I think a ‘square-root’ recovery is more likely than a V-shaped one: Expert

Director of Fiscal Policy at the American Action Forum Gordon Gray joins Yahoo Finance’s Seana Smith to break down the April jobs report and how some workers are making more on unemployment compared to their wages before the coronavirus pandemic.

Video Transcript

SEANA SMITH: Now, for more on this, I want to bring in Gordon Gray, Director of Fiscal Policy at the American Action Forum. And, Gordon, there's lots to talk to you about in this jobs report, but first let's jump off with average hourly earnings. What did you make of the number? And do you agree with what Ethan was just saying just in terms of some of the notes that we got out today, that maybe this is more of a distorted figure?

GORDON GRAY: Yeah, and to be perfectly honest, you know, I work in data, you know, in my day job. That indicator was one of the few times when just a number made me sad, because we've been waiting for this entire recovery for wages to pick up, particularly among those who are the most vulnerable and further down the income spectrum. And then we see a number that looked historically high, and it is because that those vulnerable people are no longer working. They artificially sort of inflated the number. And so it was really, frankly, sad to see. So I completely agree with the previous guest.

SEANA SMITH: Yeah, Gordon, I was going through your notes, and one thing that stuck out to me is that "these job losses are not to be thought of in the same way as those seen during downturns in the business cycle." Now, what exactly do you mean by that? And is that because a lot of these job losses may in fact be temporary?

GORDON GRAY: So first of all, it's important to recognize that the-- I mean, this is the worst jobs report ever. But it is-- it is that bad in part because of deliberate policy choices. It is important that we allow the health mission, the public health mission, to take hold. That's the testing, the therapeutics that some other guests have talked about. And so this was a deliberate policy choice. This is necessary. And so it's not the same thing as essentially the evaporation of demand or a financial crisis.

So the horrifying numbers that we saw-- I mean, we should be shocked. They should shock policymakers as to the scope and scale of the challenge. But they were foreseeable insofar as we can understand that when you essentially outlaw large segments of the US economy, and necessarily so, that you're going to get these major disruptions. And so it is not the same as a recession. And so it's important to think of it a little differently. It's not just the same thing where you can all of a sudden just, OK, yeah, we're going to cut taxes, increase spending, and everything will go back to normal. There's a whole other element to this, the public health part, which has to be part of the solution.

SEANA SMITH: Yeah, Gordon, you were just saying that it should remind the policymakers about this unprecedented scale of what we're seeing and the need for what you say is deliberate, coherent, and also constructive policy responses across a spectrum of needs. What measures do you think are needed most right now?

GORDON GRAY: So first, it is important to recognize and give credit where credit is due. First, the Federal Reserve has been working at breakneck pace to exceed-- or get right up to the very edge of their emergency authorities to pump needed assistance in the economy. And Congress stepped up with on the order of 10% of GDP in terms of fiscal intervention, and did so in a matter of weeks. That's remarkable and to be commended.

Going forward, particularly as we're starting to see some of the predictable and usual kind of party divisions show up in the public policy debate, my hope is that, to some degree, this report will remind policymakers that they need to be in the business of working together to address what is a truly historic challenge.

SEANA SMITH: You know, when we talk about that, there's an interesting statistic that we saw today, and it was about half of all US workers stand to earn more if they're laid off than they did at their jobs before the pandemic. So just what are your thoughts on that? And just how does this shift the labor dynamics that we're seeing?

GORDON GRAY: Sure. So that's a reflection of what was a deliberate policy choice in the CARES Act to essentially add a $600 bonus to normal unemployment insurance compensation. Now, policies that make sense in March, April, May, June don't necessarily make sense further along in the recovery, particularly ones-- you know, there is consensus that it is safe to reopen businesses.

So when it is not safe to reopen businesses, the rationale for that policy was essentially holding workers harmless for what is an exogenous event, this horrible pandemic. It is essentially a wage replacement. That was the goal. Unfortunately, the systems that we rely on to implement these policies are a little clunky, so they essentially had to do it by giving people 600 bucks.

Now, it doesn't trouble me terribly that that outpaces the return to labor when the labor markets aren't functioning, when essentially your employer's closed. Later down the line, we need to ensure that the incentives are aligned so that the return to work exceeds the return to unemployment.

SEANA SMITH: Gordon, how optimistic are you that when we-- as states reopen, as they have the past couple of days, I guess-- do you think that some economists out there and some market watchers are overly optimistic just about how quickly the economy will bounce back?

GORDON GRAY: Yes, I do. And I'm very concerned about irrigorous calls for reopening. My own view is that precipitous or reckless reopenings that then precipitate a need to sort clam up again would end up being far more costly than incrementally letting some of these shelter-in-place orders continue to persist.

And part of that is how the financial markets would react. What we're seeing now, of course, in financial markets is, you know, they're forward looking. And so we have this bizarre world where we have the worst jobs report ever. And you know, the equity markets, financial markets are-- appear to have taken that in stride. That's because they're forward looking. If we started having to basically reset the clock every time we try to reopen, that's not going to-- I would imagine a severe financial reaction, among other detrimental economic dynamics.

SEANA SMITH: Gordon, do you expect that we will see a meaningful recovery?

GORDON GRAY: So my-- the hope, of course, is that we will start to see positive growth in the third quarter, possibly to the fourth quarter. You know, I think the analogy folks are using now is kind of a square root recovery. I think that is more likely, certainly, than a V-shaped recovery.

One of the things in the job report today-- that of the 20 and 1/2 million workers that lost their jobs, 18 million are temporarily laid off. But if you assume all of those folks get back to work immediately, that still leaves the unemployment rate at around 9%. And that means that there's still going to be a lot of time needed to get back to where we were just a few months ago.

SEANA SMITH: Yeah, certainly. All right. Well, Gordon Gray, Director of Fiscal Policy at the American Action Forum, thanks so much for joining.

GORDON GRAY: Thanks so much for having me.