What Will Our Economic Recovery Look Like?

Obama's top economist: "I expect us to look like we’re on the ‘V’ trajectory, but that ‘V’ will only get us halfway."

The economic toll of the coronavirus has been almost as staggering as the death toll, and has been the driving force behind calls for various governors to reopen their states to economic recovery. As they do, can we expect the economy to recover quickly? After all, a pandemic that forces businesses to close for the sake of public health is very different from a cyclical recession. If the recovery is as steep as the downturn, could that help Donald Trump and hurt Joe Biden in the 2020 election?

This anxiety for Democrats came to a head this earlier this week in a piece for Politico by Ryan Lizza and Daniel Lippman: “The general election scenario that Democrats are dreading.”

The article highlights a growing fear among high-ranking Democrats that—according to top Obama administration economist Jason Furman—“we are about to see the best economic data we’ve seen in the history of this country.”

Nearly 40 million Americans have filed jobless claims over the past 10 weeks as the coronavirus pandemic has unfolded, and the most recent Labor Department report pegged the unemployment rate at a staggering 14.7 percent, though even that is likely an underestimate. GDP contracted at a 4.8 percent annualized rate during the first quarter, and the nonpartisan Congressional Budget Office (CBO) expects that figure to lurch closer to 40 percent in Q2. But in terms of rates of growth, such a low starting point leaves much room for improvement in the five months between now and Election Day.

As the economy has slipped, so, too, have President Trump’s poll numbers. After cresting at 45.6 percent in RealClearPolitics’ national polling average on February 20 (compared to Biden’s 50.4 percent), Trump now sits at 42.4 percent (compared to Biden’s 47.7 percent). This drop in support likely has more to do with the president’s handling of the public health situation than the economic one—polling shows voters still tend to trust Trump more than Biden on economic matters—but Furman’s predictions of economic rebound have some Democrats spooked.

“This is my big worry,” one former Obama White House official told Politico. They added that concern among Democratic elites is “high, high, high, high.”

But Furman’s economic outlook is not necessarily as rosy as some headlines floating around the internet this week made it seem. In an interview with The Dispatch on Wednesday, he likened the country’s current economic emergency partly to a natural disaster, partly to a financial crisis. “The part that’s like a natural disaster will be solved relatively quickly, and the part that’s like a financial crisis will take many years to solve,” he projected. “I expect us to look like we’re on the ‘V’ trajectory, but that ‘V’ will only get us halfway. And so it’ll look like this incredibly rapid decline in the unemployment rate—from say 20 percent to 12 percent—but then the next 8 percentage points will take much longer than the first eight percentage points.”

The same CBO report that expects record GDP contraction in Q2 forecasts record growth in Q3—23.5 percent on an annualized basis. If we do make big strides on the jobs front before November, Trump’s electoral prospects may look very different than they do right now. “I think politically and psychologically, there will be something different about a 12 percent unemployment rate if you have come down from 20 versus you have gone up to 12,” Furman said. “It’ll still be very high unemployment rate. It’ll still be an economy in a terrible situation. ... It’s just different than just it rising to 12 percent.”

The Trump campaign blasted out the Politico story with its own headline: “Joe Biden is Rooting Against Economic Recovery.”

“Before the coronavirus, Democrats tried to talk the country into a recession, and now they’d like to see the pandemic’s impact linger as long as possible,” the press release reads. “It’s no wonder Biden is supporting blue state lockdowns that could drag down the economy and preaching sit-down-and-shut-up economic misery while laughing off experts who may predict otherwise: a booming economy would be bad news for Biden’s campaign.”

Furman—now an economics professor at Harvard University—took umbrage with that characterization. “The only people I’ve seen who seem to want the economy to fail are the administration, which doesn’t seem to want another round of major action to help the economy,” he told The Dispatch. “Nancy Pelosi, if she got her way on state and local assistance, the economy would be in better shape in November than if she didn’t get her way. … Broadly speaking, if you look at Democratic wonks, or Democratic political leaders, almost all of it has been, ‘Let’s do more. Let’s do it sooner.’”

House Democrats passed the HEROES Act—which, in addition to a laundry list of Democratic priorities, would provide nearly $1 trillion to state and local governments to cover budgetary shortfalls—earlier this month, but the president referred to the legislation as “dead on arrival.” The Washington Post reports the White House is softening on aid to states, which some Republicans have referred to as “blue state bailouts.”

The Trump campaign—unsurprisingly—pushed back when presented with Furman’s most recent comments. “Democrats and their allies in the media have rooted for the economy to tank because they believe America has to fail for them to win,” campaign spokesman Ken Farnaso told The Dispatch in an email. “Democrats celebrated blocking funding for the paycheck protection program as President Trump fought for it. Make no mistake, the best remedy for our economy right now is the safe reopening of our states.”

Asked to rank his priorities for the next package of relief legislation, Furman listed state and local aid, followed by extended—but phased down—unemployment insurance and additional business loans—not grants—from the Federal Reserve.

The CARES Act’s additional $600 per week in unemployment insurance was the “right provision for the time” and necessary to protect consumer demand, Furman argued, but he advocated for a reduction in benefits when the clause expires at the end of July. “If you continued it at the full $600, I think that would be an issue because it’s a potentially unsustainable level to continue at,” he said, though he noted that the biggest problem in the economy right now is a lack of jobs, not workers to fill them. “Switching to replacement rates, like a 90 percent replacement rate, would be the better way to handle it going forward.”

Looking ahead, Furman believes the country is in for a “partial bounce back” followed by a longer “slog.” GDP, he says, won’t return to its pre-crisis level until the end of 2022; GDP per capita until 2023 or 2024. But in the immediate-term, as states begin to open up their economies, he predicts rapid job growth and economic expansion—the “low hanging fruit.”

“Then the harder stuff will come second.”

Whether it’s President Trump or President Biden leading the country through the “harder stuff” will depend in large part on how quickly things bounce back in the coming months.

Photograph of Jason Furman by Zach Gibson/Getty Images.