Obama's former top economist tells us why it made 'no sense' for the GOP to pause stimulus spending — and breaks down what should be in the next aid package

  • Unemployment remains high and new jobless claims are still above 1 million almost five months into the coronavirus pandemic.
  • Former top Obama economic advisor Jason Furman says Republicans made a mistake in assuming the economy would recover on its own without further government spending.
  • "They've recessed without having acted when the unemployment rate is the highest it's been since the Great Depression," he said of Congress in an exclusive interview with Business Insider. "It's not like anything I've ever seen before," he said of Congress.
  • Visit Business Insider's homepage for more stories.

Five months into the coronavirus pandemic, the American economy remains in a fragile state with unemployment high and weekly new jobless claims lingering above 1 million.

The devastation from the pandemic far outpaces the 2008 financial crisis, another national emergency that Jason Furman has experience with. Now a professor at Harvard University, Furman helped shape the Obama administration's $800 billion stimulus package during the recession in 2009. He was later appointed to head the Council of Economic Advisors.

Business Insider first interviewed Furman in March as the economy cratered due to the pandemic, and checked back in this week for another wide-ranging discussion. Topics included: how long it could take for unemployment levels to return to normal, the lack of a stimulus strategy from the White House, and whether direct payments and boosted unemployment benefits was effective in boosting the economy.

This is a transcript of the interview between Furman and Business Insider. The interview has been edited for clarity and length.

Zeballos-Roig: Congress is deadlocked on stimulus legislation and it doesn't appear likely there'll be a deal anytime soon. And we've seen some key provisions of the CARES Act expire, such as the $600 enhanced UI payments. How big of a hit would the economy suffer if there's no spending package to replace it?

Furman: If there is no package to replace the CARES Act, tens of millions of people will suffer quite a lot from lack of income, inability to pay rent and mortgages and the like. Ultimately, the economy will suffer too in the form of lower economic growth and higher unemployment.

Zeballos-Roig: Back in March, you told me it was a problem after the recession that many lawmakers in Congress, particularly Republicans, grew tired of fiscal stimulus. Is that what we're seeing now? And are you concerned about economic damage stemming from the pandemic being permanent without further spending?

Furman: Yeah, after the financial crisis, people grew tired of fiscal stimulus and fiscal support too soon. Here, it's a little bit different. I think it's less that people are tired of it and more that Republicans are very optimistic about the trajectory of the economy. The unemployment rate's come down very quickly and I think they've made the mistake of thinking it will continue to come down quickly so we don't need to do something.

And an important reason the unemployment rate has come down so quickly is a huge amount of economic support that we've had.

Zeballos-Roig: And how long could it be before the unemployment rate falls below 5%? What about single-digits?

Furman: We could be in the single digits before the election. Below 5%, I think that would take five years. The initial part of the unemployment rate dropping can happen very quickly because people are being called back to jobs that they were temporarily laid off from. But for all the people that need to find new employers or even new industries or occupations that is a very, very slow, protracted process.

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Zeballos-Roig: Given where we are in the economy, since it's displayed signs of weakening, would you push Congress to renew the $600 weekly federal UI benefit? That amount faced fierce resistance from Republicans arguing it disincentivized work, though that's been challenged by several studies recently.

Furman: I think there is no evidence at all that the $600 discouraged work in April, May, and June. I think it's a legitimate question whether it might discourage work in November, December and January when the economy will be different.

And also part of why it didn't discourage work is people expected it to be temporary. And if they expect it to be permanent, maybe it would affect behavior differently. I don't think being concerned about the $600 is at all crazy, even if it's not merited. The $600 dollars was clearly in retrospect the right number for the last several months.

This time, phasing it down over time or as the unemployment rate comes down might make sense.

"I think it's baffling the White House didn't have a plan"

Zeballos-Roig: Several months ago, both Republicans and the Trump administration argued that it was necessary to press pause, to see whether more spending was necessary to shore up the economy. Now they agree that it's needed, but the president kept undercutting stimulus negotiations when they were happening.

Have you been baffled by President Trump's apparent lack of a plan for another rescue package given that he's up for re-election in the fall? What's your view on this?

Furman: I think it's baffling that the White House didn't have a plan. I think it's baffling that the Senate Republicans didn't come up with a plan until the very last week. I think it's baffling that the president and Senate Republicans aren't on the same side. I thought that Congress was going to do this at 11:59 PM on July 30th. That's what normally happens.

They've recessed without having acted when the unemployment rate is the highest it's been since the Great Depression. It's not like anything I've ever seen before. In the Obama administration, we had these fiscal cliffs, we went right up to them and we shouldn't have, we should have dealt with them weeks or months in advance. We went, right, right up to the deadline. But never went over the cliff. Here we did.

Zeballos-Roig: It was last-minute, and by the time they unveiled their plan, it was virtually unavoidable to prevent benefits from expiring because it takes weeks to reprogram state benefit systems.

Furman: Yeah, and waiting to see how the economy is doing made no sense. Everyone knew the unemployment rate would be very high. Would it be 8%? Would it be 15%? Maybe you didn't know that, but you knew it was going to be very high. And also you can write legislation that is contingent on the state of the economy. It can say if the unemployment rate is above 10%, this happens. If it's below 10%, that happens. So they could have built the contingency into the legislation itself. The waiting really was costly.

Zeballos-Roig: Democrats are usually more in favor for these automatic stabilizers, but why don't you see that kind of support on the Republican side?

Furman: I don't know why you don't see it because you could have it for taxes too. You could have Republican proposals that every time the unemployment rate goes above 10%, taxes get cut. So I don't know, it makes me sad.

I feel more academic economists all like them. The International Monetary Fund strongly supports them. They recommend that countries do this. So I think it's pretty orthodox economic advice. And I don't know why it's become political here in the United States.

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Zeballos-Roig: President Trump signed array of executive orders earlier this month. Among them was a payroll-tax holiday for workers, which the administration said would be a boon to the economy. Is this the right step now, or is their reasoning flawed?

Furman: One, the legality of some of what they've been doing is maybe flawed. And I think in general Congress was given the power of the purse and the Constitution. So I think it's a set of issues around how our democracy functions that might even be more important than any of the narrower economic considerations, first of all.

Second, what they did on unemployment insurance provided basically $45 billion additional [funds]. There's an interruption, there's less money. It only lasts a couple of weeks. So it's not a substitute for Congress.

On the payroll tax, they're reducing taxes now, but raising taxes later. So it's not obvious whether that's going to be a net plus or net minus for the economy. And it definitely doesn't deliver money to the people that need it post.

"The stock market is not the economy"

Zeballos-Roig: How should people interpret the stock market's gains during the pandemic with the economy being in such a weak state? Has it prevented lawmakers from moving more quickly on an economic relief bill? 

Furman: It's really important to understand the stock market is not the economy. If, for example, a small business loses sales and Walmart gains sales, then the stock market will go up, even though the economy might be worse.

Also interest rates have a big effect on the stock market. And so the actions the Federal Reserve has taken in part has helped the stock market go up. And it's possible the stock market's rise has dented the interest of policy makers. But I think the stock market may very well be right in rising, but it just isn't telling us about the economy as a whole. It's telling us about present discounted value of earnings of a certain set of companies.

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Zeballos-Roig: You were early to call for stimulus checks to be sent to Americans early on in the pandemic. That was one part of the government response back in March, which also included the $600 enhanced payments to state UI. Has the pandemic either overturned or change assumptions about the effectiveness of giving people cash? How do you see it?

Furman: There've been a couple of different research papers that found that people really did spend their stimulus checks. I don't think it's that important that you spend it right away. If it means you have more money in the bank that you can spend more money at the beginning of next year, that's fine with me too. So I think the evidence has largely confirmed that that is a useful way of injecting money into the economy.

And it doesn't raise the tricky issues around discouraging work that unemployment insurance does and no one's going to quit their job because they got a $1,200 check. Whereas unemployment insurance, you get the money week after week and you only get it if you don't have a job.

Furman says Congress should go big once again in the next stimulus package

Zeballos-Roig: What should Congress prioritize in the next coronavirus relief bill to set the stage for a recovery? I know you've been a big advocate pressing for aid to states and local governments.

Furman: Yeah, if you look state and local governments have been expecting that Congress is going to pass an aid package. So I've talked to states that have told me, they're going to hold off on budget cuts because they think something's coming through. But if it doesn't come through, then in September, October, November, they're going to have to make those cuts.

There's other states that can't undertake the spending they need to, so that schools can meet in person in September, which means parents won't be able to work in September, which will also ripple through the economy.

Zeballos-Roig: What advice do you have for Democrats and Republicans as they craft another economic relief bill, do you think there's room for improvement from the CARES Act in March?

Furman: We're in a different phase. For example, to have unemployment insurance adjust based on economic circumstances would make sense. I think the next piece of legislation, the ideal would be that you're not just legislating for six months, but you're legislating for the rest of time, trying to get our response to not just this recession, but future recessions right.

That may be too tall in order for Congress right now, and it can barely even legislate through the next six months. But maybe that's actually a way out of the argument they're having. Sometimes it's easier to do something broader then something narrower and so I'd like to see Congress consider and try permanent automatic stabilizers, not just responding to this temporary problem in the short run.

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