INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics I'm Mark Zandi, the chief economist of Moody's Analytics, and welcome to a special edition of Inside Economics. We have a guest Sharon Parrott. Sharon's the president of the Center for Budget Policy and Priorities. Sharon. Welcome.

Sharon Parrott:                Welcome. How are you? Thank you.

Mark Zandi:                      Well, it's been a tough week, Sharon. I mean, Russia invading Ukraine. It's pretty difficult to watch but it is Friday afternoon so I guess that takes some of the sting out, but it's good to have you and welcome.

Sharon Parrott:                Thank you. It's nice to be here.

Mark Zandi:                      I'm very curious, Sharon, about your personal history, how did you become president of CBPP?

Sharon Parrott:                Well, I've been president for a little more than a year. So I started in January of 2021, just a few days into my tenure was the violent insurrection on the capital. So it was sort of a little trial by fire from a leadership perspective, actually. But I am no stranger to the center. So I actually am someone who has been at the center and then away from the center and back to the center a number of times. I actually first came to the center in 1993. I like to tell people that I was a teenager because otherwise how could I possibly, but I wasn't. So I came right out of grad school and I spent time at the center. I spent time, left for a couple of years to work at the DC human services agency to be able to sort of see how programs work on the ground and had a fantastic experience there.

                                             Came back to the center and then spent much though, not all of the Obama administration actually inside the administration so I was at HHS. I was at OMB and I came back to the center after a three week vacation after the end of the Obama administration, I turned off the lights, took a few weeks off to catch my breath and then came back to the center in February, 2017. That is a thumbnail sketch.

Mark Zandi:                      So you've been with the center pretty much most of your career, more or less with a few breaks here and there.

Sharon Parrott:                Yeah. Basically I've been at the center or in government service-

Mark Zandi:                      Very, very true.

Sharon Parrott:                For my career.

Mark Zandi:                      And the center was founded by Bob Greenstein, right?

Sharon Parrott:                Mm-hmm (affirmative).

Mark Zandi:                      Is that correct? Yeah. And so you and he must go way back then.

Sharon Parrott:                I'm only the second head of the organization. Bob founded the organization a little more than 40 years ago, about 40 years ago. That's a long time. I kept being told, "Oh, you have such big shoes to fill," and finally said, "Yes, but now they're heels." I kind of lighten the mood a little bit. But he was a tremendous leader. He built just a tremendous organization. With a lot of growth, we've really expanded what we do as compared to when the organization started. And even as compared to when I first came in 1993.

Mark Zandi:                      If I say you're a think tank, do you view that as a positive way to characterize your institution or not? Is that okay? You're okay with that?

Sharon Parrott:                Yeah. I think think tank is a pretty good description. I think the thing that's hard is that think tanks, people often have this image of people doing academic work and then it sits on the shelf or people use it or they don't use it. What the center tries to do is combine rigorous research and analysis with communications and strategic work to try to advance a policy agenda. And so that is, I think part of what makes it hard to describe, but we often get described as think tank and that is better than I think other things that were sometimes [inaudible 00:04:05].

Mark Zandi:                      That's an interesting point. You take up Brookings, which is a, let's say another think tank, you don't actually work to pursue a specific policy agenda that you do.

Sharon Parrott:                That's right.

Mark Zandi:                      So you'll pick up the baton for some child tax credit or whatever it may be and say, hey snap or what other program you think is important and say, hey, we need to do this.

Sharon Parrott:                Right. We are basing our policy views on evidence and research on a set of values, but we are working to actually try to advance them in a strategic way not just through putting out research, but we do a lot of that. That's right. Sometimes I tell people there's sort of a continuum of advocacy and academic research and you can think about different organizations following different ways along that continuum.

Mark Zandi:                      Yeah. I was going to ask something else. When people think about the think tanks in Washington, I mentioned Brookings and I kind of think of Brookings as in the political kind of spectrum as being kind of center, maybe a little more progressive left to center you might say, in AEI the American Enterprise Institute a little bit of right of center. And then I think of the CBP as a little bit even more progressive than Brookings. Would that be a fair characterization? Do you think about it that way or is that unfair?

Sharon Parrott:                Well, I won't speak to how Brookings and AEI want to be characterized, but in terms of the center, I certainly don't shy away from the notion that we are a part of the progressive infrastructure, that we are promoting progressive policies, again, based in evidence research and values.

Mark Zandi:                      Got it. Okay. Very good. And I kind of started this conversation a little oddly. I didn't introduce anybody else and I didn't even tell anybody about what we're here to talk about ... It's a little weird, but instead of starting this whole thing over again, let me do that now. I mean, we here at Moody's have done a study of global fiscal policy under the pandemic and we're going to talk a little bit about that, but it dovetails very nicely with the work that you and your team at the center just completed, where you also did the same thing, looking at US fiscal policy during the pandemic and said, hey, what worked, what didn't work quite as well. And overall, what do we think about this and obviously you landed in a place where you think the policy steps were pretty well done and helped the economy and helped lower income households.

                                             And we here at Moody's landed in the same place. We thought this would be a good place to have a conversation around that. I probably should have started that way, but just for the listener, that's where we're headed here. Sharon, do you think that's a pretty good way to characterize the conversation? You're okay with that as a direction for the conversation.

Sharon Parrott:                Yeah, absolutely.

Mark Zandi:                      Okay. Very good. To that end, I do want to introduce the co-authors on this paper I just mentioned that Moody's completed. We've got Bernard, Bernard Yaros. Listeners know Bernard. He kind of directs all of our federal fiscal policy efforts and good to see you Bernard.

Bernard Yaros:                 Nice to see you Mark. Glad to be back on.

Mark Zandi:                      I think he has new glasses guys. I don't know. I've never seen those glasses before. Do I have that right Bernard?

Bernard Yaros:                 Yeah, you do. I just got them.

Mark Zandi:                      I'm very perceptive, Bernard. And we've got Jesse. Jesse Rogers has also been on the podcast, before Jesse is all things emerging markets with a LatAm twist but he's done a lot of work with the global model and the work we did in this study. Jesse, good to see you.

Jesse Rogers:                    Good to see you, Mark. Good to be with everybody.

Mark Zandi:                      And Ross. Ross Cioffi, he's off in Prague and helped out a lot on trying to understand policies that the Europeans put in place. Ross, good to see you.

Ross Cioffi:                        Yeah. It's nice to be talking with you guys tonight.

Mark Zandi:                      And he says he has a New Jersey accent, but that's New Jersey-Czech or something. I don't know what that is. We got two co-host, Cris deRitis and Ryan Sweet. Hi guys.

Ryan Sweet:                      Hey Mark.

Mark Zandi:                      We just had a podcast earlier today. Let's dive into the Moody’s study quickly and Bernard, can you give us a thumbnail description of what we did and broadly speaking what the results were?

Bernard Yaros:                 Yeah. We did a scenario in which we took the baseline, our baseline forecast, which already has the macro impact of all of the stimulus measures that have been implemented by every country. And we look specifically at the 10 largest economies in the world. These are obviously the US, China, Japan, Germany, France, Italy, Canada, Brazil, and India. And what we did is we went into using the Moody's Analytics Global Macro Model. We took our baseline forecast and removed from it all sorts, all of the stimulus measures, the discretionary stimulus measures that these countries implemented since the start of the pandemic. For example, we removed all the government support to households from personal income. We removed all the support from the government to private sector from business income and profits.

                                             And then we also removed, for example, public health spending from government expenditures. There were several other adjustments that we made, but those were primarily the big ones that we did across all of our 10 countries. So like that we were able to simulate an alternate universe in which these 10 large economies which account for more than two thirds of the global economy did not step up at all to support households, businesses and the public health response during this period of time. And the results were quite severe-

Mark Zandi:                      Sorry, Bernard. Just to interrupt for a second. Two key other points. One is we did allow the so-called automatic stabilizers in the governments to execute. These are things that are built into the budget spending tax side of the budget of these governments that they kick in when the economy weakens and helps to stabilize so-called stabilize the economy. We allowed those to kick in. We didn't do anything with that, correct?

Bernard Yaros:                 Exactly. Those would've occurred no matter what. And we also assumed that monetary policy would've occurred independent of ... Monetary policy still would have risen. Monetary policy makers would've still risen to the occasion to offset a much weaker economic outcomes. But that said, even prior to the pandemic monetary policy makers, especially in the US had always been talking about how fiscal policy really needed to step up and step up they during the pandemic. And that's really what our results showed. If we just look at the global economy, it would have declined twice as fast in 2020, and the recovery would have been much slower last year. And even though we would've started having a self-sustaining recovery by this year, we would've never gone back to the pre pandemic trajectory, where we're at right now.

                                             And that would be due to a lot of long term scarring that was ultimately prevented by fiscal policy makers. And we estimate that over the very long term, the global economy, at least as measured by real GDP would've been permanently reduced by about two and a half to 3% over the very long term, looking out 10 years and the job market outcomes would've also been equally grim. At least in the US we would've had double digit unemployment all the way through the end of last year. Globally we would've seen last year about 40 million more jobless workers and that's globally. And it just really would've been a lot more pain and suffering that was ultimately prevented by fiscal policy.

Mark Zandi:                      Okay. So just to summarize, we have a model of the global economy. We know what fiscal policies have been put in place and we see how the economy performed. And we then simulated our model taking out the discretionary emergency federal programs that different governments put in place to combat the pandemic, simulated assumed federal reserve and other central banks would do what they typically do and it's in the model. Assume the vaccines, the therapies, all that was what it was. And if you do that, based on the model simulations, you generate this alternative world as you call it the account of factual world, and you find just very clearly the impact would've been devastating on the global economy. Even if the fed put everything it had at supporting the economy, ECB, BOE, BOJ, didn't matter if we're going down the rabbit hole if we didn't have that fiscal support.

Bernard Yaros:                 Exactly. I mean, a lot of the support was really to households by supporting personal income. So when you reduce the transfer payments that went to households, this is for the US and elsewhere, that reduces obviously disposable personal income which then weighs on consumer spending. And then obviously less consumer spending feeds directly into less GDP, higher unemployment, less imports, less trade and that just reverberates everywhere else.

Mark Zandi:                      Yeah. Got it. And was there anything in the results that you found very surprising Bernard? I mean, anything that kind of said, hey, I might have thought that, but this was really something that kind of stands out for me.

Bernard Yaros:                 I didn't realize how many countries. Of our 10 countries, about four of them benefited even more from outside stimulus than they did from their own domestic stimulus. These were countries like China, Germany, Canada in particular, and as well as India. And there's a saying, when the US sneezes the rest of the world catches a cold, and that was probably no true in this case. The US really stepped up much. If you look at fiscal support in the US as a share of pre pandemic GDP was 25%, which is much higher than any other of the countries that we looked at. And that really supported a lot of export oriented economies throughout the world.

                                             And probably no more so than in our backyard here in North America. So Canada and Mexico really benefited tremendously. And one of the poster child’s of sort of this supply demand imbalance has been the vehicle sector. And in our results, we find that about six million fewer vehicles would've been sold last year. This would've been not due to supply side constraints, it would've been entirely in the demand side and that really would've walled economies like Canada and Mexico, which would've declined further by six to 8% in this counterfactual scenario, just because of all the fewer vehicles and less goods. And even in Europe, I mean, they were also sensitive to the US. We looked at Switzerland, the UK, Germany also showed a lot of sensitivity to a lack of federal pandemic relief. One other point and I think this would be a good point for Jesse is just debt burdens throughout the world would've been much worse, especially looking at debt to GDP ratios.

Mark Zandi:                      Yeah. Before we go there though, the one thing that I wanted to point out that surprised me, I'm just curious how you think about it, is that the impact on. And here I'm focused on the United States, the US experience that the impact on the fiscal situation on debt, on debt to GDP, even if we had not provided any fiscal support, which was very substantive, over $5 trillion in fiscal support, beginning with the Cares Act extending all the way through the American Rescue Plan. Even if we had not provided that, the deficits in debt would've ultimately only ended up being just about the same as if we had provided the $5 trillion and the reason being the economy evaporated without the support that resulted in a loss of tax revenue and those automatic stabilizer mentioned before kick in and spending increases anyway. You don't get there immediately, but if you look down the road here a few years, the cost of the taxpayer is just about the same. I found that somewhat surprising.

Bernard Yaros:                 Yeah. I mean, if you look, to be specific, I mean, 10 years down the road, that to GDP ratio and our counterfactuals spot on with where we expect it to be 10 years from now in our baseline forecast. That really speaks to the long term scarring, all the permanent job losses, the credit problems, all this long term scarring that leads to a permanently lower level of tax revenues. And as you also said, in the beginning we allowed automatic stabilizers. We did not adjust those. And so if you have a weaker economy, there's still more spending over the long term on social safety net programs, just because of higher joblessness. All those things contribute to a steady but slow rise in the debt to GDP ratio and we end up at exactly the same spot 10 years from now. But on obviously now in the short term, it's easy to complain about the high debt to GDP ratio without thinking what the long term consequences.

Mark Zandi:                      Yeah. Hey Sharon, thank you for tweeting out the paper. I saw that you did that. That was very kind of you, appreciate that. And saw in your work you cited the work that we did. Was there anything in our paper that you found that surprised that you didn't think, oh, that's interesting. Did anything stand out?

Sharon Parrott:                I think the magnitudes. I think I could have forecast the direction. But the magnitudes and the long lasting nature of the impact, I think is maybe ... I don't know that I had a prior, but they are large. They're large and long lasting and I think that is easy to get wrong. The one thing I will say about the paper is I get asked all the time, given job growth, why does the public seem pretty pessimistic about the economy? I can only imagine how often you get asked that, I'm sure many times more than I do. But one of the things that strikes me is, it is really hard for people to think about what could have been. People don't walk around with a counterfactual. Like, "Gosh, if I hadn't gotten those." It's hard to even think about a counterfactual for your own life, let alone the economy.

                                             And so what I love about this paper is it is putting out there for you like, "We got you, here's the counterfactual." Now, I don't know that Moody's Analytics analysis as innovative and interesting as it is, I'm not sure it's going to filter out and we'll see a movement in polling. But it is actually the quintessential problem of when you stop bad things from happen. And this is right in politics all the time. When you stop bad things from happening, you often wonder why didn't we get more credit for that? Because you don't walk around with a counterfactual in your head. And so what I love about this paper is it puts the counterfactual out there.

                                             Again, I don't know that in every nook and cranny of the United States people will necessarily see it, but it was greatly gratifying to me to have that and to think about how can you use it to help tell a story. Even without the numbers. How do you try to explain just what the crisis would have looked like in the absence of that level of support. Because it's not only like we did support, but we did big support. In fact, I like to say it was an unprecedented response to an unprecedented crisis that did an unprecedented amount of harm reduction. And it's hard to convince people of that because the last two years have been terrible. People don't walk around and say, boy, those last two years, that was awesome. That's not what anybody thinks about the last two years. It's sort of hard to think, but it could have been catastrophic. It was already catastrophic from a health perspective.

Mark Zandi:                      Yeah.

Sharon Parrott:                Yeah. We shouldn't overlook that, but the ways in which it could have been catastrophic from an economic perspective and not just big macroeconomic numbers, but actually how people live their lives is very hard to imagine.

Mark Zandi:                      Yeah. That's an excellent point. I wonder how many people outside of economists and folks, and think tanks, even though the word counterfactual, it's a pretty hard concept to get one's mind around unless you live in that world, but that's a very important exercise to undertake. Just to try to get a sense of what's going on and how important the policy changes were.

Ryan Sweet:                      It becomes a docuseries on Netflix.

Mark Zandi:                      Say that again, Ryan.

Ryan Sweet:                      Have a docuseries.

Mark Zandi:                      That is not a bad idea. Maybe a book, all these counterfactuals, what if. Well, there's kind of movies like that. Remember there was some movie where, what was it, Gwyneth Paltrow got on the subway and she went down to ... You don't remember this movie? You remember this?

Ryan Sweet:                      Sliding Doors.

Mark Zandi:                      Yeah. Sliding Doors. It was actually a very good movie.

Ryan Sweet:                      It was.

Mark Zandi:                      It wasn't the counterfactual, but it was just an alternative universe. But anyway, hey, I do want to ask you Sharon, on our study, we did weigh in on this debate about the contribution of the fiscals support to inflation. This has become really important part of the debate and discussion. And we found in our work that in the counterfactual that inflation would've picked up this time last year as the economy reopened and with the vaccines and demand improved, but it would come right back in with the weakened economy and we'd end up with inflation that was well below the federal reserve target kind of where we were before the pandemic hit. We get back into that low inflation world that no one was very comfortable with.

                                             We also ran a simulation where we allowed for all of the different policy support in the US, except for the American Rescue Plan and we found that without any ARP inflation wasn't really affected by the ARP. It helped to lift inflation and demand and inflation back a year ago, but the high, uncomfortably high inflation we're observing now or suffering through right now has very little to do with anything with the ARP. Does that kind of resonate with you? I mean, do you have any views on policy, the policy effort and the inflation we're suffering through right now?

Sharon Parrott:                Yeah. I mean, look, the inflation we are suffering through right now, it is really hitting families. The first thing to say is, I think that, oh, it'll be really short term so don't worry, turned out to be wrong. Lots of people said that turned out to be wrong and people feel it and they see it, they see it very dramatically. And so that is a counterfactual people walk around with in their head. We've had a long period of low inflation. Not that many people remember high inflation times and even if they are old enough to remember, it seems like that thing that we fixed, that thing that we fixed and is a long way back. And so people do walk around with a counterfactual of inflation, like the way it was supposed to be was steady, low inflation.

                                             Very predictable, I didn't have to worry about it. I think it is a very helpful finding. Time will tell whether inflation comes down as many people are predicting. Certainly, I expect as most ... I mean, I think the Fed's been pretty clear that they're going to come in and start to ease off since they're still in an expansionary mode. I think to look at the ARP and say 12 months later when lots of the stimulus is gone, it's like the culprit feels more political and less analytic way to describe the world, but it is a very real political argument that's being made that is, I think, clouding the conversation about the importance of relief overall and of the ARP. I think there are for lots of political reasons that are pretty obvious.

                                             There is a great interest in saying, oh, that stuff we did in 2020, that was really important. But the ARP was just too big. It was too much. It wasn't needed, we just shouldn't have done any of it. And then we'd be at that lovely two and a half percent inflation that everybody was comfortable with. And part of what's great about the analysis you all have done is a part of the analysis that showed no, the stuff we did in 2020 was really important, but we were not done. And if we hadn't come in with ARP, we still would have had a far slower recovery with lots of pain. I think that is a really important point because I think that is the politics play out in a way that there are a lot of people who would like to say stuff in 2020 was great, but the ARP was a mistake.

Mark Zandi:                      Yeah. Well, that is a very important point of the piece that without the ARP, the economy doesn't actually quite go back into recession in early 2020, but it comes pretty close to going back and to the point where unemployment actually goes up, not down as it actually did. It was very, very important. Hey, Jesse, to Bernard's earlier point about a number of countries actually benefiting more from external stimulus, stimulus provided by the United States and others than their own internal stimulus. Do you want to flesh that out a little bit? I mean, which countries, I think you mentioned there were four out of the 10 that we explicitly studied. Do you recall who they were? Do you have anything to add on that? That was, I thought very interesting point.

Jesse Rogers:                    Yeah, that is a really interesting point. I mean, if you think about it in our globalized world and a potentially more fragmented world with China and the US perhaps pulling away and maybe some repercussions from what's going on with Russia and Ukraine today, I think it's just so interesting how interdependent and interlinked the global economy really is. When we did this study, when we first set out to do it, we were looking at the partial effect of one country and another country. And each country's own fiscal stimulus was important, but when we combined everything into one simultaneous simulation in the global model, the effects were just really massive and it just speaks to how each economy or no country is and island. The economy is like you said, Mark, that benefited most from external fiscal support or at least as much as their own were China, India, and Brazil.

                                             And these are large emerging market economies and it's kind of natural to think that they would because the emerging world is sort of always driven by the local motive of the US and advanced economies. But just the degree that external fiscal support was at least as much more important, that wasn't really something that we thought we were going to find at the outset.

Mark Zandi:                      Yeah. Those countries, you mentioned, the one I found most surprising is China. Because if you go back to the financial crisis, they were the country that provided the most fiscal support to their economies and they actually lifted the global train. I don't know that they lifted the US economy, but certainly couldn't have hurt the US economy, but I'm sure it helped, but in much of the rest of the world, it was about Chinese fiscal policy. And this time they took a very different approach, at least that's my sense of things. Is that right, Jesse?

Jesse Rogers:                    Yeah. Right on. I mean, it was a much more reserved and cautious stimulus. And I think it speaks to underlying issues of leverage both in the corporate and household sectors. And so this balancing act where policy makers want to reactivate the economy, but at the same time for very good reasons are concerned about going as big as they did in 2008. You kind of end up in a world in which China's own fiscal stimulus is important both through the Chinese and global economies, but really it's the US and the rest of the advanced world without that strong recovery and domestic demand and really final demand for Chinese exports, particularly consumer goods, but also machinery and equipment China's economy wouldn't have recovered as rapidly, not nearly as much independent of how successful they were in control of COVID.

Mark Zandi:                      Just one last question, Jesse, is there any other than that result which was quite surprising, anything else that surprised you in looking globally at what countries did, anything else stand out?

Jesse Rogers:                    Yeah. Well, I want to underline just the point that Mark made earlier and sorry, Bernard made earlier. And that was that almost all the economies in the study ended up in a darker place in terms of debt to GDP ratios and debt burdens. And that's not something we thought we were going to find at the outset. And for the emerging world that really, really matters. I don't think it would be wild to venture that without this strong fiscal support response that there would've been a debt crisis in emerging markets and quite a big one at that.

Mark Zandi:                      Well, that's interesting. What you're suggesting if I got it right is that if governments had not stepped up and provided that support, they could have actually suffered at that crisis?

Jesse Rogers:                    Yeah. It's kind of counterintuitive to think about it. When you ask me what I'm most surprised about, I don't know, that's a ringer.

Mark Zandi:                      Yeah. That's interesting. Very interesting. Very good. Sharon, if you don't mind, I'd love to dive it more into your work that the folks ... And it sounds like you had a lot of folks working on this, all hand on deck.

Sharon Parrott:                We had so many that we gave up and we didn't list all the authors because at a certain point, if you have 14 authors, it looks a little silly. Yes, it was a whole of center on budget effort, for sure.

Mark Zandi:                      And it's a wonderful piece of work. I mean, because if you want to know, well, the analysis of the impact on minority groups and on poverty and low wage workers, very well done. But the thing that I found really helpful is you go through each of the major policy steps that were taken and go through that in some detail. I thought that was very, very helpful. Good information for us to have when we look back a few years from now and try to figure out what happened and how well it worked or didn't work. In terms of the impacts on lower income, low wage households, the thing that I found incredibly striking was what you learned of about the effects of these policies on poverty. I found that amazing. Do you want to describe that a little bit?

Sharon Parrott:                Yeah, it's really stunning. We don't have data for 2021, but we have monthly data so we feel pretty confident that 2021 will look quite a bit like 2020. Some of the things we did in 2020 phased out, but then the ARP added more. And so I think we'll see very large poverty effects in 2021 as well and without the ARP we wouldn't have. If you look at 2020, where we do have the data on poverty from the Census Bureau, what you find is that government programs, whether they were new or old, government programs overall kept 53 million people out of poverty in 2020. 53 million people had incomes above the poverty line when you include government benefits. And if we only looked at their private income, they would've been below the poverty line. In 2019, the same figure is 35 million.

                                             There are two things going on between 2019 and 2020 that's driving that result. One is, there are more people whose private income was low in 2020 because we had massive job losses. Part of it is more people have incomes that are low, but that would not have driven that magnitude of an effect, it was because we then did things to help people, a historic expansion jobless benefits, stimulus payments, expanded snap benefits, what we used to call food stamps. And those things are driving this really remarkable results. So that when you look at 2020, and you compare it to 2019, you would've thought that poverty would go up. But in fact, poverty went down. Eight million fewer people had incomes below the poverty line in 2020 as compared to 2019. But if we only look at private incomes, we only look at what happens if you only look at people's incomes other than government, poverty would've increased by nine million people. It is a remarkable outcome. And again, I think the impacts on poverty will be very large in 2021 as well.

Mark Zandi:                      And you said you have monthly data into 2021. Is that what you are saying?

Sharon Parrott:                There's some monthly data. You've probably seen the work that the Columbia Center on, not going to get the exact name right, they're doing tremendous work. Maybe someone can look up the name and I can actually get it right for them so I can name check them, but they're doing tremendous work. And so just as one example, they are showing that in December of 2021, that 3.7 million kids were protected from poverty just from the child tax credit expansion, from the child tax credit. And that in January of 2022, when the child tax credit ended, 3.7 million kids were pushed back into poverty by ending that policy. I feel very confident that the child tax credit expansion, the March the Rescue Plan, stimulus payments, the expansion, the continuation of expanded jobless benefits through the summer will result in very large impacts in poverty in 2021.

Mark Zandi:                      Got it. And this may be an unfair question, but that doesn't stop me from asking it. There's a plethora of policy responses which you nicely kind of lay out and go through in your paper. If you had to pick out one or maybe two that were particularly you think effective, which would they be?

Sharon Parrott:                Definitely not going to answer that that way.

Mark Zandi:                      That might be had but which child do I want.

Sharon Parrott:                Yeah. First I want to just say, it's the Center on Poverty and Social Policy at Columbia University.

Mark Zandi:                      Oh, okay. There you go.

Sharon Parrott:                And now I've gotten their name so thank you for that. We had different policy responses that had really different purposes, and I think it is actually important to think about the categories. You had a category of response that was broad-based and the stimulus payments are sort of the best example of that. Lots of people are losing jobs. We're worried about a downward spiral in demand. We're worried about people making ends meet. One thing to do is to get stimulus payments out broadly, not to everybody. So people that had quite high incomes in prior years weren't automatically eligible. They looked at prior year tax data, and we're going to get it out fast.

                                             We're going to look at people's prior years and we're going to get money out the door. And there is a lot of value in that. It is more expensive because you're getting help broadly. And so it is an important stimulus and it is an important support for households themselves, particularly those that are seeing their incomes go down it's not highly targeted. So then you have a series of things that are more targeted. You have an unprecedented, really a historic expansion, jobless benefits. And I think a lot of people, there's been a lot of misunderstanding about exactly what that jobless benefit expansion did. There's a lot of focus on the increase in the benefit amount and that is hugely important, but what's also hugely important is that we dramatically expanded who was eligible for jobless benefits.

                                             In the normal course of business in a normal year before the pandemic, only about a third of people who were unemployed qualified for any jobless benefits at all. And the people who didn't qualify were the people that were struggling the most. Low paid workers are much less likely to qualify, gig workers and self-employed and contract workers are completely ineligible. And people who have been unemployed for "too long" that have exhausted their benefits. So those are all people that in a pandemic, in a crisis where people are going to be out of work for some time, if we don't get jobless benefits too, we're going to miss a lot of people who really need help. And so the combination expanding eligibility and providing much more adequate benefits in fact, providing large benefits at the beginning because really we wanted to make it possible for people to not work as the pandemic and the virus and we didn't know what was happening on the health side.

                                             That was targeted, but it was tens of millions of people. Still very large effects. And have a set of more targeted things that were really about people that were really struggling. People getting extra help to people that have very low incomes and are getting help through SNAP, again, what we used to call the food stamp program. Getting help to kids who were missing out on school meals. A household where a kid usually eats two meals a day at school and all of a sudden school is closed. That is a real problem for a household and it was a real policy innovation to say, wait a minute, they're not going to be able to get school meals, we've got to get help to them.

                                             So then you have these kind of more targeted things. And then the last thing I'll say is on the health side. There's the public health response about which I am not an expert, but there was all also this sense that if a lot of people lose their jobs, the expectation would be that a lot of people are going to lose their health insurance. And the kind of the last thing you want in a pandemic is for a lot of people to become uninsured. And so we did two really important things. Early on we said, people on Medicaid can stay on Medicaid. We're not going to re-determine your eligibility. We're not going to worry if your income went up a little bit or you were a kid on Medicaid and now you're 19. We're just going to keep everybody getting Medicaid so that we don't have all this churn and people have health coverage during the pandemic.

                                             And then the second thing we did, which we didn't do until 2021 was make Affordable Care Act marketplace coverage a lot more affordable. And we actually decided to help people sign up. And those two things meant that by the end of 2021, we had fewer people uninsured than we had in 2019. In a world where people were losing private coverage. Those are big swings. Those things would've gone in a completely different direction in ways that would have meant just ... When you think about people not being able to make ends meet, we use these terms, they can't make ends meet. What happens to a household when they get evicted, what happens to their kids when they can no longer go to their regular school, what it means for a family when they just don't have enough money at the grocery store. When you talk about economic scarring, part of that scarring is what happens to actual people when they have that kind of hardship.

Mark Zandi:                      Good point. One of the criticisms of the various support that you laid out and most specifically around the unemployment insurance, the supplemental UI, the big payments, was that this kept people from working because they could make more on in this case, unemployment insurance than going back to work and back on the job. Does that resonate with you? I mean, is that a reasonable criticism of the program of that particular effort or the efforts more broadly?

Sharon Parrott:                Right. In general, what we know about unemployment insurance right is that benefits are low. People are highly motivated and to the degree there is an employment effect. It is generally about people staying unemployed a few extra weeks, which actually is generally good, because you generally want people to hold out for a better fit job. It's better for employers. It's better for workers. Here we gave much more robust unemployment benefits, particularly in 2020 when actually those benefits were kind of doing what they were designed to do, which is to make it okay for people to not work right as the economy shut down and to bolster consumption. Then as the economy was beginning to recover, we still expanded jobless benefits really because our underlying system is so bad and because we couldn't do it in a particularly laser aligned way.

                                             And so we had to pick a number and we had to give everybody the same amount because the underlying system is kind of terrible. And so then we reduced it. They weren't getting 600 anymore they were getting 300 anymore and yet employment was rising. And people knew it was going to end. I think sometimes people who oppose these programs, they can't decide, whether they're jobless or low income, they can't decide whether they're really smart or really dumb, frankly. Sometimes they ascribe to them that they understand the inner workings of these benefit programs in this incredible level of detail. But then they also say, well, this person's not going to look for a job, because they're getting this jobless benefit even though they know it's going to end. It is sort of a funny way that people think and talk about low income people and people that are out of work.

                                             Anyway we know that people were getting jobs and we know that when some states stopped the benefit, they expanded benefit sooner than other states. We don't see big differences in return to work. We don't see big differences on the employment side. Look, if you ask me, do I think that there is a way to construct an unemployment insurance system with very generous benefits that would have employment effects? Yes, you could obviously construct a benefit that would be that high that would have those kinds of effects. But I think here, we sort of did the best we could and it ended and lots of people have gone back to work, but I do want to just emphasize one point, which is some of what we had to do was because the underlying program was so bad.

                                             Yeah. And you talked earlier about how in your modeling you allowed, whatever a country had as automatic stabilizers to remain in place. And the US had as real weaknesses there. We wouldn't have had to dive in and I describe it as take duct tape and string and try to piece together a better unemployment insurance system if we had a more rational, robust unemployment insurance system that worked for workers in normal economic times and would work during our crisis. And right now we have a system that doesn't work during normal times and really doesn't work during a crisis unless you dive in and really dramatically change the system. But when you do that, it's with a lot of friction and that's why you saw long waits and systems crashing because they just wasn't built do these things.

Mark Zandi:                      That's a good point. I think we make that point in our paper that the US provided a very large amount of fiscal support. I mentioned $5 trillion, 25% of GDP. The next closest country I think was the UK at 17, 18% of GDP. But one of the key reasons for that is the one you pointed out is that the automatic stabilizers in the US are just a lot weaker than they are in other parts of the world. To get the same support to the economy, you have to use more discretionary and that's what we measured here. Discretionary, meaning you have to pass a piece of legislation to get it done fiscal policy and that's a very, I think a very important point. With that in mind, one set of policies that we, I think have learned that has been very effective overseas that we tried to adopt here in a half-hearted way is around employee retention.

                                             We had this paycheck protection program, which was loans and then grants to small businesses, less than 500 employees, but countries overseas and when I say overseas, I mean advanced economies, mostly in Europe and Japan and Canada had these labor market schemes. And I know Ross, you did a lot of work in this area. What is your sense of the effectiveness of those particular labor markets? Can you maybe describe those schemes or maybe pick one of them like Germany or UK or whatever you think is most important or most illustrative and give us a sense of how well it worked.

Ross Cioffi:                        Yeah. Well, most countries in Europe have these short time work schemes as we call them. Germany of course is the most famous, so to say, because it proved very successful back in the great recession as well. There was a lot of talk about that and countries around Europe took their lead and built up their own systems following that recession. We've seen in the past two years, in fact, there's a lot of proof that unemployment in Europe was helped a lot, employment was helped a lot, thanks to these schemes. To describe them briefly, it's basically where the government agrees to pay a share of the hourly wages that are lost when a firm cuts the hours that one of their employees works. Instead of laying off the worker because they become temporarily redundant, they cut the hours and the government pays the share of wages that would've been lost that could even be to zero hours, or it could be to half of the hours that they normally work.

                                             The effect has been much lighter hits to employment in Europe than we saw in the US. But at the same time, we also saw incomes being protected. Maybe not to the same extent in the sense that the government typically pays something like 70% or 80%. It depends on the country. They're not all uniform this way, but we saw protection of incomes. We saw protection of employment as well. And I think you could argue it helped leave workers connected to the labor force to a large degree as well, because you weren't suffering this long term, unemployment, this long term uncertainty about whether you'd be coming back to your job or not. And I think you could argue quite well that that helped keep labor force participation high in Europe.

Mark Zandi:                      Yeah. I think that's a good point that the fact that these scheme is, kind of in my mind, it's kind of a pejorative connotation, but that's what they say overseas. They say scheme, it's kind of a program instead of just a different way of saying the same thing. But the idea is that keeping people on payroll, even if they're not exactly working, which a lot of people weren't in the teeth of the pandemic means that they remain connected to their employer so when business starts to pick up again, they're there, they're working. It's not like here in the United States, we let everyone get laid off or almost everyone get laid off. I mean the PPP program I mentioned earlier that expired in the middle of 2021 so a lot of people lost their jobs. They're not connected to their employer and therefore it's hard to get people back in their seats and working again.

                                             And that's one reason, I think why wage growth and inflation has been much less pronounced in Europe and in Japan than has been in the United States. And one of the reasons why these severe inflationary pressure is relative, inflation's up everywhere and it's because of the pandemic. It's up a lot everywhere, but it's up a little bit more here and this might be one of the reasons why. Which if anyone ask me, Sharon the one thing that I think we should focus on for the next crisis, and this is for crisis, not for typical recession, I wouldn't conclude this as part of the automatic stabilizers, but I kind of let's break glass if we needed in an emergency would be employee retention tax credit.

                                             That was part of the early on the tax in the Cares Act, never really got traction because of the way it was designed and the eligibility was set in such a way that would be very difficult for businesses to qualify, but that could very effectively get cash to businesses of all sizes, big and small in a crisis like the one we went through and keep people on payroll. And so we don't have to do gerrymanders something like the PPP program. And you just use the same tax infrastructure that you have now instead of the business paying the IRS for unemployment insurance, the money goes the other direction, the IRS cuts a check and puts it into the bank account of the business to hold onto their workers and we move forward. But I think that would be something to explore going forward.

Sharon Parrott:                If I can just jump in, I mean, I think the one thing I will say is that we learned this lesson, the great recession, we learned it again here. We're a big place. The United States is a big country and it is hard to do new things in the teeth of a crisis. The more you can figure out how to have something in place that people understand and then have it accordion, have it grow as needed, the better off you are. When we got help to people fast, it was because we built on existing programs. Where we had the most friction was when we had to change the rules. In Europe where they had this kind of work sharing, job retention or structure, they knew how it worked.

                                             It was already built in. They could say, okay, now we're going to use this, but they already have the infrastructure set up. Whatever their version of ADP, maybe it's ADP. Whatever their version of their payroll administrators, it was already all programmed in. It wasn't some new thing. And the new thing happens with a lot of lack and those new things can do great things. There was a lot of talk about the emergency rental system going out too slowly. A lot of talk about it. I don't know what people thought that you were literally going to pass it and the next day people facing eviction we're going to be just fine. That's not how the world works. But the truth, it was slow at first, but by the end of the year, 3.2 million households, that has a lot of people, 3.2 million households that were behind in rent had gotten assistance to pay back rent and to stabilize their housing going for forward for up to a maximum of 18 months. 3.2 million households.

                                             You can do a lot of good, but you can't do it super fast. And so when these big crises hit, you want to act fast. That's in general, my mantra is what can we put in place so that we aren't counting also on a political process to act fast. That worked at the beginning of 2020. I mean, we were, in some ways, very lucky that the political process actually worked to pass two relief measures just in March of 2020, but you could easily imagine political scenarios where that wouldn't have happened. And so the more you can bake into the cake, the better protected people are.

Mark Zandi:                      Sharon and I want to press you on one other issue that's come up with regard to all the support, particularly around the American Rescue Plan. And that was related to the amount of funds that went to state and local governments. I think, correct me if I'm wrong, but I think in total, so the ARP was $1.8, $1.9 trillion over 10 years, that 500 billion went to state and local governments. I think $150 billion went to education K-12 and another $350 billion basically went out to states and local governments. And it was very open ended. You could spend it however you wanted to spend it and you have a lot of time to spend it.

                                             I mean, it's still out there in many cases out to 2024. And most state local governments, their fiscal situations look pretty good, not all of them, but most of them and it doesn't feel like they needed all that money. Was that a mistake giving those state loan governments that money? How do you think about that? How do you respond to that criticism to the ARP?

Sharon Parrott:                Yeah. It's a great question. I think first of all, back up and remember that we did important relief to states in particular in 2020. We did it two ways. We did it through direct support and cares. And then we also did it by expanding Medicaid funding to make it easier for states to maintain their Medicaid funding and their Medicaid programs as they were expanding. Then we get to the ARP and you're exactly right $350 billion, but some big differences. It went not only to states and not only to large localities, but to small localities as well. It also went to territories and tribal governments. And so there's a lot of things to think about, about those dollars. One is how uncertain the world was in March of 2021. And not just in March, but in January, February, March as this package is getting crafted.

                                             The end of 2020, we saw rapidly rising virus cases. We knew the economy had slowed down. The political process had been a real problem in the latter half of 2020, not surprisingly, it was an election year. And so we needed another tranche of relief. It didn't come until after Christmas in December. And so that's the swamp of uncertain that a new Biden administration Congress is trying to rapidly craft their relief package in. At that time, most states were expecting and were forecasting continued declines and very large budget holes, declines in revenues and large budget holes. And then there was kind of the specter of the lessons of the great recession. In the great recession, we didn't do nearly enough state and local aid. In fact, we really only did state aid we didn't do local aid.

                                             It was not nearly enough and it did not last long enough and cuts in jobs in states and localities, let alone the cut of services that they cut for people, were a drag on the economy. Given all that, it was a very robust package. And in the end, it turned out in part because of the overall robustness of the American Rescue Plan, as your research shows, the economy picked up more quickly, therefore state revenue picked up more quickly. And so their budget holes as a result of the pandemic were smaller or in some cases nonexistent because the economy did so much better than they had forecast. Now, they also had higher costs because they were dealing with a pandemic and they had people with a lot of needs. I don't think it's the case that you wouldn't have wanted to do physical support even if you knew that you'd be back at baseline revenues, you might have done less but you didn't know and so it was a hedge against what had happened in the great recession, which was too little and it didn't last long enough.

                                             The other thing is that the dollars were actually designed to not just meet immediate needs but actually to redress some of what we didn't learn about, I hate when people say we learned these lessons in the pandemic as if we didn't know that there were just enormous racial and economic disparities in the country, they were just simply hidden. We knew them. We didn't necessarily pay very much attention to them. And certainly over the course of this pandemic, the impact of those kinds of disparities were incredibly glaring.

                                             The dollars really were designed to not only be about relief, but to be about plotting a course to a better recovery. If you had to do it all over again and you had pop perfect information, do I think it would've come out a little bit differently? Sure it would've, but you didn't have perfect information. I think there are two things you could think about going forward to do differently in the next time, one is, could you calibrate the money based on economic circumstances and the other is could you more tightly narrow the uses of the dollars, but we should recognize how hard those two things are.

                                             They are actually technically hard to do, because money's pretty fundable. And because states set budgets and they expect a certain amount of money and then economic circumstances change and it's not clear that you want the federal money to all of a sudden become uncertain. And it's very hard to do politically, but those are two things you could think about doing, but it's really important to remember that we got this badly wrong in the other direction and the great recession and it slowed the recovery and it hurt a lot of people.

Mark Zandi:                      Yeah. Makes a lot of sense. Sharon, we covered a lot of ground there. I could keep you for another couple hours, but you're a busy person, so I don't want to do that to you. And I do appreciate you taking the time out and thank you for the great study. And we enjoyed working with your folks and have a great team. Thanks for all the good work that you're doing there at the center. And congratulations on the new, I guess it's not new anymore, it's been a year you said so, but kind of feels that way. But congratulations anyway. Thanks very much and I think we're going to call that a podcast. This is a, as I said, special edition of our podcast. I hope you enjoyed it. If you have any suggestions for future topics, guests, anything at all, any feedback we do listen very carefully to what you have to say so please fire away. We would appreciate that. With that, thanks very much.