States may be easing social distancing measures to spur business activity halted by the pandemic, but Former Clinton Treasury Secretary Larry Summers says the economy Americans return to will be significantly different than the one before the closures.
Speaking to Yahoo Finance, Summers, who also served as the Director of the National Economic Council under President Obama, said the record downturn experienced over a two month period, will have lasting effects on the economy, even after a vaccine is developed
“I think [the pandemic] is going to mark a fairly profound structural change,” Summers said. “We’re going to have very substantial increases in inequality, and a very substantial reduction in any sense of solidarity in our society, unless the government steps up and meets this challenge.”
Nationwide stay-at-home measures have already led to record declines in economic activity.
Retail sales plummeted a record 16% in April, while GDP contracted 4.8% in the first quarter. More than 36 million Americans have filed unemployment insurance claims, overwhelming local government agencies.
‘We still have not hit bottom’
Summers said more pain will likely follow, especially when it comes to the labor market, saying “in general, unemployment goes up the escalator and goes down the staircase.”
“My guess is that we still have not hit bottom, that there will be a range of knock on effects from the disruptions that have taken place that are likely to be significant relative to the effects of people coming back,” Summers said. “I'm pretty concerned about the economic outlook, not just for the next few months, but for the next few years.”
Congress has approved nearly $3 trillion in emergency relief to combat the downturn, while delaying tax deadlines for businesses and individuals. But with the Senate unlikely to approve the House’s $3 trillion bill targeting additional stimulus, there are growing concerns that politics will delay help to those who need it most. Unemployment benefits are set to expire in July.
“I think we need to inject much more money into the economy, and we need to find ways of injecting it that reward working, rather than reward not working,” said Summers, discussing the potential of extending unemployment benefits. “I do worry about social insurance measures that provide people an incentive not to work. I think that is a legitimate concern. But I worry much more about not providing enough funding and not providing enough demand in the economy, which I think is potentially a more serious problem.”
Labor market unlikely to recover ‘with any rapidity’
The downturn has hit the most vulnerable communities the hardest. A recent Federal Reserve survey found that nearly 40% of people living in households earning $40,000 or less lost jobs, while just 13% of those making more than $100,000 were cut. In a “60 Minutes” interview Sunday, Federal Reserve Chairman Jerome Powell said workers getting hurt the worst are the most recently hired, especially women.
Summers said additional workers are likely to be squeezed out of the labor force permanently, if the government doesn’t act quickly enough.
“Surely there will be people who are in their early 60s who will plan on taking an earlier retirement than they had otherwise planned on. There will no doubt be people coming out of high school who get off on the wrong road, and maybe for a long time, if ever before they find their way back to regular, stable work,” he said. “I don't think that this is going to be a thing we're going to move through with any rapidity.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita