Economic Stimulus During COVID-19: An Interview with Professor Waseem Noor

Main Street in Salinas, California. Photo by Naotake Murayama.

As the United States braces for another surge in daily COVID-19 cases, the pandemic and its effects on the economy are at the forefront of national political conversations. While a first stimulus package, the CARES Act, has already been implemented, the debate over the scale and scope of a second round of stimulus continues. Oliver Niu sat down with Professor Waseem Noor to contextualize the importance of economic stimulus as well as the long term effects of the pandemic on the U.S. economy. 

Dr. Noor is an Adjunct Professor of Economics at Columbia University. He has extensive experience advising international leaders on strategic planning, growth strategy and talent engagements. He is based in New York, and spent over twenty years in the private sector as a strategy and leadership consultant. He has advised large pharmaceutical, biotech and global health executives on strategic planning, growth strategy and business acquisition engagement, and has consulted for the Harvard Institute for International Development, the International Labour Organization and the World Bank. He holds a B.A. in quantitative economics from Stanford University and an M.A. and a Ph.D. in economics from Columbia University. The transcript has been lightly edited for clarity.

The interview below is transcribed from the Columbia Political Review Podcast. The full episode can be found on Spotify and Apple Podcasts.

What are the intended goals of an economic stimulus package in this situation, and how is a stimulus’ role in economic recovery different from the one the Federal Reserve plays?

We need to remember that a stimulus package is a tool used by the federal government, and  it's Fiscal policy to inject money into the economy. The stimulus package would provide funds directly to households and firms. And those two entities are the drivers of an economy because firms hire people in households and provide salary, and then in turn, the households take that salary and purchase goods and services from the firms. It's that circular motion between households and firms that runs the economic activity of a country. The goal of a stimulus package is to help people who have become unemployed in households and don't have money to buy goods, so that they can pay for items like food, medicine and rent. And it's meant to provide short term loans to small businesses, so that they can continue to keep their staff working to keep people from being unemployed in their ranks. That's the intended goal of the stimulus package—to keep that circular motion between the households and the firms going.

For the Federal Reserve, when they inject money into credit markets, or when they provide money to banks, in order to keep credit markets and their liquidity going, how does that differ specifically from what you're talking about in terms of keeping a circle of consumers and businesses going?

The Federal Reserve is not a purely government entity. It's a quasi-government entity. So it's headed partly by the federal government and partly by the private sector. What the Federal Reserve can't do is give money directly to firms and households. But what it can do is work with large banks and large companies and help provide them assistance to get loans more easily so that they don't go bankrupt. In these cases, it helps large organizations take debt off of their books, and it helps large banks take bad assets off of their books.

Even before this crisis began, President Trump seemed to criticize a lot of the Federal Reserve's actions, including, for example, not reducing interest rates enough. Can you contextualize what that means in the case of this crisis, and also why President Trump was so insistent on wanting the Federal Reserve to reduce interest rates?

A reduction in interest rates makes it easier to borrow money because the cost of borrowing money goes down. And so by doing so, more firms will  be able to borrow money and will be able to use that money to hire people, make new investments and expand. Traditionally, the Federal Reserve has used interest rates as a way to prop up the economy. When interest rates are low, the economy grows quickly. When interest rates are high, it deflates the economy, and the economy slows down. President Trump was looking to inflate the economy and prop up the economy at a time when a lot of economic activity was shutting down due to the pandemic. That's why he was encouraging such strong measures by the Federal Reserve to do that. What is important to recognize, though, in this is that the interest rates for the United States and around the world are already at very historically low levels, and so the ability of the Federal Reserve to bring them down even more is minimal.

Is it possible for interest rates to go negative? And what would that look like?

To understand a negative interest rate, you have to make a distinction between a nominal interest rate and a real interest rate. A real interest rate is an inflation adjusted number, whereas the nominal interest rate is the interest rate that we see when we go to a bank window and it shows you can get 2.6% interest on a savings account, or etc. The real interest rate would take that 2.6% and adjust it for inflation. And there may be cases when, if inflation is higher than 2.6%, you get a negative real interest rate. That's what's happening in a lot of countries in Europe right now; they are experiencing a negative real interest rate, the US has not gone down to a negative real interest rate yet, but we are very close.

President-Elect Joe Biden said throughout the campaign season that you can't really fix the economy without controlling the pandemic. Do you think economic recovery is possible without fully controlling the spread of the virus? 

I believe that President Elect Biden is right. He's saying there is not a trade off between controlling the pandemic and fixing the economy. They go hand in hand, it's not a one or another choice. There are many countries like China, Australia, New Zealand, that are controlling the virus effectively, and are experiencing economic growth. So it's not an either-or kind of situation. I think what the pandemic is doing in the US is it's interrupting this economic cycle that we talked about between households and firms. So the fear of the virus has led to  situations where people are being laid off from work, people are not going and buying things from stores, people are not going to restaurants, they're not going to movie theaters, they're not going to museums. And because of all that reduction in economic activity, the economic cycle of spending money and earning money is going down.

When we're thinking about countries who have successfully controlled the virus, and are going through rapid economic growth right now, such as China, President Trump has taken a very, very hardline stance in terms of trade with China. So when China's economy is kind of booming in a way, and the US is being stuck on a treadmill, to what extent does the Trump administration's policy of tariffs and a hardline stance against Chinese trade affect US recovery?

The hardline stance with China and trade started before the pandemic. The hardline stance has been ongoing for three or four years, ever since President Trump came into office. What it may do is it may aggravate the situation even more because, as we know, although international trade has economic benefits, trade policy is rarely based on economic considerations alone, there are usually a lot of political considerations at play when you think about trade policy.  What the hardline with China is doing, in the end, is less demand from China for US goods in terms of agriculture and high tech goods, etc. This potentially could slow down recovery, especially if China shifts its demand for these goods to other countries or starts producing many of these goods domestically.

There seems to be a lot of debate about the necessity of unemployment payments, whether or not it is beneficial for Americans to receive $600 a week or $300 a week. How important are these direct payment programs in comparison to the other indirect forms of aid such as small business loans or airline bailouts that we also see included in a stimulus package?

I think they're all necessary. They're all different tools that the federal government has in order to conduct it’s fiscal policy. And they are all different entry ways into the economic cycle. The loans to small businesses and to airlines will help them retain staff, and will help them continue to employ people. The loans to households and individuals will help them continue to buy goods and to purchase goods from these companies, which then will keep these companies running. You need the stimulus at these different points in the economic cycle, not just at one element of it.

A common criticism of giving, for example, airlines massive bailouts is that once they were profitable, they spent a ton of money on stock buybacks. Do you think this criticism is fair? Do you think it should indicate that there should be more regulations on whether or not companies should be allowed to do stock buybacks?

Whether or not the company did stock buybacks before is an irrelevant point to whether or not these companies need help now. There is unquestionably a need now. Now, if these loans are structured in such a way, that the payback to the government requires them not to have future stock buybacks or other mechanisms to make them more profitable or have the ability to retain more money during profitable times, then that might be a clever way to actually provide the stimulus now in their time of need. Some kind of structured help is probably better than just unconditionally providing them funds.

In the context of the stock market, President Trump tweets pictures of the Dow Jones index every day. And he constantly reminds his followers and people in the United States that the stock market has done incredibly well under his tenure. And there seems to be this kind of disconnect between what the stock market means for everyday Americans and what it means for the general US economy. So in the case of right now, where the stock market is kind of booming, and it's setting all time highs, why is the stock market selling all time highs, whereas Main Street—small businesses—are all suffering.

We have to remember that there is a difference between the economy and the stock market. The economy is a reflection of how many people are employed, how much production of goods and services firms are creating.  The stock market reflects people's future expectations of how companies will fare in the long run. People make investments or bets on how these companies will fare in the long run. So the stock market is not looking, necessarily, at present day conditions. It's looking towards the future and saying—will these companies do better in the future than they are doing now? And in this case, they probably will be if the government continues to help support them through Monetary and Fiscal policy. And that's why President Trump is showing those numbers rather than the actual economy numbers because the economy numbers, although they're not abysmal, they are not as exuberant as the stock market is showing.

Is the injection of funds from the Federal Reserve into a lot of these big companies that you talked about part of the reason why the stock market is being propped up, whereas small businesses are suffering under the weight of the pandemic?

What the Federal Reserve does can be very complicated. But in essence, what it's conducting right now is a policy called quantitative easing, where it is taking large debts that large companies may have and taking it off of their books and giving them money instead. They are doing this because they believe that these debts could potentially be paid off in the future, so they're willing to take on these debts themselves. By doing so, essentially, the Federal Reserve is putting more cash into these companies with which they can employ people to invest in and continue to grow.  If the Federal Reserve were to stop doing that, it would be a problem. But the Federal Reserve cannot keep doing that forever, either. In some ways, as it continues to give cash to companies right now,  we are essentially having to borrow this cash, either from other countries or from future generations. So, although we would like to continue to do this forever, there is a limit to which it will burden us.

Is the argument that some say that the Federal Reserve mainly helps, those on Wall Street, the big corporations instead of the little guy, a fair criticism? Or is that more of a criticism of our government not passing more relief?

I think it is. I'm not sure if it's a criticism necessarily, but it is questioning the mandate of the Federal Reserve. In that, should the Federal Reserve be doing more for smaller businesses? It's not that the Federal Reserve couldn't do it, but it would not be a great return on its investment of time and effort to do so. It really is the role of the federal government to do that kind of work, to help out with small businesses and households, and let the Federal Reserve work on large companies and banks.

From a broader landscape, given the different nature of this economic crisis, because of the pandemic and the necessity to stay at home—even with a successful vaccine, how might this economic recovery differ from how we recovered from the 2008 Financial Crisis or how we recovered from the Dot Com Bubble?

With the financial crisis of 2008, the main issue was that banks were worried about loaning money to other banks and to firms. And that was the key pain point that was slowing down the economic cycle between firms and households. So in some ways, the recovery from that was a little bit faster, because if you could address the issue of banks loaning to each other and to other firms, then you could help get the circle working again. Here, with the pandemic, the issue is that there are multiple points on this economic cycle that are not working well. And that's why a stimulus package is important because it needs to address all these different points on the economic cycle, including households, small businesses, large firms and banks. And that's something that we did not need to do as much in the financial crisis of 2008.

So a lot of people,  as a result of a decline in manufacturing, as a result of automation have been feeling forgotten in the political system, mostly people who reside in the Rust Belt. Do you think this economic crisis has the potential to also generate more groups of people that are increasingly going to be left behind in terms of the future of the U.S.'s economy, and if so, what areas or groups of people may be harmed in the long term as a result of the pandemic and the economic crisis?

The loss of manufacturing jobs over the past two decades, is a real pain that has occurred to American families throughout the Rust Belt and throughout lots of other parts of the US as well. It has led to a massive amount of unemployment, a lot of need for retraining, etc. that I'm not sure the government has addressed as well as it should. But having said that, the pandemic could potentially impact on groups that may be in the Rust Belt, but I think the pandemic is more impacting on individuals who are more involved in the kind of “gig” economies that have been created over the past few years—actors, taxi drivers, bus boys—people who are working in situations that aren't long term careers or full employment, and whose income is based on small businesses to a certain extent. It's these people who are unable to continue spending money or paying rent because their jobs are more at risk under this kind of pandemic economy. So that's one group of people that are more at risk. The second group of people who are more at risk are people who may be unable to leave home to work in order to take care of sick parents or watch over children who are not going to school, who cannot video conference into their jobs and telecommute. That's a second group of people who are also going to be very adversely affected by this pandemic. And so the economic crisis, I think, is going to impact a different category of individuals, than the loss of manufacturing did.

Will it necessarily leave those people behind? For example, the gig economy, those jobs are not necessarily high skilled jobs. So when the vaccine comes out, and when the economy hopefully recovers, those jobs would still exist, correct?

Those jobs will still exist, but there will be a strata of people who will not have had the benefit of income over the past year, which will definitely leave them behind. The pandemic will contribute to more income inequality that is existing in the US, as more and more people fall behind, due to whatever reason. Before it was people that potentially didn't have college degrees that were working in the manufacturing sector. Now, it may or may not be people with college degrees, but people that have that are working in this gig economy that are going to be falling behind as well.

Ultimately, if the United States doesn't pass another stimulus package, and we don't do more in terms of helping economic recovery and refilling the circle of economic spending and economic growth, what would be the implications for the US economy if Congress can't get together and pass a compromise?

I think that spending is a critical part to getting the economy going again. But given the situation that we're in, measures to control the pandemic are just as important in this short term period. Effective contract tracing, widespread testing, availability of appropriate PPE in hospitals—these are things that need to be instituted along with the stimulus package in order for there to be robust economic recovery. Just providing a stimulus package, without putting these other items into effect is not going to help the economy in the long term. Over the summer, we did provide a stimulus package, but the states were not consistent in getting public health measures firmly into place. We now are in a situation where although there has been a first round of economic stimulus, the effect isn't long lasting enough because we haven't been able to successfully keep the disease at bay. I think we're going to need to do both.

Would the reason why the circle of economic spending and economic growth not be refilled, due to a vaccine, be because of the people who are left behind without income for the past eight months?

That's exactly right. It's because firms will still not still not be able to retain or hire people. And people and individuals and households will not have salaries necessary to buy more goods and services. And once that breaks down. It's harder and harder to get the circle running again.

Oliver Niu is a senior editor at CPR and a sophomore in Columbia College studying Political Science. He can typically be found waiting at a social distance for a delayed 1 train.