- The Federal Reserve Bank of St. Louis estimates that the unemployment rate could reach 32%, the highest level ever recorded this summer.
- Stanford economist Matthew Jackson told Business Insider that if that happens, the US will need significant government action in the form of a “New New Deal,” or a series of programs to help combat unemployment and lack of consumer spending.
- Jackson’s proposal references President Franklin D. Roosevelt’s New Deal, which was a series of government programs and reforms after The Great Depression that help put people back to work, among other things.
- The Better Capitalism series tracks the ways companies and people are rethinking the economy and role of business in society.
- Visit Business Insider’s homepage for more stories.
The US will likely surpass Great Depression-era unemployment rates this summer, and workers will need more than a $1,200 stimulus check to get through it, according to a Stanford University economist who studies financial networks.
Instead, the US needs a “New New Deal,” or a set of expansive government programs and reforms to help cash-strapped, jobless Americans and struggling businesses, Matthew Jackson, Stanford economics professor and author of “The Human Network,” told Business Insider.
“The very peak of the Great Depression was just under 25% unemployment rate. And that took several years to hit. If the [current] trend continues, we’ll blow through that by the summertime,” he said.
In less than one month, the coronavirus pandemic has displaced more than 10% of American workers. The Federal Reserve Bank of St. Louis estimates that more than 47 million Americans could lose their jobs in the second quarter (between April and June), which would send the unemployment rate to a staggering 32%.
"I think to really get the economy running again, we'll need either some sort of New New Deal or we'll just have to wait a decade or more [for the economy to recover]" Jackson said.
The US government has already extended trillions of dollars worth of relief through direct payments, emergency loans, and strengthened unemployment insurance under the CARES Act. Part of the package includes checks of up to $1,200 for Americans who qualify.
But that's hardly enough, the economist argued.
"The size of those checks, you know, they're on the order of part of a month's rent or a month's rent, they're not the kinds of things that are going to last people through long-term unemployment," he said.
Americans may need more cash assistance, he said.
The economist is referring to Franklin D. Roosevelt's series of programs and reforms instituted in the late 1920s and 1930s after The Great Depression. These programs included the creation of the Civilian Conservation Corps, which employed young men between 18 and 25 years of age in parks and conservation work, the Civil Works Administration, which gave unemployed people work ranging from highway repairs to teaching, and the creation of Social Security, or financial support for Americans who are elderly or disabled.
Jackson noted that the coronavirus pandemic is different from The Great Depression. In fact, he said, it's worse.
The Great Depression had numerous sector slowdowns, like finance and farming, but it did not have any sectors so dramatically closed like we do today with the restaurant, tourism, airline, and sporting events industries, he said. And while The Great Depression started with the stock market crash of 1929 and eventually led to a slowdown in demand from consumers, today, the economy is starting out with a substantial loss in production, amounting to a partial shutdown of the economy, which is worse.
"A shutdown of the economy is really unprecedented in modern times. All the time and labor that could have been producing things, that's gone. And that's a real loss to the economy," he said. Gross domestic product for countries across the globe will dip, he added.
The crisis will likely require much more government intervention, Jackson said.
"We'll have to figure out how to first provide a safety net for people so that they get to a place where they can return to work and spend money," he said.
Businesses will need more capital in the form of forgivable loans so they can keep paying their employees while they're out of work, the economist said.
"When people are out of work, they don't spend, and when they don't buy things, then businesses won't be rehiring people," he said.
Last week, House Democrats introduced the Emergency Money for the People Act, which would give $2,000 a month to Americans over the age of 16 who make less than $130,000 a year.
Jackson said policymakers need to continue to "get creative" with solutions, or consumers could begin defaulting on their loans, mortgages, and other payments. He warned of a global financial crisis similar to the 2007 subprime mortgage crisis if government intervention is minimal.
"That's the other shoe that's going to drop at some point in the future, when businesses, consumers, and even countries start defaulting," he said. "Sovereign countries won't be able to pay their bills."
