Our recent MassBenchmarks' editorial board meeting was unlike any other in the over two-decade history of our journal. Our first ever virtual meeting was motivated by the need for social distancing in recognition of the growing public health threat presented by the COVID-19 pandemic. The discussion focused on the wide variety of ways in which this public health emergency is likely to affect the economy, with special attention to the ways in which the ongoing crisis can be expected to weigh on the Commonwealth's economic and fiscal outlook.

For the last several years, the US and Massachusetts economies have experienced a sustained period of economic stability, growth, and prosperity, with the main concerns involving labor supply and uncertainty in federal policy and international relations. It was in this context that the Board met on Friday March 13th, two days after the World Health Organization (WHO) declared a global pandemic related to COVID-19 and the spread of the novel coronavirus. While it is too early to identify the full range of the impacts that the pandemic will cause, the recent performance of global equity and bond markets suggests that the economic consequences are likely to be very large and widespread.

In recent weeks concerns about the spread of the virus and its expected negative economic impacts have taken their toll on investor and business confidence. By Friday March 13, most employers and major institutions had adopted "social distancing" policies which, while a wise and necessary public health strategy, have served to disrupt daily life significantly and greatly reduce day-to-day economic activity. Mandated closures put in place over the weekend further diminish activity levels.

Noticeable job loss will occur because of these changes, which could result in significant reductions, in consumer and business demand for a wide range of goods and services. The cancellation of small and major events (including the suspension of the NBA and NHL seasons), the departure of large numbers of residential students from college campuses, and the sudden and large increase in worker telecommuting all have huge implications for the leisure, hospitality, and tourism industries. In addition, the recent statewide school closures and prohibition on in-person service at bars and restaurants through April 7th that are designed to reduce the spread of the virus and "flatten the curve" of the number of cases occurring at once will further shrink economic activity. A similar fate is expected for other businesses that rely on discretionary consumer and business spending. As these industries disproportionately employ workers on an hourly or on-call basis, steep declines in demand at such businesses will lead to reduced wages and outright layoffs.

The large and costly disruption to global supply chains associated with the widening impact of the global pandemic presents an ongoing challenge for the Commonwealth's sizable advanced manufacturing and high technology sectors. Should these conditions persist or worsen as expected, it will become increasingly difficult for many employers to maintain their payrolls which could lead to a significant reversal of fortune for the state labor market. Job losses could result in a negative feedback loop that sends both the nation and the state into a recession. These and other concerns were discussed at some length during our deliberations.

A great deal of uncertainty surrounding the COVID-19 pandemic remains. The outlook for the remainder of 2020 is as much a function of epidemiological as economic conditions. The critical economic questions regarding the pandemic are: How long will it last? When will the peak occur? How effective are the national, state, and local responses to this crisis? Despite the enormous uncertainty presented by the current situation, the Board agreed there has not been a risk to the economy quite like that posed by the COVID-19 pandemic in our collective memory. The board also expressed broad agreement concerning assessments of the near-term outlook, as follows:

• A global recession is a virtual certainty
• The depth and length of the recession will be driven by the evolution of the virus which will affect when people can resume their normal activities.
• The impact on the US economy will be felt on both the supply and the demand side.
• The impact on the state economy will be both direct, from the essential shutdown of public gatherings and reduced commerce, and indirect, from the significant slowdown of the national and global economies.
• Economic policy should be targeted towards populations and sectors most likely to experience disruptions in income and business activity, particularly hourly workers in the service industry, as well as those working for small businesses, who cannot work remotely and have no paid leave benefits.

The domestic economic impact of the coronavirus began as a supply shock. The disruption of international supply chains, notably intermediate and manufactured goods originating from China, caused many US companies to go into crisis management mode. The last time the US experienced a serious supply-side disruption was the oil price shocks in the 1970s and 1980s. At the time, those economic shocks were followed by spikes in inflation and unemployment. While inflation currently appears to be well contained, sizable job losses appear a very real possibility in light of recent developments.

Compounding this supply shock are the growing demand side impacts associated with ongoing social distancing efforts and voluntary isolation that have effectively ended all public gatherings and events for the foreseeable future. These impacts are far more significant than any supply-side effects at this point. Since the Board's March 13 meeting, these voluntary responses have been replaced by mandatory closures in many locations. They can be expected to have a large and negative impact on the state and national economy, particularly on the prospects for the leisure and tourism and food services industries, among others. Small businesses that rely on steady cash flow are likely to go out of business, and temporarily shuttered businesses are likely to shed workers.

Exacerbating these problems are deep disruptions in both energy and financial sectors. Oil markets have been roiled by a price war. In the past, a precipitous and deep fall in oil prices would have been a boon to American consumers, the equivalent of a tax cut that served to put more disposable income in the pockets of consumers. While this is still the case, the structure of the US oil industry has changed drastically in the recent past. The advent of hydraulic fracturing, better known as fracking, has immensely increased both production and reserves of domestic oil and natural gas. A drop in oil price of the recent magnitude will have a severe impact on the fracking industry. While reduced fracking may be seen as a welcome long-term development in light of climate change, the domestic oil sector is heavily leveraged, making it vulnerable to credit defaults with potentially sizable negative effects on the broader economy.

The financial sector writ large is also experiencing serious volatility and disruption. The Bear Market arrived rather dramatically last week and credit markets have at times become immobilized recently. The Federal Reserve intervened in a big way in credit markets last week; over the weekend, they took the dramatic step of lowering their target interest rate to near-zero and announced plans for large-scale purchases of Treasuries and agency mortgage-backed securities.

At this point, it is difficult to determine, let alone project, the depth, spread, and duration of the economic downturn that is currently beginning to play itself out. This picture may become somewhat clearer as more testing is done. While there are important fiscal and social policies that will be critical to responding to what comes next, at this stage of the crisis the best policy advice will come from public health experts. We encourage our state and local leaders to give them the resources they need. The state currently has a substantial rainy-day fund which could provide an important source of resources. But the state government is obliged to balance its budget and significant federal financial support will be essential to minimizing the economic disruption and human suffering associated with this crisis. Of particular importance will be efforts to ensure the continued health of municipal and state bond markets and support for households experiencing income disruption as a result of the pandemic and its aftermath. Low-income households are particularly vulnerable to both the health and the economic consequences of the COVID-19 pandemic, especially as compared to their neighbors with better access to health care, and paid leave and unemployment insurance benefits.

The right policy should build on the best available evidence and reinforce consensus public health guidance, while providing fiscal support for people and businesses that suffer financially as a result. As our colleagues at EconoFact and others have recently pointed out, social distancing can help to reduce the intensity of the spread of disease and help the health care system be better prepared to help those in the most need for care.¹

But just as the public health crisis demands a public health solution, the associated economic implications demand significant and targeted public policy intervention. We believe targeted approaches will be more effective than broad-based fiscal policies such as a payroll tax cut that is unlikely to directly benefit those most vulnerable to being displaced as a result of the pandemic. For example, a payroll tax cut will not reach persons who have lost their jobs. Examples of targeted interventions worth the serious consideration of state and federal policymakers include the following, many of which are included in bills under consideration by federal lawmakers:

• Free and broad based coronavirus testing on demand to determine where resources are most needed
• Assistance with medical co-payments (and other efforts to increase health care access)
• Universal paid sick time benefits for all workers (including contractors and gig economy workers)
• Federal paid family leave program
• Special loan funds for small and medium sized business to help them survive periods of inactivity associated with the crisis.
• Support to states for special unemployment compensation that waives the job search requirement and replaces lost wages due to lost hours
• Supports to ensure housing stability such as temporary suspension of evictions for rent non-payment
• Expanded food assistance for impacted households, with special attention to elders and to low-income children deprived of meals due to school closures. This could include expanded SNAP benefits as well as meal pick-up at school and community locations.
• Providing stimulus to help support impacted households with direct payments so that people can purchase the goods and services they need
• Plan now for needed infrastructure projects — roads, bridges, hospitals — to get people back to work as soon as possible once the need for social distancing abates

State and local governments will be on the front lines of this crisis and face resource constraints as a result of balanced budget requirements. Federal support will be required. In today's interest rate environment, the federal government is well positioned to provide it given the necessary will.

 

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its meeting on March 13, 2020. It was prepared by Executive Editor and UMass Amherst Professor Robert Nakosteen and was reviewed and edited by the members of the Editorial Board. While discussion among the Board members was spirited and individual Board members hold a wide variety of views on current economic conditions, this summary reflects the consensus view of the Board regarding the current state of the Massachusetts economy.

MassBenchmarks is published by the University of Massachusetts Donahue Institute in cooperation with the Federal Reserve Bank of Boston. The views expressed are not necessarily those of the University of Massachusetts or the Federal Reserve Bank of Boston.

¹ The Board's discussion was informed by work from Michael Klein and Miriam Wasserman of The Fletcher School, Tufts University and EconoFact, Coronavirus and the Health of the U.S. Economy, https://econofact.org/; and recommendations from Dr. Paul Biddinger, Massachusetts General Hospital Endowed Chair in Emergency Preparedness and director of the MGH Center for Disaster Medicine, and Eric Rosengren, Ph.D., president and CEO of the Federal Reserve Bank of Boston, Employer Responsibility in the Time of Coronavirus: A Joint Perspective Boston Fed's Rosengren and MGH's Biddinger say risking inconvenience now can reduce impact later https://www.bostonfed.org/news-and-events/news/2020/03/esr_coronavirus-article.aspx.