Economic Effects of COVID-19

Speaker 1:
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David Yepsen:
A global pandemic reaches the Midwest causing health and safety concerns across the country, but one of the largest impacts on daily life could be economic. We preview the fallout from the COVID-19 shutdown on this edition of Iowa Press

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Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are, there is an Iowa banker who is ready to help you get where you want to go. Iowa bankers. Allowing you to discover the genuine difference of Iowa banks.

Speaker 1:
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Voiceover:
For decades, Iowa Press has brought you politicians and newsmakers from across Iowa and beyond. Celebrating nearly 50 years of broadcast excellence on statewide Iowa PBS. This is the Friday, March 20 edition of Iowa Press. Here is David Yepsen.

Speaker 2:
As a global pandemic spreads throughout the country, the concerns of Americans are multifaceted. Fears for health, safety and disaster preparedness dominate the headlines. But the immediate shutdowns will have significant economic repercussions. Joining us to discuss the fallout from COVID-19 is Creighton University economics professor Ernie Goss and Iowa State University Professor Peter Orazem. Gentlemen, welcome to the show. Good have you back, Ernie. Good to see you.

Ernie Goss:
Good to be here. Great to be here.

David Yepsen:
Reporters joining us across the table are James Lynch, political writer with the Gazette and Kay Henderson is news director for Radio Iowa.

Kay Henderson:
Dr. Goss, in the nation's Capitol, they are talking about sending checks to almost everybody. Is that a good idea?

Ernie Goss:
It's a good idea in the sense of stimulating demand. Uh, and that's what we're talking about here. The problem with it is we're all hunkered down now and when you get the check, where do you spend it? Of course there are not many options for most of us right now, but ultimately it will. We will get a spring back in the economy and that would be part of it. And one of the problems, and from my vantage point, I'm more of a monetarist is sometimes sometimes call supply side economist, is that that we have this what's sometimes called the new monetary theory. Which is in a sense I, I will characterize it not to, uh, I don't, not to not provide it not too much praise is the deficit doesn't matter anymore. Well, we're talking about, many of the programs we're talking about is a trillion, 2 trillion, 3 trillion dollars deficit expanding from current one and a quarter, trillion to one to two to 3 trillion. And that's, that's a problem.

David Yepsen:
Dr. Orazem.

Peter Orazem:
Well, I think that this is not the time to worry as much about the deficit. I think we should have been worrying about the deficit before. And so we're, we're coming into this problem running rather substantial deficits when we should really not have been running stimulative economic policies given the standpoint of the overall economy. But once you get to this particular state where a bunch of firms are going to be shutting down and a lot of people do not have savings to withstand that problem. I think doing some sort of government transfer payment program to try to help out the population is a very good idea. My concern would be that it's not targeted. So there are going to be sectors of the economy where you can pretty much do what you've been doing from home and you're not going to suffer economically. Whereas if you're in one of the service sector jobs where the firm was shut down and it was completely unexpected, those people are going to be in serious trouble. So if there was some way to target those benefits, I think that would be much more effective.

James Lynch:
Professor Orazem, I want to come back to you. I think the overarching question on people's minds as they watch this unfold in real time and in real life is simply how bad is this going to be?

Peter Orazem:
Well, China gives us one example. Although their economy is much more labor intensive than ours. Their manufacturing is much more labor intensive than ours. If you look at Wuhan province, they suffered about a 13% reduction in manufacturing, about a over 20% reduction in the service sector, restaurants and so on. In our case, I don't think manufacturing is going to be hit as hard from the COVID-19 problem. I think it's going to be hit harder by the fact that our partners, our trade partners, are going to be in serious trouble. But our service sector, the entertainment, the hospitality industry, the restaurant industry, that's about 22% of the jobs here in Iowa. And those are a lot of firms that are mom and pop establishments. It's hard for them to get by with one or two months of no revenue. Those are going to be the sectors that are really nailed.

James Lynch:
Professor Goss, bring it home for us. How is this going to affect Iowa in the Midwest?

Ernie Goss:
You know, James, to address the issue that you had asked Peter about, is 12 to 15% is the consensus. So we're thinking of a V shape recovery. But to your question of...we've done two surveys since the Coronavirus really got the attention of Americans. And both of them says sharp declines for Iowa, sharp declines for this part of the country. We, for our survey of rural bankers, bank CEOs in 10 States, including Iowa and Nebraska and other States in this area, took our largest one month hit since we began the survey in 2006. Of course, that takes into account the recession 2008 and 2009. This is a far bigger hit, but I expect it to be, the duration to be shorter. We're like, in my judgment, likely to see a rebound. Rebound is too strong a word. But see things improve in the third quarter of this year. Second quarter is already almost in the books. The first quarter is almost finished. The second quarter is almost, the damage has been done to a large degree.

David Yepsen:
Dr. Rosen, in addition to being an economist, you spent 10 years as a member of the Ames city council. So you've run for elective office and you've had some experience in local governments. Two part question. What's the effect of this crisis on local governments? And secondly, what can local governments be doing, if anything, to mitigate the impact in their communities?

Peter Orazem:
Well, there's several aspects of that. How are the employees in local government going to be affected? And the answer is the government sector is going to be relatively immune from the economic fallout. Uh, our resources are primarily driven by property taxes. The property values are not going to drop like they did say in the last recession where about half of the wealth loss in the U S was in the drop in property values. In this case, it's going to be much more concentrated in sectors, and it's going to be related to the government having to enforce restrictions on the opening of businesses. In some places, you have the National Guard being called out to enforce, for example, the shelter in place in new Rochelle, New York, for example. So I think from the standpoint of local government employees, they're not going to be hurt as badly as other sectors. From the standpoint of the government's ability to do its business. To protect the interests of its citizens. To provide public services and so on. Some of those services are going to be extremely challenging. So what do you do in terms of housing for the poor, or food services, when you're also concerned about the welfare of both the customer base and the people who are delivering those services? And I think that's where you're going to see bigger challenges. Um, if this thing drags on much longer, then you're going to have some serious problems. If it's relatively short, then I think the local governments are going to be okay.

David Yepsen:
Dr. Goss, same question to you. Are there things that local governments and state governments could be doing to mitigate the damage to our economy?

Ernie Goss:
A lot of it is already in the books. By that I mean, think about all the casinos in Iowa being closed. That's a tremendous source of state and local tax collections. And uh, if you look at sales taxes, I don't know about Adventureland. I would assume that's being closed. We'll see what happens in this coming summer. But think about all the travelers that come in to Des Moines, to Dubuque, to Cedar Rapids and they're renting cars where there's a fairly significant state tax that's being collected from those business travelers. A tourist, tourism. There's, you know, we're talking about occupancy taxes in the hotels. We're talking about a real hit to state government, and it's not being talked about. I don't hear much about it. There's going to be a big hit there and you're gonna have to dip into reserves. That's going to have to be done.

Peter Orazem:
Well, if I could make...Walmart just announced they want to hire 150,000 people. There's going to be a transfer of some demand away from what had been the hospitality industry, the restaurants, bars, hotels, back to other sources of food. And you're going to see the grocery stores actually benefiting from this. Amazon is likely to benefit tremendously from this in the form that people will now be shopping more online.

David Yepsen:
But do you agree with your colleague that state and local tax revenues are going to be hit?

Peter Orazem:
I think that they'll be hit, but it depends on how long this is going to last. And if in fact the transfers occur. Suppose there's a $1 trillion infusion of funds into the economy. That's 5% of our annual production, right? Uh, that's 18 days of production.

Ernie Goss:
That's if it's spent. That's, if it's spent. I mean, we're talk...

Peter Orazem:
It'll be spent.

New Speaker:
Uh, we'll see. I'm not as certain of that. In the last recession, what we had was, technically speaking, the velocity of money went down dramatically. In other words, individuals, they got the money. They just held on. The cash balances went up in the checking accounts and so on. Did they spend it? And they, as you're saying, I mean, the opportunity for us to spend right now is fairly limited. I mean, you know, I have luncheon meetings now that were in restaurants are now in the front seat of my car. I mean...and I obviously spend a lot less that way than I do in a good restaurant.

David Yepsen:
Kay.

Kay Henderson:
Mr Goss, every industry wants a bailout. Which one should get it?

Ernie Goss:
Education. Academics. Colleges and universities, of course. No, we've been bailed out for so long and so much that no. Certainly right now we're talking about the airline industry. What's not talked about as the cruise ship industry. There we're talking about potential bankruptcy. I mean, for example, I don't want to name any, but I did own the stock. Carnival cruise line. And what the investors have to watch out for is not, will it go back up. It will. But what about bankruptcy? And that's what individuals have to watch out for. Boeing aircraft, for example, is really a question mark right now as we speak today. Boeing aircraft for not just the coronavirus. They had other problems. But that part of the economy. Anything linked to tourism, anything linked to travel, is where there's dire, there's some real dire circumstances right now.

Kay Henderson:
Dr. Orazem, Do you see an industry sitting there that is asking for a bailout that shouldn't get one?

Peter Orazem:
Well, I think there's some that are not necessarily asking for bailouts that we have to be very concerned about. I mean, my own sense is that it's relatively easy for us to help the airline industry. There's fairly few firms and it's relatively easy for us to do an infusion of funds through publicly traded companies. It's much more difficult for the mom and pop restaurants and bars that are going to be hurt very badly by this particular process because they simply don't have the reserves. And they have costs that they have to expend. So they're going to lay off their employees. The unemployment insurance program, I don't know if we'll talk about that, but that's one of our sort of automatic stabilizers in our economy is the unemployment insurance system. So their workers will get a fraction of their previous earnings, and that's going to help a little bit. But they still have to make payment on their businesses.

David Yepsen:
James.

James Lynch:
Professor Goss, I want to come back to you. You talked a little bit about the impact on state revenues if people are not buying and paying sales tax. The governor announced this morning that she's suspending payment of property taxes, which will effect local governments more than state government. But I mean, assuming that people pay those taxes down the road, what's the impact on state government and state revenues? And are we gonna empty out the reserve funds, the rainy day funds to get through this? And then what happens if there's a flood next month in Western Iowa?

Ernie Goss:
The answer is yes, we are going to draw down those reserves. And I'll jump a little ahead on the, there's a real positive coming out of this. In other words, we in education, we're doing online programs now. We'll continue some of those. We're talking about government now thinking, well, okay, you can do some of this distance. You do it at your home office. So there's some, there are some real positives come out of this. So I think it will help streamline government. We'll face, the problem I envision is we use this as an opportunity to expand government. For example, at the federal level. I don't mean to not address your question. But the federal level. Larry Kudlow, the chief economic advisor to the president, a conservative, is talking about the U.S. Government taking stakes in private businesses through stock or bonds. That's nowhere. That's not to be done. Japan has shown us how that, what it does to an economy. It slows it down. Three decades now of zero to no growth and negative growth. But in terms of state government, there will be some cuts. There will be some reorganizations. And some of those are good. I think we're talking about, and we will see that at the local level as well. And as Peter is talking about property taxes, they're much more stable. Now, the governor is saying that you don't pay that for a while. I guess you will ultimately pay back.

James Lynch:
Eventually.

Ernie Goss:
Yeah.

James Lynch:
And I want to ask you, does state government have the capacity to get through this and deal with floods or tornadoes or those things that also happen?

Peter Orazem:
Well, let's hope not. Uh, I mean, there's only so many disasters you can handle at one time. The federal government in the United States is sort of the lender of last resort to state governments. They did chip in during the last recession because it's a lot easier for the federal government to borrow than it is for state governments to borrow. And I would see that if you had something like those national disasters, you would see the federal government stepping in. Perhaps more aggressively than they have in the past. But one of the things, and Ernie sort of alluded to this, we're already borrowing $1 trillion, right? And our interest rates haven't really responded in the past because among other countries, the Chinese and investors around the world were willing to buy U.S. Government treasuries. Well, those countries aren't doing that well. And so now we're going to be selling another trillion dollars worth of bonds. You're going to see, start seeing a creep up in interest rates. It's going to be much more challenging for the federal reserve to maintain low interest rates in this environment than it was in the past.

David Yepsen:
Kay.

Speaker 6:
Dr. Goss. Let's talk specifically about the farm economy. The price of some inputs may be low this year. You see fuel prices are at record lows. What's your analysis of what's going to happen to the farm economy?

Ernie Goss:
Well, you know, we were all excited about phase one with the deal with China and USMCA, and your senators played a big part in getting that approved. And things looked much rosier than they look now. As I said, our recent survey of bank CEOs in rural areas of 10 States, including Iowa, 60% said recession. And this was, this was a week ago. So I would say today it would be not six out of 10, it'd be seven out of 10. In other words, we're going to see a downturn in the rural economy. I don't think it'll be as nearly as significant as in the urban economies. But nonetheless, we're talking about, for example, cattle prices, pork prices, corn prices, soybean prices, the list is long. Those prices are low. So the fact is your input price is low, but your output prices are even lower. So farm income for 2020 is not nearly as bright as we thought it was going to be. And I think we're gonna have to do some belt tightening out there and we will see that. And farmers have responded quite well in the past and they'll respond quite well this year. But they're getting a little tired. And you ask about places for targeted assistance, the agricultural sector could, would be one of those sectors where there is a definite need. And what could be done that's not assistance is what about the tariffs? I mean we're still involved in what I would call a trade war. And we got out of TPP, we were signed into TPP. We exited it, and we didn't, we had nothing to repl.... We did have an agreement with Japan. That's not enough. Trade is a positive.

David Yepsen:
What's your answer to that question?

New Speaker:
I think we were already seeing weakness in the farm sector. And you're starting to see some farmers who were overextended. And I don't think we're in the same type of environment that we had in the early 80s, where you had to reschedule borrowing and lending. And a lot of banks now know how to do that a lot better than they did in that environment. I think you're gonna see a lot more of that, in terms of some of the non-farm small businesses having to reschedule loans. And I hope that we have some sort of way maybe through the small business administration or some of these other programs to try to help some of the smaller businesses. Not necessarily farm related, but are in these small towns that are going to find themselves over extended.

James Lynch:
We haven't seen stockbrokers jumping out of windows yet, but the stock market has really taken a hit in the last couple of weeks. Is this the time for people who have some cash to be buying stocks, Professor Orazem, given...

Peter Orazem:
I did. I bought a little bit too early.

James Lynch:
You did? OK.

Peter Orazem:
My own sense is that this is an economic blip that's not related to economic fundamentals. It's related to other issues. There's nothing that is that much different in terms of the fundamentals of the economy in March. In February, things look really good. I mean, the economic data in February, we added a substantial number of jobs. The unemployment rate is historically low. That's going to change. The only question is how long is it going to be before we can sort of regain our previous economic momentum? But also, are trading partners going to be hit worse? I mean, Italy was already at 0% growth. Germany was at less than 1%. France was less than 1%. Japan was less than 1%. Those guys are now going to be in recession. That's going to be a serious issue.

David Yepsen:
Excuse me, help us out, Dr. What's your answer to your own question? How long is this recovery going to take? Is that contingent on how long this crisis, this sickness goes on?

Peter Orazem:
Right. So, we're trying to moderate how many cases there are. And that drags on the amount of time it's going to take before we can regain our previous momentum.

Ernie Goss:
But we should probably say that you should not take stock advice, buying advice, from economists.

David Yepsen:
No, I understand.

Ernie Goss:
That said, what's usually advisable here... Even the best cannot time a bottom or a top. So what, and you bought this week. I bought this week. I'm going to buy next. Buy, it's called dollar cost averaging, as it moves down. You buy, you buy, you buy.

David Yepsen:
I was thinking more of the pain small businesses, and that people want to know how soon this will be over.

Ernie Goss:
This morning, right now, we're talking about the Congress talking about some huge programs, oriented to small business. That's a huge program. Huge.

Kay Henderson:
We haven't much time left. Dr. Goss, when we look back at this period, we've had Uber sort of disrupting things and a lot of discussion about how the economy's being disrupted. Businesses may learn that they can have their employees work at home. They don't need a physical structure. When we look back on this period, will the economy be reoriented by these two events?

Ernie Goss:
Oh, absolutely. We normally have a have a sort of a continuous movement in that direction. Here's going to be a disruption. It's going to be, in some cases a positive disruption. For example, universities are going to begin offering more and more online. We'll become more cost effective, which we need to do. That's universities, colleges, K through 12 education, particularly for rural areas, we're going to have to move in that direction. So there are some real positive outcomes to be had. But I like to say one thing before, we're talking about, prior to this downturn, we had a federal government that was running a deficit of one and a quarter trillion dollars. We had a federal reserve that was in expansive mode. The interest rates were one and a half to one and three quarters. So we were already stimulating the economy and now we've got this. So we have to, how many bullets do we have in that holster of the federal government and the federal reserve? That's the real question. One of the questions.

James Lynch:
People are talking about less travel, possibly fewer imports, greater reliance on domestic production. Professor Goss, is this the end of globalism?

Ernie Goss:
It's certainly an interruption. And we'd already seen that movement with President Trump and other world leaders as nationalism, what I call new nationalism, where we're seeing the ascendance of Navarro. That's Trump's chief, one of his chief trade advisers. And I think they're wrong. I think it's not the way to go. We're the most productive manufacturers. Farmers. We're the most productive nation on the face of the earth. We should engage, not disengage.

David Yepsen:
Dr. Orazem, what's your reaction to that?

Peter Orazem:
I don't think this is the end of globalism. I think that one of the lessons that's gonna come out of this is that you learn a lot from what's happening in other countries. And you can, certainly, the U.S. Economy is much stronger when we have strong trading relationships with our customer base, and we're much weaker when those relationships are disrupted. I don't think that there's any reason to rethink what our national or international status is as a result of this particular virus. We will always have illnesses, and being isolationists doesn't protect you from those illnesses. Remember, the Spanish flu started in Fort Riley, Kansas. We just called it the Spanish flu.

Ernie Goss:
And you're a Kansan.

Peter Orazem:
I'm a Kansan.

David Yepsen:
And I'm out of time. Thank you both for being with us today. Appreciate your insights.

Ernie Goss:
Thanks for having us.

Peter Orazem:
Thank you.

David Yepsen:
And we'll be back next week for another edition of Iowa Press at our regular times...Friday night at 7:30 and again at noon on Sunday. For all of us here at Iowa PBS, I'm David Yepsen, and thanks for joining us today.

Speaker 1:
[music]

Voiceover:
Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation. The Associated General Contractors of Iowa, the public's partner in building Iowa's highway bridge and municipal utility infrastructure. I'm a dad. I am a mom. I'm a kid. I'm a kid at heart. I'm a banker. I'm an Iowa banker. No matter who you are, there is an Iowa banker who is ready to help you get where you want to go. Iowa bankers. Allowing you to discover the genuine difference of Iowa banks.