 So good afternoon, everyone. We're delighted to welcome Jason Furman back to the IIEA. Jason is Professor of the Practice of Economic Policy at Harvard University and a non-resident senior fellow at Washington DC's Peterson Institute for International Economics. He may be best known among IIEA members for his service as the chairman of the Council of Economic Advisors to the President of the United States from 2013 to 2017, during which time he acted as both President Obama's Chief Economist and as a member of the cabinet. In his upcoming address, Jason will discuss macroeconomic responses to the COVID-19 emergency, including the roles of both monitoring fiscal policy in combating the economic fallout of the crisis. He'll also address issues around debt sustainability, the possibility of inflation, and what can be learned from the different approaches on the two sides of the Atlantic. Professor Furman will speak for around 20 minutes and then we will go to Q&A with you, our members. You'll be able to join the discussion using the Q&A function on Zoom, which you should see at the bottom of your screens. Feel free to send in your questions and comments throughout the session as they occur to you and we will come to them once Jason has finished his presentation. A reminder, today's presentation is on the record while the Q&A will take place under the Chatham House rule, meaning you can use the information but cannot attribute it to the person who said it or where it was said. Once again, Jason, thanks for joining us. We look forward to your presentation. Great, thank you so much, Dan. Thank you all for joining. I was originally scheduled to be in Dublin around now for what would have been my second visit to IIEA. I was gonna talk about the topic of unlocking digital competition, a report I had done for the UK government. When I'm thrilled that the UK government has taken all the strategic recommendations to move forward with a more competitive regime for digital competition. But unfortunately, events have both kept me from Dublin and those events have made the topic that I switched to for today all the more urgent, which is what is the macroeconomic response to COVID-19? What's working, what's not working, where we go from here? Gonna share some slides with you to take you through a range of perspectives. I am going to focus on what's going on in the United States but draw to some degree on international evidence and international experience because it's a lot in common. This is also a lot that's different. I'm gonna talk about five topics I'll put down on the table to set the stage for our Q&A where we can explore any of these in more depth. The overall economic framework that I use for thinking about it, what's gone on so far, what's happened in the policy response so far, the question of deficit and debt, and what should come next. Overall economic framework. I'll tell you the way I think about what's going on in the economy right now and there's some moving pieces in this. Before COVID, our economies, United States, Ireland, Europe were on a growth trajectory and just moving along. We then get to three phases. The first phase is the one we've already gone through, which is a collapse in economic activity where it just economies get shut down, people stop going to work, businesses stop selling things and you reach a new level that is say 20% below where you were before. The second phase is a partial bounce back. That's really rapid growth and it's the easy type of growth of a business that was closed, turns its lights back on, a person that had been furloughed from a job temporarily gets back at that job and we'll see potentially double digit growth rates at an annualized rate in the third quarter in the United States. We'll see millions of jobs a month. The question though is how far this partial bounce back gets you. I've drawn it somewhat arbitrarily as getting you halfway there. And that leads to the third phase. And the third phase, I'm calling the slog. The slog is the normal business cycle dynamic. Instead of going back to your old job, you have to find a new job. Instead of turning the lights on in a business, a new business needs to be formed or an old business needs to be expanded. That's something that historically has had effectively a speed limit on it. The asymmetry we normally see in business cycles where unemployment rates can rise very rapidly and unemployment rates rarely fall very rapidly. In the way I've drawn it, you're not getting back to your baseline until sometime in 2023 and you're never quite reaching the trend you were on. Some portion of output is permanently lost. So the big question is what fraction is the partial bounce back? Does it go halfway? Does it go most of the way? Does it go only a tiny bit of the way? And you could have optimistic and pessimistic views about all of that. Which will determine which of these paths we're on? How far the partial bounce back takes us? How much room and time is needed for the slog? Well, the most important set of factors are the spread of the virus, the handling of the reopening and treatment in the vaccine. The least important issues are monetary policy, fiscal policy and lending policy. Today I'm gonna focus on the least important issues. That's because they're my comparative advantage. It's also they may be least important but they're still very, very important. And it's very important to get them as right as possible. So within the economic frame, part of the complexity of what we're seeing is that the shock is a combination of different types of shocks. There's a demand shock where people don't have jobs or worried about their income and they're not spending. And there's a supply shock where it's impossible to produce, impossible to go to work. There's a liquidity shock where businesses temporarily don't have enough money but there's a solvency shock where they may have the insolvent. There's what I'm calling a stop-start shock, turn out the lights on the economy, turn them back on again and it pops back up in exactly the same place it started. But there's also a reallocation shock which is a year from now, there may be fewer restaurants and fewer movie theaters, more takeout and more streaming. Demand shock, we have a lot of tools. We have fiscal and monetary policy. They can solve the demand shock. Liquidity shocks, we have a lot of tools, specifically lending facilities. Stop-start, we've been inventing tools, different things to get businesses through this period. So there's a lot we can do for those. The question is are we, are we not? These three, the supply shock, the solvency shock and the reallocation shock are all much trickier. There really aren't great policy tools. I mean, reallocation is some training programs, public works and the like to help create jobs but they're difficult. They're very, very difficult. So what we have to do is hope that it's more of these types of shocks which a lot of that will depend on the health and make sure that we're treating those types of shocks because they are treatable. So what do we see in the data so far? How does it help us try to sort through how much of what we're seeing is demand, liquidity, stop-start versus supply, solvency and reallocation. We're all familiar with the large contractions in GDP around the world in the first quarter. The IMF has forecast for the four quarters of this year and it's important to note that contemporaneous economic data doesn't give you a great window right now into what's gonna happen over the course of the year. China economy contracted 9.8%. This is relative to the fourth quarter of 2019 not the way they usually report the data. But the theory is that was an investment in getting rid of the virus to give them positive growth later this year. The United States had a smaller contraction in the first quarter, but is expected to have more cases spread throughout the year and thus negative growth for the year. And so there are definitely some cases where lower growth upfront can lead to higher growth later on. The United States reported its jobs numbers last week. We lost 20.5 million jobs. That's the most jobs ever lost in a month. The headline unemployment rate rose to 14.7%. To give you a sense of what's going on in the labor market though I wanted to make some adjustments. One adjustment is that 8 million people left the labor force. They stopped looking for work. If you counted them as unemployed, the unemployment rate would be 19%. In addition, there were a lot of people who were reported they were not at work for other reasons. They looked like they weren't employed. They weren't working hours. They weren't getting paid money, but they weren't classified as unemployed. Classified them as unemployed, the unemployment rate gets to 23.5. Now, if you wanna be extremely optimistic, there were 18 million people that reported being temporarily furloughed. If every one of those 18 million people was rehired at their job and there were no additional job losses, then the underlying unemployment rate would be 8.5%. It gives you a range of what you see. In some sense, the 8.5, I think of as the best case if everyone got a vaccine today. That's where the unemployment rate would be. Inflation, on the United States reported that it's inflation rate yesterday. This is core, which excludes the volatile food and energy components. And you can see it was minus 0.4% for the month of April. That's the lowest inflation rate that we've ever recorded. Futures markets are also expecting an inflation rate of about 1% over the next decade. I would say a few things about inflation. Number one, clearly there's a large demand shock. It's very hard to get inflation without either commodity price pressure or wage pressure. And there's none of either of those. Central banks around the world have completely failed to raise inflation even when they wanted to look at Japan. And so I think there's a lot of reason for skepticism about the possibility of inflation. I would say though, also, if there was inflation, that I think would be actually good news. So it's not something we should worry a lot about. It's not something policy should be structured to avoid. It would avoid a deflationary spiral. It would mean lower real interest rates, which would help investment. It would mean lower real wages, which would help employment. And it would deleverage household, corporate and government debt. Just looking at more high-frequency data, Apple mobility trends, that they have a great website, recommend you all use it. You can see there, the bottom of the economy was reached sometime in April and things have rebounded in the week since then. You see that also in high-frequency employment data, high-frequency consumption data, and with Apple trends, you can compare across countries and look at, this is how much people search for driving directions. And if you look at how much they were searching for driving directions on May 10th, as compared to before all of this, Ireland is actually down more than any of the countries. I looked at down even more than Italy. You see that places like Japan, Hong Kong and South Korea that are not doing the types of mandatory lockdowns still have very, very substantial behavior changes. Only Sweden at this point does not. So that's some of the high-frequency data. What we've seen there is just a collapse in activity. We're seeing the beginning of the partial rebound that I talked about. It looks like there is a lot of reallocation in those data, but it's hard to tell. Policy response. I'll just touch very quickly on monetary policy and really focus on fiscal policy. There's been a huge expansion in the balance sheets of the central banks. This is showing the Federal Reserve adding more than $2.5 trillion of assets, continuing to add assets at a very rapid rate, buying treasuries, buying mortgage-backed securities and engaged in lending and purchase operations in a wide range of financial markets, including non-investment grade corporate debt. That's prevented a financial crisis. It's narrowed spreads and it's sort of an unfortunate fact that the one thing the central bank can do really well is stabilize financial markets. It's done that. And that's leading to a bit of a populist backlash. Why did you save Wall Street and not save Main Street? The answer is the Fed's doing everything they can for Main Street. This is gonna help Main Street too, but they just don't have the full set of tools. The fiscal response has varied across countries. These are data from Evercore ISI. Everyone has different fiscal numbers. It's very hard to sort out, given differences in automatic stabilizers, commitments, how to measure credit programs and the like. What I'd emphasize is the standard fiscal measures. What I'm drawing here in red have been much larger in the United States, about twice as large in the United States as they have been in the Euro area and Japan. We've done much more in terms of transfers, grants and the like than other countries have. We have smaller automatic stabilizers, but even taking that into account, it's a lot more. We've also done a lot more giving grants to businesses, some of them in the form of forgivable loans, a tool that other countries haven't used nearly as much. Of course, lending and a lot of this is dominated by Germany. Loans and loan guarantees have been a much bigger part of the European response so far. Although some of our lending programs are still getting up and running. To put the US fiscal response in context, 2010 was the largest discretionary fiscal response the United States had ever done to deal with an economic crisis. It was 3% of GDP. This year, we're at 12% of GDP so far. That's four times larger than the largest we've ever done. The right comparison isn't what we've done for economic crises in the past. It's what we did for World War II. So this is something like half of what we did for World War II, four times larger than what we've done for any economic crisis. And that's just what's happened so far. There've been two big debates. I'll just briefly talk about them and we can come back to them. One is what's called the US model, which is if there's somebody that can't work, the business furloughs them, they stop paying them, they receive unemployment insurance, and that unemployment insurance is actually greater than 100% of what they were earning for the majority of workers. The European model, so-called, is that the businesses don't fire the workers, they keep them on, they pay them, maybe less than 100%, and they get reimbursed from the government. These two systems are actually less different than meets the eye. In both of them, employers can return, if they return to economic viability, they'll reactivate their employees. The US system is more disruptive for employees in the transition, because you need to get onto unemployment insurance, which in a lot of states is difficult. Then it actually pays better and it does more to reduce the cost for businesses. And then finally, the US system has a greater option on reallocation. So, I think some of the differences you're seeing between countries are optical, whether you count people as unemployed or whether you count them as working. In all countries, lots and lots of people aren't doing jobs right now. In all countries, the question is, will you reopen? Will you be able to get them back to work? The second debate that we're having quite a lot in the United States is, do you want grants for functioning businesses? We have that in the Paycheck Protection Plan for small businesses. We have it in the airline bailout for airlines and people from the left to the right, from Bernie Sanders to Senator Hawley have proposed much bigger versions. The problem with paying businesses that have active workers is that it's basically a windfall for their owners. If you require them to maintain 100% employees, you're limiting the program to businesses that would have been successful anyway. In many cases, you're building a bridge to nowhere. The US airlines are maintaining full employment through September 30th. What's gonna, with federal funding, what's gonna happen on October 1st? Unlike bankruptcy, this lets shareholders and bondholders off the hook, and it costs about 20% of GDP annually just for small businesses. So the unlimited grants for businesses, which is something the United States has partly done and their proposals to do more of would be a difficult and costly, and I think ineffective way to keep the economy going, but that's something we can discuss more. Deficit and debt. We have, of course, had a huge run up in debt. The United States last year, the IMF thought our debt would be 84% of GDP at the end of this year. Now they think 107%. Italy, 143%. Japan, 169%. Every country has debt in 2020. It's gonna be a lot higher than was originally thought, and the majority of the G7 are gonna have debt exceeding 100% of GDP. I did my own attempt, and this is very, very approximate, to look at the debt going forward, and I estimate that it's rising to about 150% of GDP in the United States after a decade. How worried should we be about this? In the short run, I don't think we need to be worried. In the short run, real interest rates are negative in all but Italy in the G7. Central banks have substantial capacity to purchase assets. There's no indication at all that markets are nervous about the scale of borrowing, and you need an economy to repay your debt, and if you're accumulating that debt for the sake of having an economy, you're accumulating it for a very good reason. So in the short run, I think we don't need to worry at all. We can do, I would not say whatever it takes, I would say whatever works. If you're wasting money, if you're doing stuff unnecessarily, you're adding to the debt in a way that will create some problems for you down the road. So don't worry about the fiscal constraint for anything good, but keep asking questions about whether it's good. On the other side of all of this though, there will be a desire to stabilize the debt. I don't know where you'll wanna stabilize the debt. Let's say we wanna stabilize the debt at 150% of GDP. For the United States, I think that would be a reasonable place to stabilize the debt. The UK had debt at that level for centuries and was perfectly fine. The United States has exorbitant privilege and the like. Well, if very optimistically, we thought the growth rate, not very optimistically, somewhat optimistically, we thought the growth rate was two percentage points higher than the interest rate, then we would need 3% of GDP primary deficit. That's the largest primary deficit we could run. Well, the United States already has a primary deficit larger than that in 2019. And that primary deficit's rising. It's probably rising to about 6% of GDP. So for the United States, just to stabilize at 150% of GDP, we will eventually need an adjustment of something like 3% of GDP. If the UK wants to stabilize its debt at 100% of GDP, it's much closer to the mark. It's running a deficit of 0.7% of GDP. That's about what it could run under even a more pessimistic scenario where the growth rate is only slightly higher on the interest rate. So growth rates being higher than the interest rates give you room to run. Some countries like the United States still need to make an adjustment even with that extra room other countries less so. I'll just end with one slide on what should come next. This is very parochial. I'm looking just at the United States and what I think our priorities are. I think some of these have broader application. Some of them don't. And I have four. One is our states and local governments have balanced budget requirements. They're all making dramatic budget cuts right now that's gonna undermine the economic recovery not to mention her schools and other things funded by them. They need fiscal relief. Second, too many tens of millions of people appear to have lost their health insurance. There's lines at food banks. We've done a lot with unemployment insurance a lot with mailing people checks but should directly support healthcare and nutrition. Third, especially in the United States the automatic stabilizers are weak. We don't have a fully effective functioning parliamentary system. We have divided government. The suboptimally putting everything we've done on autopilot and having it last longer than needed or more likely ending it even when the unemployment rate is very high I think is a big problem. So setting in place automatic triggers that extend programs as long as the unemployment rate is elevated I think is far superior to having Congress every couple of months get into a big fight. I think that idea is a good idea everywhere. I think it's especially important in the United States. And then finally, if you think that a slog is very likely a long prolonged period of high unemployment, of slow economic recovery then we're gonna need not just the immediate emergency relief measures that we've done in all of our countries. We're gonna need to answer the question where are jobs gonna come from in 2021 and 2022 and 2023 and 2024? And while longer term reconstruction like public investment and training are not a substitute for immediate emergency relief I think the sooner we get acting on them the better because even if that money doesn't spend out for another two or three years I'm reasonably certain it would be helpful to the demand side of the economy in two or three years and I'm completely positive it would be helpful for the supply side of the economy in two or three years. So at end where I began there's an enormous amount of uncertainty in the macro economy right now. The most important factor is how we handle the virus. Policy can do a lot. So far it has done a lot. I think it's done a quite good job of solving all the problem, solving not all but solving many of the problems it can solve on the demand side, on the liquidity side and on the stop start side. The issue is that there's many other problems that may emerge, not all of which policy can solve which is why we need to make sure that we're continuing our response at least on the demand and relief side as long as it's needed without artificially constraining ourselves based on a budget constraint even if eventually some fiscal adjustment will need to be made. Thank you. Great, thanks so much, Jason. Really clear comprehensive presentation.