The Corona Economy with John B. Taylor

interview with John B. Taylor
Friday, March 27, 2020

To watch the video, click here.


Peter Robinson: Welcome to a special corona virus edition, of Uncommon Knowledge with Peter Robinson. I'm Peter Robinson. We're trying something different, because we have no choice. We're using the online technology to record interviews. In the other box, is my friend and colleague, at the Hoover Institution, John Taylor, who is a just a remarkably eminent economist. John served on the council of economic advisors, under president Ford as a member of the council, of economic advisors under president George H. W. Bush, and during the presidency of George W. Bush, as under secretary, of the treasury for international affairs. He has published academic papers, that are endless and is the author, of what is known as the Taylor Rule, which is a sophisticated and elegant, but pretty accessible rule, for when the federal reserve, ought to expand the money supply, and when it ought not to do so. But John is also, despite that tremendous eminence, and the long list of credentials, here at Stanford, he may be best known and certainly best loved, for teaching an introductory freshman course in Economics, called Economics 101 and my notion here, my request to John was if he could simply take me, as a layman, as a particularly slow student, through coronavirus Economics 101. John, thanks for taking the time to join us.

John B. Taylor:  You're so kind, Peter, it's great to be with you, as always.

Peter Robinson: I should note that we only live, two tenths of a mile apart, but we're here in Northern California. We're in one of the six counties, that's pretty seriously locked down.

John B. Taylor: That's true,

Peter Robinson: And so we are gonna, do this from home.

John B. Taylor: We are more than six feet apart.

Peter Robinson: Yes we are exactly. Don't sneeze into the microphone, whatever you do. All right, so president Trump announces on March 15th, there are all kinds of questions, about what he is legally entitled to do, what local officials can do, but he recommends, and where it's appropriate for him as president to do so. He institutes effectively a lockdown. Shutting down large parts of the economy. This is almost two weeks ago. What happens to the economy when people are told, people in non-essential businesses are told to stay home?

John B. Taylor: Well, it has an immediate impact, because people are not going to restaurants, people are not getting on planes as much as they used to, people are not getting together, as much as they used to. So it has an immediate impact, and it already is beginning, to have an impact in the month of March. Really after economic activity is the client. It's quite understandable right? If you're not able to buy things at stores, you're not gonna record that energy and GDP. So that's impact. It's actually because of the corona virus of course, that the action is being taken, but in many respects, the damage is from the action itself.

Peter Robinson: I see, so how bad, again I'm just asking layman questions here. I saw, well, a couple of things that, so one bank is estimating a 20% hit to GDP, that the economy will contract 20%, in one month, and that in April, when the unemployment numbers come out in April, we may see the biggest jumping, on unemployment in American history. Does that sound right to you?

John B. Taylor: It's very hard to estimate. It's conceivable, the numbers won't be that large. Remember the first quarter is just finishing. It looks like it'll be somewhat negative, because of the month of March, the last month of that quarter. And then we go into the second quarter. So people are talking about these big numbers, and on annual rates, and if this, if the virus continues, it could be that way. I think that's why it's so important, to try to find other ways to deal with the virus, that don't actually end up closing markets. And there's a lot of emphasis on closing markets, and not enough emphasis on opening markets. And I think that emphasis could be put forward, a little more clearly. And the rationale is still there. You still stay within six feet, or outside of six feet range. You just find other ways, to do the transactions that are more opening.

Peter Robinson: Alright, now, so this brings us, to what the government aught to do. The federal government. We'll start with the federal government at least. 2001, I beg your pardon 2008, the Bush administration. Now you were there, or at least you were still advising the administration, the George W. Bush administration, correct me if I have these figures wrong.

John B. Taylor: Sure.

Peter Robinson: But there's, in 2008, there's a $152 billion stimulus, by George W. Bush in the form of tax rebate, tax rebates. People get money back. $152 billion just get sent out to Americans. Did that help?

John B. Taylor: Well, as people look at it after the fact, it didn't help really. People took that money and they saved it. It might've helped them individually, but it didn't stimulate the economy. The word stimulus was used, it's still being used. So that didn't work. And you can see lots of evidence for that. I did research on it myself. And so we're in, the possibility of that happening again, is very much there. So I think it's important. It looks like that's what they're going to be doing. Paying certain amount of money to individuals. Medium income, low income. I think it's important to do some extra things, so that this doesn't get staffed, stashed away. There's some emphasis on spending the money. And I think there isn't much emphasis on that now, but as soon as the bill is passed, what I can maybe later today or tomorrow, some discussion of, hey, this is an important opportunity, for you to take advantage, of the extra money you have, you're getting, and spending.

Peter Robinson: All right, which of course brings us to the fed, in the 2008 crisis, help me, again you're, on the fed you are one of the nation's leading experts, so I've, I'm sure I'll get this wrong, and if I'm asking the wrong question, just slap me around, and correct the question before you answer it. But I want to distinguish very carefully, between what the fed did, during the 2008 crisis, and then these various rounds of quantitative easing, that have taken place since the crisis.

John B. Taylor: Correct.

Peter Robinson: In the crisis itself, my memory, my impression is, that there was a huge effort, to flood the system with liquidity, because the immediate concern, was to keep the media of exchange open, keep markets functioning. Is that correct?

John B. Taylor: Yeah, they did that with these special facilities, commercial paper funding facility, et cetera. And that really kept the markets going. It meant that people could sell their securities, that otherwise wouldn't be stopped. So that was an important market opening measure. Not everything was done perfectly, but that was what, that was at that time. And there's similar activities that are going on now. They've got six or seven different facilities, which all have the purpose, of trying to make the markets open function better.

Peter Robinson: All right, and I'm trying to remember, back to my Milton Friedman and MV equals PQ, but we're not worried at least in the short term, about inflation, as a result of this huge gusher, of liquidity into the system.

John B. Taylor: Well, I think it's

Peter Robinson: Oh, we are.

John B. Taylor: Peter, you're right. It's important not to forget that, because those are the basics of economics. And you always have to worry about what's next. That's why I think that there needs to be a strategy. Yes, it's important to keep the markets open, keep them running and the fed has a role there, sometimes called lender of last resort. But it also has to make sure, that it doesn't just create, so much of increase in the money supply, that the inflation is left under, out of control. And it's related to the deficit, because the stimulus package is raising a deficit. And so we can't be in that mode at all time as well.

Peter Robinson: All right, and then the other, again, I'm going back to Economics 101. I keep on trying in my own mind, as I think this through, I'm trying to distinguish, between these two large categories. The real economy, goods and services, and the financial economy, which is money. Obviously they're related, but they're not the same thing.

John B. Taylor: No, they're not the same scene. And I think what you, what the concern is, are people will panic. They'll take their money out of banks, they'll stash it away, and they won't spend it. And that's what happens if the markets are not working well. We've seen that in the past. So you wanna make sure that financial side, doesn't make the whole economy even worse, than otherwise would be. I think actually just met. I think some of the comparisons are useful, even back at the 9/11, 9/11 was a surprise.

Peter Robinson: Right.

John B. Taylor: There was actions put together very quickly, to deal with it. And I think they were effective. We didn't have a big calamity. The economy went along pretty well. And one thing at that time was always an emphasis, on keeping markets open. We were trying to freeze the assets of Al Qaeda, and the people did the damage, but at the same time, this is an open market, open economy. So that those went together, and I think that kind of thing was helpful then, and it could be helpful now as well.

Peter Robinson: Okay, so I watched the stock market over the last week, and we get over the course of 10 days or so. We get a sell off, of something like a third, 30% huge. Although of course in October 1987, there was a one day sell off, that was almost 30%. But still, nothing, we've seen nothing like this, that kind of sell off since 1987. Yesterday, the market goes up over 11 points, the biggest gain in 87 years. And today who knows where it'll be, when you and I stopped talking. But as we're talking now, I just checked, the market is continuing to rise. Alan Greenspan, when he was fed chairman, famously criticized irrational exuberance. Was the sell off last week, irrational pessimism? What, what,

John B. Taylor: No it...

Peter Robinson: To what extent is the market saying, you know, we can see the economic light, at the end of the tunnel, and to what is the extent, is the market just saying, whoopee! The fed is going to give us money. This huge gusher of fiscal activities, this huge bill is going to come through, has nothing to do with a real economy. Those guys in New York, just see a gusher of cash headed their way.

John B. Taylor: I think it has a lot to do with the real economy. People are concerned about these big negative numbers, that cuts on the profits, and so it's a real effect. But on top of that, you're quite right. There's these actions back and forth. There's, maybe a really positive about the fed's move, then disappointment about the fed's moves. It looks like the budget's moving ahead, then it's not moving ahead. I think yesterday there was some, also a lot of discussion, about maybe relaxing some of these constraints. Came out of the white house.

Peter Robinson: Constraints on the economy.

John B. Taylor: Yeah... 

Peter Robinson: And people...

John B. Taylor: And that that may be, have been a factor as well, and certainly it wasn't in some people's mind.

Peter Robinson: Okay, It's just allergies John, nothing worse than that.

John B. Taylor: Okay so far away, don't worry.

Peter Robinson: Okay, let me take you through, several of the main actors in Washington. Give me a grade, tell me how they've done and what they, what you wished they'd done. The fed, the fed under chairman Jerome Powell. How have they done so far?

John B. Taylor: They've done far, I think the initial action, a week and a half ago was a little, not very well articulated. Since then it's been...

Peter Robinson: The initial action was cutting the interest rate, by half a ...

John B. Taylor: Quite very rapidly yes.

Peter Robinson: Right.

John B. Taylor:  And the facilities were drawn out fairly slowly. But I would say it's good, but there needs to be a better description, of what the whole strategy is about. You and I talking about strategy, how to make sure it doesn't last too long. How to make sure there's liquidity in the system. Let's think about what we're doing, on the real economy and the financial side of the economy. I think more of that would be useful. I mean from the fed, the other central banks have been doing it, but that would be the thing that I would mention now. I think that on the healthcare side, people made the right decisions, they're following it very closely, getting the best data they can. And on the economic side, we've talked the budget. I worry that some of the impacts, are not gonna be as strong as people hope. And that's why I wanna bolster them, with some things, that make people spend this a little bit more, that keep the economy...

Peter Robinson: How would you do that, John?

John B. Taylor: I think it's a matter of, a lot of it is a matter of attitude. How often have you heard statements, that's the market open, other than take action and close markets. Well, there's a lot of online stuff. Amazon is hiring people, FedEx is hiring people. And that's because there's demand for buying things online. And could, more of that could be done. Let's take some of the money that people will get, and buy an exercise bike, or something like that, which you can do. You can even buy a Tesla online, but more realistically, a lot of things you can do, and I would do that kind of stuff to make...

Peter Robinson: So you want the president, for example, to go out on these briefings and say, look folks, we have enacted this huge package. Please, you're doing an act.

John B. Taylor: Yeah.

Peter Robinson: You're doing a patriotic act, if you spend some of it.

John B. Taylor: Yes, I would put it that way, maybe he'd do it somewhat differently, but that's the message, and that would make markets more open.

Peter Robinson: I see, what about this, as you talk, I think they're holding the votes, and it looks as though this package, they're calling it a stimulus package. I don't know what else to call it. It looks as though it's going to come in, at around two trillion dollars. And of course it's laded with all kinds of nonsense. Latest item, I saw people, there are a few people, who were actually reading the bill. Probably not many in Congress, but there are few people who are reading the bill, and they're tweeting about what they find.

John B. Taylor: Yeah.

Peter Robinson: And this $2 trillion bill, which is supposed to address the Corona virus crisis, includes $100 million for the arts, for example. Now, so how is it so important, that we have a vast stimulus package, that the president ought to sign the damn thing, even though it contains a lot of garbage, and everybody knows it? Or is this so close to a repeat, of what the Bush administration did in 2008, which just really didn't work. That he ought to say, no shut it down, I'm not signing that damn thing. As long as the fed provides a backstop to the markets, and keeps the systems of exchange functioning, we're okay.

John B. Taylor: So there's some things in the bill, that are important. The unemployment compensation is increasing, the size of that and maybe they'd gone too far, but there's some lending...

Peter Robinson: We've gotta have that.

John B. Taylor: Very troubled industries. So I think those are there. I think the questions I have are these one time payments, they won't work unless they bolstered by other things. And this other stuff you're mentioning, I haven't read every line, was it 1400 pages? And they're gonna be, there's gonna be that. And someone's saying, the unemployment compensation is so large, you get more by not working than working. That's obviously not good for incentives either. So it's not gonna be perfect. I think it'd be best if they go ahead and finish this, or the magnitudes are mind boggling. I think when we look through the impact on the deficit, it won't be that large, but it will be large. Remember we already had a trillion dollar deficit.

Peter Robinson: Right.

John B. Taylor: When this began.

Peter Robinson: All right, now last sort of series of questions here are of the following nature. What do you say to so-and-so? All right, here's one. My wife comes home from her walk this morning. She and several ladies have gotten together, to go for walks each morning to keep from going crazy. I dunno what your wife is doing, but people have to do something to keep from going crazy. We're all going stir crazy. And the story is as follows, there's a restaurant, I'm sure you know the restaurant, over in Atherton. And like all the restaurants in town, it's closed because governor Newsom told the restaurants to close down, but it's still open for takeout. So one of my wife's friends places an order, and she goes over to pick it up the other evening, and the owner comes out and puts it in her hands, and bursts into tears. Because it's the first order, the first business he's had in three or four days, and the guy's running short on cash. He's this close to losing his business. That's real suffering. And of course it's happening across the country. What do you say to a small business owner, who's been shut down, and is running out of cash?

John Taylor: I think the first thing is, you encourage more of the actions that your wife took. Right, now why can't more people do the takeouts, so he's gotten more than one customer. So that's what I think, that's really gonna different. There's also those small business loans that are possible, but I don't think that's like a fix it, a rubber band. The thing is to change the attitude. So people are not worried about ordering takeout, and they do more of that. It's still not gonna, you know, make people completely hold against reassure, but that would look up things. That that's like a market opening right?

Peter Robinson: Yes.

John B. Taylor: You are not going to the restaurant, but you gonna buy this stuff anyway. And there's lots of examples like that we could be doing. I think... There's also just maybe I think there's lots of things that we should do now that we maybe should done in the past, but there's more of a reason. So there's a lot of occupational licensing rules, out there that people can't go into certain businesses, unless they take long tests and courses, even landscape and things like that. That's a constraint on labor markets, and a constraint on people finding other things to do. We could relax some of those. Those are, it's not a partisan issue. The Obama administration wanted to take away some of those restrictions and it's good economics. So I think we should be looking for those kinds of things too. It is a stimulus. It's not the usual kind of spending money, but it could make a real difference.

Peter Robinson: And what about payroll tax cut? What about, we've talked about this $2 trillion package, of money that's going to be gushing out, to the American people, into businesses, in one way or another. But what about cutting taxes? Is this just, I hope there's no room in the budget to cut taxes. What about that?

John B. Taylor: It's a very good question. I think now the rebates, the one time payments, are really not cutting taxes, because you get it no matter what. If there’s a way to reduce the marginal tax, or at least not increase it. So here's an idea. Couldn't there be an agreement? No tax increases, for the next two years, three years or something? Bi-partisan? One side we won't have trouble with that, but the other, and that would be a stimulus. That would be a great thing. You suddenly, hey, well this talk about raising taxes. That's off the table at least for a while. I think if there could be some agreement about that, and may be some of these things, could be informal agreements. It doesn't have to be legislation, but the side said that, I think it'd be, if we start to listen, then it can make the difference.

Peter Robinson: Right, and what do you think, about the public health officials? Do you, I'll show my own thinking on this one.

John B. Taylor: Good.

Peter Robinson: All I'm doing is sitting at home, trying to think this through. This is not expert opinion. I could very, very well be wrong. But I think back, to the early reports about president Trump. Before the fire is hit in full, and the press was mocking him into writing him, because he wasn't taking it seriously enough. And it looks to me as those, his instincts were, that there was a danger of an overreaction. And now we see him today, he gave out an interim view to Fox news. I think it was yesterday saying, he would love to get the country back to work by Easter, which is April 12th. He is chafing under these strictures, that the public health officials are placing on him. And so I am just thinking to myself, if you're a public health expert, and you've spent your entire life devoted to, you've devoted your entire life to saving people's lives. There's no real reason, you should be expected to know much, about the way the economy works. The incentives for you in quite, in terms of your own self esteem, and your reputation, within your profession, is to advice the president to shut the economy down, and send everybody home, because you're trying to save individual lives. And what you have in your mind, is a picture of a hospital where there are, all the ICU units are taken, and people are starting to line up in the hallways, and they're choking to death, because they don't have ventilators. There's nothing wrong with that.

John B. Taylor: Yeah.

Peter Robinson: But that's the human reaction. Whereas the president, Trump or any president, the president is the person, who has to look at the whole picture, and he sees, he knows what, If Trump, now would come specifically to Trump, because he knows what it's like to to run a business, and to deal with contractors, for whom each two week their salary matters to people. He's used to dealing with people, who have to make it the rent that month, or make their mortgage payments. My own feeling is, I'm kind of, would like to see the president push back, a little bit maybe against the, they just face different incentives. The health officials are bad people, but they face different incentives. It can't be the case, that if we shut down the economy, for another two months, we'll actually be doing, it could be the case, but it doesn't look to me, it looks to me as though, we're running the risk of doing more harm than good. It's as simple as that.

John B. Taylor: Well you got a very good point, and people are worried about that all over the place. I think the healthcare officials, I mean, let's sympathize, they're a tough situation. Medical care workers, it's very difficult, very risky. So you can see why that, they'd have that attitude. But I think if you have the economics integrated, more with the health decisions, it'd go a long way to dealing with the problem, is your issue. You don't, you're not that, you wanna eliminate the restrictions. You wanna make them less confining, less closing, more opening. And I think there's many ways that can be do that. I'd like to see in the next edition, of the 15 day message, that the president would put out, I think that was helpful, to have more of these things. Some of the tick points, let's use some of this money to buy things. Let's find ways, that people can use online messaging, or online purchases more. Let's find a way now that we have more tests, that people can maybe go to a restaurant or do more takeout. There needs to be more of these things in the message. And I'm pretty hopeful that when the next one comes out, four or five days. It started 15 days, it's 15 day thing, that you'll see more of that. So it's not that you wanna override these medical decrees, you wanna make them work better. And I think that means economics, and the health has to work together. I would go back to the 9/11 attacks. It was incredibly frightening, the stops are all pulled out, there was talk about stopping all traffic. We had all our online stop remember? But there was all this simultaneously, let's not hurt the economy. Let's keep the economy going as much as we can. I think we need more of that now, and the documents, and the expressions in the statement should reflect that.

Peter Robinson: John, do you have any sense, even any instinct, about how long it will be, before we get back to something that feels normal?

John Taylor: Well if we reach a peak, a visible peak, on the disease, I think it'll come pretty quickly. I think people haven't seen that. They see the curve is still moving up, we haven't seen any kind of a slow down. I think when we see that, you'll be able to see light at the end of the tunnel. And some of these analogies, this were an incredible turbulent period. The economy's slowing down, but there's nothing permanent about it. As long as we don't make it permanent, so we can hire people back again, people can start going give classes again. And common knowledge will be in person, rather than on the video. All those things will happen very quickly. We could do it tomorrow if the situation change.

Peter Robinson: Right, so that was, that's really sort of my final question is, what is the permanent damage from this? And you're at your answer is there need be almost none.

John B. Taylor: I think you should think about it more positively. There may be some positive things about this. People every day I'm getting messages, try this internet, try this idea, new products. I think it's best to be optimistic here and start late. Sorry, we don't know for sure, but people are rising to this occasion, and they're thinking of different ways to produce, different ways to transact, different ways to work. And it's been there for a long time, but I think this may be an impetus, if you like to mold these things, and it will be better if this occurs that that way.

Peter Robinson: John Taylor of the Hoover Institution, my colleague and friend, I'm happy to say, and the legendary professor of Economics 101, thanks so much.

John B. Taylor: Thank you, thank you, Peter.