Wash U Economics Professor Sizes Up COVID-19's Impact | St. Louis Public Radio

Wash U Economics Professor Sizes Up COVID-19's Impact

Apr 7, 2020

The coronavirus outbreak continues to hammer the economy. Many businesses are shut down because of social distancing efforts to help stop the spread of the virus. That’s leading to several questions about the country's economic future.

The federal government says roughly 10 million people have filed for unemployment claims in the past couple of weeks. The full impact has yet to be felt in the national unemployment rate, which jumped last month from 3.5% to 4.4%.

John Horn, a Washington University professor of practice in economics, said a more accurate unemployment picture places the rate at 9.8%, which approaches the levels experienced during the recession of 2008 and 2009. Other experts, like St. Louis Federal Reserve Bank President James Bullard, predict it could eventually be around 30%.

St. Louis Public Radio’s Wayne Pratt spoke with Horn about the uncertainty surrounding the economy during the pandemic.

Wayne Pratt: How do you start to make sense of this all from an economic standpoint?

John Horn: Not just how long will this last, but where are the sectors that this is going to make a difference? How is this going to affect the economy overall, what parts of the economy is this going to affect overall? And then start to think about, in those particular industries or sectors, how do you think this is going to play out and therefore then getting back to how’s this going to play out on the bigger, bigger stage. 

Pratt: So, have you drawn any conclusions out of those questions you've laid out for yourself? 

Horn: The big takeaway I would have is that as I look at it, there is no doubt that this is going to cause economic disruption. I mean, it already is. There are estimates that the unemployment rate is going to be somewhere in the 25-to-30% range later this spring and early this summer. Just as a point of reference, in the downturn it maxed out at about 10% in the great financial crisis that we had in 2008-2009. 

Horn graduated from the University of Michigan and holds advanced degrees from Harvard University.
Credit Washington University Olin Business School

So we're already talking two-and-a-half to three times what it was in the most recent recession. This is Great Depression numbers. Now, the difference is that in the Great Depression, those numbers lasted for years. And I think that's really the question that we're going to have is how long is this going to last? And I think the real question that we're facing is if we come up with the vaccine, how quickly do we start getting back both demand and supply? 

Pratt: I would assume it's still too early to assess how quickly that may happen? 

Horn: Yeah, because in the best of all possible worlds everyone goes out and says, "I want to start buying and consuming and eating in restaurants and going to movies and everything," and all those stores start saying “Great! We'll start producing next week and ramp right back up.” Ideally, the only way that happens is if there's sort of a clear-cutting point where COVID-19 goes from you need to stay indoors and shelter to all of a sudden it’s safe to go out, all restrictions are off just like it was last November. And I think the challenge is how quickly does the virus end? If we start seeing pop-ups and hot spots, that could actually make it really hard to restart the economy.

Pratt: We're looking at several weeks of people just staying home. Can the economy handle several more weeks? 

Horn: We think of it as we're just going to hit a pause on all economic activity for a couple of months and then just start it back up. In theory, in concept, that could work. The challenge with that is, do we have enough supplies of food and other things to last us until that point? 

The second challenge is that in the interim to whenever that startup a point is, say even if it's June or July, in the interim period, you have rent payments and debt payments and interest payments and other things that if you don't pay those, you go bankrupt. Business owners go bankrupt and individuals go bankrupt. And the challenge will be are the restaurant owners in a financial place where banks say, “We'll give you the capital to start starting up your business again,” or do they say, “No, you went bankrupt and so now we’re not going to lend to you.”

Pratt: Was there anything that could have been done to avoid this impact on the economy? And I say that knowing that we're in an unprecedented health situation.

Horn: I think economically, not really. The preparation comes down to more for treating the virus and preparing to minimize the spread of the virus. The economic point would be to have plans in place that would have addressed things like: What's going to happen for health insurance and health coverage? What's going to happen to your financial situation? What's going to happen to your debt payments? What's going to happen to rent payments? Having a plan put in place so that we could have instantly said, “OK, here's what's happening with the major payments that are constantly flowing through the economy. We're going to put this in place to try to manage the disruption to those flows.” 

I think if that plan had been put in place, it would have alleviated a lot of the fear about where the economy was going to go and how it was going to come back. And I think it would have made restarting the economy easier because we would have known how to unwind some of those things in the first place.

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