Jaylen Brown: All right! Let’s go ahead and get started. Hello and thank you all for joining us today. I am so excited to be hosting the first of Pearson’s Unwritten series featuring author and student perspectives on the pandemic. I’m your host Jaylen Brown, a Pearson campus ambassador and sophomore at the University of Central Florida, majoring in Finance. I am joined today by Laura Howe, she’s a Vice President of Innovation Communications for Pearson and we’ll be moderating our live Q&A.
Now I’m thrilled to welcome Dr. Glenn Hubbard, who is a leading economist and academic. He’s served as the Dean of Columbia University Graduate School of Business from 2004 to 2019, where he remains a Professor of Finance and Economics. He previously served as Deputy Assistant Secretary at the U.S. Department of the Treasury and Chairman of the Council of Economic Advisers from 2001 to 2003. He’s authored several textbooks on economics with co-author Anthony O’Brien of Lehigh University. Oh, and I must point out, one of Dr. Hubbard’s most notable achievements is that he’s a proud graduate of UCF, go Knights! All right, that one might have been a little bit of bias; but anyways. To start our conversation, we’ll turn it over to our author/expert for a 2-minute hot take on the most important thing people should know about right now, about what’s happening in our COVID changed world. So, Dr. Hubbard, please give us your hot take.
Dr. Glenn Hubbard: Thanks so much, Jaylen, and thanks everyone for joining. This is obviously a super-stressful and super-interesting time in the economy. The way I think about it at first blush is, think of two curves. One is a curve about the pandemic with infection and mortality. Another is a curve about economic costs. And obviously from healthcare perspective, we want to bring down the infection rate as fast as we can. We want to limit the pandemic standard.
The more we do that, of course, we raise costs in the near term to the economy. Part of that’s unavoidable. The question is, can we avoid making those costs too large? From an economic perspective, that’s about supply shocks on the one hand, health policy and demand on the other from unemployment, business failures and so on. Economics is a wonderful subject and it does give us a way to look at this and it gives us a way to help businesses continue to alleviate unemployment and to think about ways in which policy can marry healthcare decisions on the one hand and what we need to do in the economy.
Just today, the Federal Reserve at 8:30 this morning stood up a whole panoply of lending facilities aimed at exactly what I’m talking about here, maybe we can get to it in the conversation, but this is going to be a fascinating time. I know, for students, it’s a stressful time. A lot of it is online classes, fears about the job market, but this too will pass. This is our test, and I think we will get through it as an economy and we’ll get through it together.
Jaylen Brown: All right! Thank you for your hot take, Dr. Hubbard. So as a student, something that’s been, I guess, on the top of my mind and for a lot of my peers is the job market. Can you share some thoughts on the impact of COVID for those searching for jobs, whether right out of school or further along in their career?
Dr. Glenn Hubbard: It’s a great question, and I’d be stunned if it wasn’t top of mind for everybody on the call, and the way I think about it is as follows. Let’s go back to before the pandemic crisis hit. We had an extremely hot job market, very low rates of unemployment, very tight market actually for talent, coming out of college, coming out of graduate school. Fast forward, we’re in a different world right now. So, the question is, when do we go back toward that better world?
The way I think about the economy is less like you read about in the paper, which is about V-shaped or U-shaped type recoveries. I think of the Nike swoosh shape recovery, and by a Nike swoosh, I mean, we go down sharply, we’re experiencing that right now. Very high unemployment claims numbers just this morning. But then we’re going to recover, but recover grabs fairly gradual. The question for the job market is when do businesspeople have the confidence to go out and pull the trigger again on hiring? I think with aggressive policy, that can be relatively soon. But building that confidence is going to be critical as we go from the down part of the Nike swoosh to the upturn.
Jaylen Brown: All right! Very well said, but while we’re still talking about the job market, we already see a lot of layoffs from companies of all sizes. What do you see as the immediate and long term impacts of this?
Dr. Glenn Hubbard: It’s a great question. I’ve been focused a lot in my own work in writing and working with people in the Congress about small and mid-sized businesses, because losing your revenue for firms like that for a month or two could be devastating. It’s night and day. It’s death for the business. It’s not just death for a business. It’s layoffs of all the businesses’ employees that Congress work with several economists, myself included, to try to put together a business continuity measure that would basically be grants to firms if they didn’t lay off their workers. That’s in what’s called the CARES Act that President Trump had just signed. I think that will be super-important for stopping small and mid-sized firms’ layoffs.
For big firms layoffs are still going to happen, but they’re the Federal Reserve just this morning announced very large facilities to lend to those firms to help them to try to keep people on payrolls. So whether it’s at the Federal Reserve level in monetary policy or fiscal policy with the Congress, people are very, very focused on this. So in the very near term, there are going to be a lot of layoffs. But going forward, I expect the job market to get better sooner rather than later as that policy takes effect.
Jaylen Brown: That’s very interesting. Never thought of it like that. Just to switch things up a little bit. Unfortunately, a recession seems inevitable as this situation gets continues to grow, change and just develop over time. Do you have any thoughts on what that might look like? For example, do you think we are in this for the long haul or should we expect a quick but dramatic period of loss?
Dr. Glenn Hubbard: I think it’s somewhere in between, Jaylen, and I think that we’re going to see a very sharp contraction in GDP and employment this quarter like nothing you’ve seen in any textbook. This is orders of magnitude different than what policy has experienced before. And at some level, you shouldn’t be surprised if you deliberately shut down big sectors of an economy, you would expect that.
The question is the recovery. I think the stock market will recover first. What the job market and the real economy will recover over several quarters. So people expect this to snap back in the third quarter. I think you’ll see a big growth spurt in the third quarter, but I don’t think you’re going to see the economy go back to normal that fast. I think it will take time to build that policy really as to focus on keeping workers attached to their jobs and giving businesspeople confidence they need to hire and invest again.
And then obviously, we need to do whatever we can on the healthcare front to make sure that we don’t get yet another recurrence of COVID-19 in the fall and the winter. The US has been a little bit behind in that perspective relative to the progress some other countries have made.
Jaylen Brown: All right! Well, let me ask you this. Do you think we might stumble into the depression territory? Can you explain like the difference between the two, like recession and depression?
Dr. Glenn Hubbard: Sure! I’ve been worried in this episode about what I call the demand doom loop. It’s just a more dramatic way of talking, but heading sleepwalking toward a depression. This shouldn’t end that way. This should end with a sharp downturn, followed by a slow and gradual Nike swoosh type upturn back to normal that’s not a depression, so you have a quarter of pain and then slower gains. What could trip into a depression would have been policy being enacted. Anybody who studied even principles of economics knows policy failed a lot during the Great Depression and what could have been avoided happened.
I think this time the bold action that Congress took and the Fed took really, really helps. At the same time, though, we’ve got to push hard on the healthcare front and we’ve got to think harder about how to be more prepared as a government and business for a future crisis. But I think the probability of the depression here is small given the action policymakers are taking.
Jaylen Brown: Yeah, I saw you mentioned the Great Depression, so from what I know, one of the things that happened at the start of the Great Depression was a run-on banks.
Dr. Glenn Hubbard: Yeah.
Jaylen Brown: So, I know there are safeguards to prevent that from happening now, but the psychology of that really hasn’t changed that much. So can you talk about how that plays out in the consumer market today? And is that why we are out of toilet paper?
Dr. Glenn Hubbard: Actually it is as a matter of fact. Banks themselves are not going to be run, they are too well-capitalized. Policy has gotten that right. You did however see a run on mutual fund -- money market mutual funds that policymakers stepped in fairly quickly. But you’re definitely seeing a run on toilet paper and people joke about it, but it’s actually a teaching moment to think about a bank run. Why does a bank run happen? Well, a bank run happens because I see people lining up outside of one bank to take their money out. I don’t know if my bank is safe, so I do the same thing and it cascades through the system.
With toilet paper people were unsure about the supply of toilet paper. They see stories that say, oh my god, this store ran out of toilet paper. I should go to my store and buy all the toilet paper. The way a bank run gets stopped is by a lender of last resort stepping in and massively supplying reserves to the banking system, so too with toilet paper. You were seeing toilet paper supplies being beefed up and sold and now you’re not reading as many stories about toilet paper runs. So I don’t think you got to run to the store and buy toilet paper, nor do you need to worry about your bank.
Jaylen Brown: All right! Thank you. Very well put. So this is going to be the last question from me, but I do see that there are a lot of students on the call.
So what is your take on how universities fair economically during all of this? What do students need to know or at least think about in terms of what their university is doing during this time?
Dr. Glenn Hubbard: Well, the first thing obviously most important is the educational experience. Almost everywhere, students are taking classes online. I’ve been teaching Zoom classes to business school students. It’s not a perfect substitute for being face-to-face, but it’s still pretty good. The question will be for next academic year, what’s the balance going to be? Are we going to be able to open whole stop for all physical classes or do we need online? My guess is university administrators are going to grapple with that.
The finances of a number of universities are obviously affected too, endowments, fundraising, other businesses, universities around like training executives. All of those are sensitive to the economy. And students may face issues with tuition and room and board and college. So we’re not out of the woods on this yet, but I see an opportunity for universities to lead by figuring out how do we mix technology and face-to-face, because honestly, as you know, from your own experience in class, you learn so much from literally rubbing shoulders with fellow students, faculty and alumni. So, while Zoom is great, I enjoy seeing you this way, it could be even better if we were in person.
Jaylen Brown: I agree. Well, thanks, Dr. Hubbard. We do want to take some time to answer some questions from the people who have joined us, and I see there’s a lot. So, I’m going to send it over to Laura to answer some questions that have been coming in from the audience.
Laura Howe: There we go. Okay, now -- now we’re good. All right! We had a lot of questions coming in and we had a fair number of questions that were submitted prior to the Zoom call starting as well.
So I want to start with some questions around the stimulus package, because there’s a lot of people asking about that. And one person writes, I love how he put this. I’m an old man, so $2 trillion still sounds like a lot of money to me and I understand that Congress may appropriate additional amounts in future rescue packages. So how will these amounts be paid for? Who’s actually paying for them, and how does the federal government recover from that kind of spending?
So a lot of other people asking, is this going to drive us into inflation or a lot of government debt?
Dr. Glenn Hubbard: Wow! A lot of questions there. I’ll try to answer it. The hardest parts I’ll have to leave up to Jaylen, but I’ll take the easy part.
So here’s how I think about it. $2 trillion is definitely a lot of money. And I don’t think of this as a stimulus package. I think of it as a stabilization or recovery package. I mean, literally right now we’re telling people to sit at home and not go out. So we’re not trying to get you to go out and go shopping. We’re trying to stabilize employment and things like that. So is $2 trillion a lot of money? Well, when I spoke to congressional leaders about it, I asked them what their counterfactual was. Because if their counterfactual is the economy’s fine, then yeah, we shouldn’t be wasting $2 trillion. But if the counterfactual is the economy would be in freefall, then $2 trillion is worth it.
The way I think about it is like a war. If you fight a war, you borrow a massive amount of money one time and then over time your debt to GDP ratio shrinks. You stop spending all that money. The economy is growing. And typically after a war, interest rates are held at a low rate for a period of time.
Same thing here. We’re borrowing a large amount of money one time. Interest rates are very low. And then we’ll restart the economy. What would be much more worrisome to me would be is if we use this occasion to start whole new programs that had large ongoing costs, to me that would raise real fiscal questions. What we’re doing now? Honestly, give them a tough hand that we were played by the pandemic, I think it is about the best you can do.
I don’t think $2 trillion is enough. I had told members of Congress, for example, the small business piece that they think cost $350 billion, my pencil tells me it costs a trillion dollars and I did my math with Dun & Bradstreet. So I think they are going to be coming back for more and I think we are all, I hate to say it, just going to have to deliver it.
Laura Howe: Interesting! So here is a question that came in and this is interesting because this is actually a debate that my husband and I were having the other night and the question is this, from the point of view of the overall economy, is it better for the government to help out businesses so that the businesses can create and keep jobs, or is it better to help out consumers directly so they can pay their rent and buy goods?
Dr. Glenn Hubbard: Well, actually if you focus on businesses you are doing both. So if you think about the small and midsized business piece, by keeping people attached to work, they still have their income to pay their rent and the business still has its revenue covered to pay its rent. If you go the alternative route of letting a business fail, people will throw it on unemployment insurance. It may be a long time before they find a new job when the economy restarts.
So I think there is a potential win-win if we get the business part right. As you all know from looking at the newspaper, it’s hard to implement in practice what the Congress is trying to do, but I still think it’s definitely the right idea.
Laura Howe: All right! So just pivoting a little bit here, we have had some questions come in about the sectors of the economy that are suffering and that also might actually gain from this. So talk a little bit about other than some of the really obvious sectors; grocery, retail and Amazon and things like that, which other businesses or sectors might actually flourish during this downturn?
Dr. Glenn Hubbard: Well, Amazon, of course stands for generally online sales of things. They happen to be a big backbone for that. But I think this will be an accelerant to the trend of online commerce dominating bricks and mortar, physical commerce; now, that had already been a slow bleed. It’s just going to accelerate. Obviously there are other wins in the technology sector. There are wins in some healthcare and biotech sectors.
The losers are also obvious. They will be in the hospitality area, leisure, travel, because even when supply constraints come off, it’s probably not going to be instantaneously that consumers are comfortable doing the kind of travel and massing together that they did. I don’t know how quickly we will see large stadium events or concerts or things that would drive that industry.
Laura Howe: So one of the things that I think we are all familiar with was the subprime mortgage crisis from the last major recession and downturn. Can you talk a little bit about how this is either similar or different from that? Because I think that’s the sort of frame of reference that a lot of people have for this current downturn and we have got a lot of questions about that.
Dr. Glenn Hubbard: Well, it’s a great question. I am going to play the classic economist and I am going to say it's both different and similar. So it's different in the sense that last time it was the financial sector got in trouble and it brought the real economy down. This time it's the real economy getting in trouble with the pandemic which may have financial effects so that -- in that sense it's different.
But it's similar in the following sense. It's about unseen connections. So think about subprime mortgages. I was the Chairman of the Economic Club of New York when Ben Bernanke came to New York to give a speech where he said the subprime mortgage problem can't be too big because he stated the dollar volume of subprime mortgages and then divided it by GDP. So it's small.
Well, what if those subprime mortgages are connected to lots of other things, through securitizations and things the Fed at the time and others didn't see? One of the things we are learning now is how connected we all are in ways that we don’t suspect.
So if you shut down some subsectors of the economy, how quickly it spills over to others? Let me just give an example of real estate. So Jane’s pizza shop closes down or doesn’t pay its rent. That landlord has diminished income from Jane's pizza shop and other pizza shops like it. That landlord defaults on a mortgage payment. That mortgage was not held as a home loan by a bank, it's part of a securitization, except the services that people collect on those mortgages are, since ’08, not part of banks and they can’t take it.
So again, there is a cascade. You wouldn’t have thought that shutting down small service businesses could have a massive real estate effect, but it does. So I think it’s different, it's not a purely financial crisis, but it's similar in the sense that like all economic problems, connections are a lot deeper than you think at first look.
Laura Howe: So speaking about the loan market, we have had a number of questions come in from students about student loans and how the economic downturn affects things like student loans and maybe also talk about things like mortgages, car loans, that sort of thing. So especially with the Fed taking the interest rate down to zero, how is all of that tied together?
Dr. Glenn Hubbard: Well, it depends on who you are. So if you are somebody who is just about to think about borrowing money for a car loan or a mortgage, the low interest rates are a good thing for you.
If you are somebody who already owns an asset that’s affected by interest rate capitalization, suppose you own a home, that’s a good thing for you.
If you are somebody who is already indebted at a higher interest rate, it’s not a good thing for you.
So I think that there have been a number of policy proposals on how to give interim relief for people whose debt burdens are too high; student loans are clearly an example because just like the example I gave of Jane's pizza shop, if a student were to find it harder to get a job, it becomes harder to service student loan debt and we shouldn’t let that loan debt crush the student. And so I think policymakers are going to be talking through that, but some people are made better off and some people are made worse off.
Laura Howe: So switching gears just a little bit. We have had some questions come in about people watching the cost of goods going up and down and fluctuating a lot. Can you talk about why the cost of some goods are actually going up and where do you hit the line between the cost of goods going up and things like price gouging, for instance?
Dr. Glenn Hubbard: Great question! So, the costs of goods are going up for, if you think about commodity type goods, like things when you go to the grocery store and look, you are going to see very high frequency fluctuations. In New York, where I live, the price of eggs, a fairly basic commodity, last week was 300% higher than the week before, which is the fact that it's short-term supply and demand. You can't store eggs for months and so it's a problem.
Price gouging is also an issue. Most states have price gouging regulations to make sure that people don’t take an opportunity to do, as one story suggested, of selling hand sanitizer for $70 for a vial or whatever. So I think that will limit itself, but you have to be somewhat careful. You also at the same time don’t want to try to push prices so low that suppliers don’t have an incentive to make the good available. So being on the alert for price gouging isn't the same as advocating price controls on those.
Laura Howe: So I want to go back to some of the comments you had made earlier about the state of higher education. So we have a lot of faculty members on the call, a lot of students. One thing that the people are asking about is college enrollment. You touched on this just a little bit. But often we see college enrollments go up when the economy sort of takes a downturn. Do you foresee that happening or sort of what do you think about the state of college enrollments as we get into the fall?
Dr. Glenn Hubbard: Well, let me speak generally and I will talk about segments of the hiring more. Generally in the recession applications for college matriculation in college go up. And it's easy to see why the opportunity cost of doing it goes down because the job market is less good. You definitely see that in post-college graduate education, like going to business school or law school or medical school. Those applications definitely soar during a crisis.
Now, this is a little different than a typical recession and obviously its early days so I haven’t seen numbers to know what it is, but I would be surprised to see that same soaring effect as in a typical recession because there is a lot of uncertainty about the long-term future of certain paths. So I think prospective students may be a little more willing to hang on to what they have than let it go so quickly and try to go to college.
I do think enrollments generally will still be good, but there are some colleges that are probably very underfunded and are going to have a hard time surviving going forward, particularly if you were to go to a world where for a period of time you had social distancing so that you couldn’t have students just crowded.
I know when I teach in a very large, very crowded classroom, if that classroom had to save up every third seat, I am not sure the economics for the university would be the same.
Laura Howe: And let's pivot a little bit, because there are a number of questions coming in with people asking about foreign policy, globalization, sort of our interconnected global supply chains and all of this that have very clearly been disrupted. So can you talk a little bit about the future of kind of globalization and kind of our interconnected global economy through all of this?
Dr. Glenn Hubbard: Great question! Sometimes I think you get to moments in the global economy and foreign policy that are true pivots, like the search for a New World order after the Second World War would come to mind. I know a lot of people are talking about the present moment like that. I am not so sure. I think of it as more an accelerant of things that were already going on.
So within industrial economies there were broad swaths of populations that were questioning the value of globalization for them, that may be a benefit in certain elites, but not them. And I think that has accelerated. The skepticism some countries have about hyper-efficient global supply chains has accelerated.
But at the same time, I don’t see globalization going away. The world is interconnected more than ever before and I think for business leaders it’s less about, do I put my supply chain say in the United States versus some other country, as it is that I want redundancy?
One thing business leaders learn is this hyper-efficient, just in time, no chinks in the armor kind of supply chain works in good times, but in a time like this it’s just devastating. And so I think that will be a lesson and that will mean business may be a little less efficient, transactions costs can be a little higher, but I don’t think it’s necessarily going to knock globalization. I wish America would take this role to play more of a leadership role in the world, both for healthcare policy that we are going through and an economic policy.
The final quick thing I would say on that is that something we haven't talked about today but is very important I hope to everyone on this call is the success or failure of emerging markets. Right now emerging markets are going to be hit very hard by both the healthcare aspect of this because of weaker public health systems and economic devastation. That’s not just their problem, that’s our problem, because that’s demand, that’s our world and so it's time for the United States to play a lead role.
Laura Howe: All right! Well, I want to thank all of our participants for their amazing questions. There were more than 150 questions that came in. I am sorry we couldn't get to all of them so we tried to cover some big themes. But I am going to throw it back over to Jaylen to wrap us up.
And Dr. Hubbard, thank you very much!
Dr. Glenn Hubbard: Thank you! Jaylen is the master questioner.
Jaylen Brown: Thank you! Thanks Laura! Thank you Dr. Hubbard for being here today! I want to thank everyone who joined this call and I hope that this session was as insightful to you as it was for me. So stay safe everyone and God bless!
Dr. Glenn Hubbard: Thank you!