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The CARES Act ‘was not a focused effort’: Fmr. Chair of the Council of Economic Advisers under Trump

Dr. Tomas Philipson ,Former Chair of the Council of Economic Advisers under President Trump, joins Yahoo Finance’s Zack Guzman to discuss the latest on economic recovery in the U.S. as the coronavirus pandemic continues.

Video Transcript

ZACK GUZMAN: Meantime, I want to stick with the idea of this recovery maybe losing some steam as we brace for what the next jobs report for the month of September might look like. We got an interesting update from the Census Bureau. The household poll survey coming in there showing that employment jobs gained 1.6 million. That was the headline number. But it kind of hides what's happening in terms of hiring at larger corporations versus some smaller businesses.

And for more on that as well as more on how this recovery is shaping up in the final months of 2020, we're joined by Tomas Philipson, former chair of Council of Economic Advisors under President Trump. Mr. Philipson, appreciate you taking the time to chat. I guess, first, just your reaction to those numbers that we're seeing here on the unemployment claims still staying stubbornly high above 800,000. What's your take on where we're at now?

TOMAS PHILIPSON: Well, we're doing a lot better than expectations were back in April, May where people were a lot more pessimistic about the labor market. So in a way, I want to think about that, you know, what happened part of setting out the great labor market before COVID is that you can think of it as a-- the economy basically surviving COVID because they didn't have any pre-existing conditions in some sense.

And I think what's going on right now is that there's a very sort of repeated pattern here from many other infectious diseases, which is true for COVID, which is kind of like a deja vu experience when you look at previous history about the infectious diseases. You will see these cycles which is pronounced both in the US and other countries, as well, and also across states in the US partly being responsible for these state numbers as well.

But what happens is that basically when the prevalence of the disease goes up, prevention goes up. And that knocks down the future of disease. And people become comfortable. And then prevention slacks off and then back comes the disease. That's very typical for infectious diseases. And when economic market behavior is tied to prevention, which it is for COVID obviously, you will see sort of differential sector effects across the economy depending on how dependent the sector is on prevention against COVID.

So if you look at cars and homes, et cetera, it's not only interest rates that are driving them to basically boom right now. It is also that there's sort of safer industries relative to group consumption industries I call them. We have to actually consume stuff in groups, like entertainment, travel, restaurants, et cetera.

And the Hawaii numbers you talked about, the Nevada numbers. Are you sort of reflecting that those industries are much more sensitive to these prevention cycles going on? So I think that's kind of what's holding back. But it's not-- it's not necessarily surprising, I would say, that we see these cycles going on until we get a vaccine.

ZACK GUZMAN: Well, I guess the concerns here too would be the slowing of the recovery too. And as you highlight, I mean, we are a service-based economy here. And a lot of those hard hit sectors you talk about, hospitality/entertainment, still are dealing with the concerns and the overhang of an uptick in cases that we're kind of seeing start playing out right now potentially could be that second wave that have been feared.

But when you look at that, I mean, just in this household poll survey, I mean, we saw jobs being added by large corporations and government agencies. But small businesses posted a loss of about 1/2 million jobs, which would seem to support calls that we're hearing on both sides praising the Paycheck Protection Program and benefits and stimulus here for small businesses.

If you look at the survey for September, the jobs report there, economists are expecting 900,000 jobs, which would be the third straight monthly decline we've seen in that headline number. So what does that maybe say about the call for more stimulus here and why more might need to be done to continue to support some of those hard hit sectors we're talking about?

TOMAS PHILIPSON: Yeah, I mean, there's a couple of lessons I think that we learned from CARES, the first stimulus effort, that I think the proposals on the table currently has not learned in some sense. And one has to do with liquidity, and one has to do with incentives. Obviously CARES was very useful for liquidity. But our comeback that it could have been a lot more useful for those really hurting. I think it was too broad.

But in terms of incentives, I think, you know, everyone understands that labor market supply has been affected adversely here. But, you know, that the discussions on the table is to reduce it from [? 600 ?] to a 300 flat fee on top of it. That's still going to have a majority of the labor force facing an implicit tax rate of 100%, meaning you earn less if you work than if you don't work.

And some economists even have said that doesn't matter, which I think is just a sort of fantasy world. It does matter. Otherwise, you could start a company and hire people by having them pay you as opposed to you paying them. And no one thinks that's feasible. And I think, you know, once you tax earnings more than 100%, you're going to slow down labor supply.

In fact, the CARES Act basically had 20 times the load on the Obama flat fee, which was about $25. So inflation adjusted is about 20 times. And we were very concerned about a slowdown from that $25 back then.

ZACK GUZMAN: Yeah--

TOMAS PHILIPSON: Some people have argued that it not labor supply, but it's actually labor demand. But I think that's misguided, because wages are going up. So whenever you have quantity and prices going up in a market, in this case, employment and wages, you would think that demand must be responsible for that that's even more indicative of that because there's a composition effect that we're pulling in low wage workers into the economy. So that should correct down wage growth.

But we've seen wage growth despite that competition effect, which I think is important. Also, we see a jolt that that's a lot. Jobs openings are sort of at the level of December 2019 right now. So I think the incentive story is an important story that hasn't been learned and what the discussions have to offer right now.

ZACK GUZMAN: I mean, I think it's a complicated discussion to have too, because obviously we're dealing right now with-- even the economy. Look at the unemployment rate. All kinds of metrics with businesses reopening. We're at a different-- very different stage than we were back in March and April.

And on the discussion of the additional benefits here, I think that's another thing that economists still are trying to figure out in terms of what it looks like when people got that and whether or not they thought it was going to be a temporary addition and whether or not they would still prefer to have a job that's much more dependable when we think about money coming in.

But I think that is one of the questions that becomes so important here when we think about where we go from here and what the next round of stimulus might look like, because you have people disagreeing on the underlying problem at hand, which is still the pandemic. We're seeing cases rise in some states. There are concerns that other people out there are seeing what's happening in the UK and Israel with return to lockdown that that could happen here.

We heard from your former compatriot here in Larry Kudlow talking about how he would not support anymore shutdowns to deal with that here in the US. But, I mean, when we think about that being a possibility and the idea that Republicans and Democrats would not pass stimulus here as we get closer to the election, does that not concern you that we might deal with another shutdown without the support we saw in CARES?

TOMAS PHILIPSON: So a couple of comments. If you look at-- if you look at the CARES Act-- and this is what I think it missed helping those in need the most, which is really what we care about in terms of liquidity. What happened with the CARES Act was that personal disposable income, which is government, you know, transfers plus you private income, went up 45% in Q2.

That's, you know, in a boom and then expansion, we're lucky to have a 10% annualized growth in a quarter. And personal income-- disposable income went up 45-- four times of a good boom in one of the greatest recessions we've seen since the Depression. So that's telling you something that this was not a focused effort enough to help hold truly.

ZACK GUZMAN: I think you've made your point there too. And we talked about that being potentially, you know, in those months, we saw that. But this rolled off since the end of July. So we are now back to where we were with a few states still paying up $300 in a-- half of what they had under CARES.

But I think one of the questions too on all this would be, you know, what we're seeing play out in the politics of this too, because it's clear that a lot of people don't necessarily agree on where the pandemic is headed, what measures should be put in place, as we see Indiana moving forward with a full reopening.

And one of the questions that I have for you since you worked for President Trump looking at this from an economic lens, as we get closer to the election, there's still a lot of fears about what could happen in terms of this transition of power. And we've heard from him talking about not committing to a peaceful transition of power should he lose re-election here.

A lot of people are saying that's not great when you think about how much investors have to grapple with around volatility we already had in 2020 and what that could say about it here. I understand the idea that you don't want to give in to the idea you could lose re-election. And you don't want to talk about that maybe. But what does it say about adding volatility now, and why the president might not agree to that?

TOMAS PHILIPSON: No, I won't comment on anythings that's outside of economics. But what I can say is that you usually get a dampening of basically investment around elections because you basically have investment uncertainty or investments very driven by uncertainty or held back by uncertainly.

And many elections, you don't know where it's going to go. What's unusual about this election for that for effecting investment and therefore, labor demand is that there's such extreme position. Usually in election, competition by parties for the same voters tend to make the parties look the same. Sometimes in the past, it's hard to tell whether a Republican platform and how it differ from their democratic one.

But this election is such a stark difference in the platform that I think that uncertainty is even larger. And I think that actually is bearing down on some of what we're seeing among companies not wanting to make decisions until, you know, 45 days from now or after November 4.