trying to figure out what the next wave of stimulus might look like. But for now, we'll leave it there. Robert Scott, EPI senior economist, appreciate you taking the time to chat.

ROBERT SCOTT: Thanks for having me.