UCalgary podcasts feature interviews with experts from our community on the COVID-19 situation.
Episode 20: The new economy
May 11, 2020
The COVID-19 pandemic has been the shock of a lifetime to our economic systems, the effects of which will be felt for years to come. We talk to economist and policy researcher Lindsay Tedds about what economic recovery might look like and what policies we can put in place to soften the blow. *Recorded on April 2, 2020.
Lindsay Tedds (LT): If you don't have the ability to withstand four, five months without any income, which a lot of our businesses can't do, those businesses are gone. And then when they're gone, that is what's going to take the recovery longer because we have to recreate businesses and opportunities. We have to recreate entrepreneurs, we have to replace all of that activity. And that's why I think this one is going to be longer than a lot of people think.
Corey Hogan (CH): That was Lindsay Tedds, an economist in our School of Public Policy. And this is UCalgary COVIDcast. I’m Corey Hogan.
Nuvyn Peters (NP): And I’m Nuvyn Peters. Thanks so much for joining us. After weeks of isolation and economic shutdown due to coronavirus, there's a lot of uncertainty about what the economic landscape is going to look like once we come out of this. We're seeing job losses on a scale we haven't seen since the 1930s. People are naturally starting to wonder what reopening for business would look like and how long it's going to take.
CH: For this episode of COVIDcast, we talked with Lindsay Tedds, an associate professor in School of Public Policy here at the University of Calgary. Lindsey is also the scientific director for fiscal and economic policy in the Department of Economics. Her main areas of research are in applied economics and policy analysis, particularly tax policy. All to say Lindsay's work is taking the science of economics and applying it to the art of governing.
NP: It's certainly an interesting time, and as we look beyond the public health crisis aspect of this pandemic, to the economic impact, there's a lot of uncertainty out there. Particularly here in Alberta.
CH: Well and you used the words economic impact there, and I think what Lindsay and her cohort of economists looking at the macro challenges something like COVID would bring, they're trying really hard not to make it an economic crisis to follow up the public health crisis. Her insights were really quite illuminating for me, and in some ways a little bit alarming.
NP: Lindsay joins us to talk about the effects of a long-term economic shutdown, the policies that governments are enacting to soften the blow, and what factors are going to have to go into getting our economy back on its feet. So without further ado, let's go to our chat with Lindsay.
CH: So Lindsay, every day we're seeing staggering job loss numbers, unprecedented public response, every day there's a different wrinkle in this, every day there's another multi-billion dollar program. Where do we start? What do we make of all of this?
LT: I think what's really hard for me as an economist is that I can factually understand all of the things that are happening around me. But I myself, I'm sure like a lot of people listening to this, I'm actually finding it hard to internalize what is going on here. I mean, I've lived through recessions. I'm sure everybody who's been here, the 80s recession, the 90s, that financial collapse, I mean we've all sort of seen that, but this is the first time in most of our lives, there'll be a few people who are alive who lived through the real depression back in the 30s, but for the most part, we haven't seen something like this. And what this is is a, when you think about the 2008 financial collapse, what took 12 months to ripple through the system is happening in one month here. It is just mind boggling talking, today the US unemployment numbers came out, 6.6 million people in the last week have applied for employment insurance. We're looking at numbers of about a million a week, when normally we get 45,000 people applying for unemployment in a particular week. It's mind boggling.
CH: Yeah. And the Great Depression comparisons are rampant. People talk about... Everyone's seen those charts online, I think probably, where you look at the market decline relative to what it was with the collapse in 1929 and all of that. And it's scary as hell. And when I talk to economists, they tend to tell me things like, or they did before all of this happened, things of this nature usually have a V shaped recovery, bounces back very quickly. What do you think? Is this going to bounce back? Or are we in for a bit of a long haul?
LT: Well, really we need to see more data, more information. So my biggest concern, and most people's biggest concern right now is the United States. They do not have the virus under control. Their numbers are very much under-counting how much the infection is affecting that country. We can't even start thinking about a recovery until the United States has got this under control. So we are seeing China demand come back online. And so some businesses in Canada are seeing an uptick and are able to get some exports out. But without the United States, and without our European trading partners being able to participate in the recovery, we do not have a recovery. So yeah, I don't know. Some people are talking about this being steep in Q2, Q3 and then by late fall we'll be back sort of to normal. But more pessimistic ones, which I have to admit I'm a little more aligned to, is more the hockey shaped stick recovery. No, Canadian, right, this hockey stick and that is really, really, really steep. Steep recession, possibly a depression and that taking years to recover.
CH: Well, and we run things so close to the line these days, managerially, right. We always talk about not having any supplies on hand. We always talk about being as efficient with resources as possible. So there's not a lot of slack in the systems there. And I wonder how much we are, when we talk about the traditional quick recovery usually that involves all of us kind of taking our beating and then coming back online. But are we equipped to do that, I guess is the question.
LT: Yeah, so what we're really talking about is here is how fast the businesses can get back to normal. And then we all get back to normal. We are going to see... We went into this with our businesses, both in Canada, the United States carrying a very heavy debt load. And that was because the tax system favors borrowing over using your own equity to fund your actions. So the debt leverage of our businesses was way too high to begin with, simply because of a tax,` some people would call it a tax loophole, but it's the tax treatment. And as a result, they can't actually take on more borrowing, which is what they need to be able to do right now. I mean, we are coming out with some policies. The federal government now finally is rolling out some pretty good policies. But in the end, if you don't have the ability to withstand four, five months without any income, which a lot of our businesses can't do, those businesses are gone. And then when they're gone, that is what's going to take the recovery longer because we have to recreate businesses and opportunities. We have to recreate entrepreneurs, we have to replace all of that activity. And that's why I think this one is going to be longer than a lot of people think.
CH: So you talked a bit about federal action. What's your general synopsis of the federal action and what impact you think it'll be?
LT: So I would say given that we were starting to see the cases move around the world by late January, early February, the fact that it's what, April 2nd and we're just rolling out policies now, we were calling for this two months ago. There's a core group of economists that are quite active in, both on social media but also in advising governments on that they need to follow. We were saying this in mid-February, you need to be doing bridging programs, we've got to get money out to businesses and we've got to do this now. But at that time there just wasn't... People were, "It's not going to be that serious. There's not going to be that many cases. Canada's fine. We've got a good healthcare system." There was a lot of that, Don't worry about it you crazy economists.
CH: That's generally the reaction to economists, isn't it?
LT: Crazy economist. Well it's not often that economist will come out and say, "You need to give money freely to people. Borrow, go into debt, don't worry about it." I mean that doesn't happen very often.
CH: Yeah, fair.
LT: And that's what we were doing and there was a core group in Canada, there was a very small group down in the United States as well. We were all dismissed. We are not being dismissed now.
CH: So if we're doing what we should have done two months ago, what do you think we should be doing now to stay ahead of this economically?
LT: Well, I mean so we're announcing programs, but we haven't implemented any programs. So there's a lot of announcements, but it's still going to be another week before we see benefits flowing under the Community and Emergency Response Benefit, which is that what they've come out with to plug all the holes with the employment insurance system, the wage subsidies programs so that we can curtail layoffs, because we want people to maintain their labor market attachment. We don't want people laid off. We want them to keep their jobs so that when the recovery comes back, we don't have to go through that whole process again. Those wage subsidies are not going to flow for another three to six weeks. We were going to have too many layoffs, too many hits, too many business closures, the ones that will be left once these benefits start to flow are going to be the bigger companies that could withstand as much without an income coming into their businesses. And people, higher income people, who have those stockpiles, we can also withstand this. What is very, very concerning to me is this delay in getting these policies out affects the most vulnerable. And those vulnerable people then end up having to rely on our usual welfare programs, which are not generous. They are not, they do not build your self esteem. They have asset tests and the last thing we want right now is to people to further draw down any assets that they have. Because as soon as we do that, it takes them longer to ever get out of it. And in fact, this can and will trap people in a cycle of poverty. This shock, this one shock of nothing to do with them, and laziness, or anything like this. This one shock is going to trap a generation of people in poverty. And I talk a lot on Twitter and to government saying you've got to get money out the door now. We have the programs to be able to do that. I don't know what's taking so long, head explodes.
CH: Well, when you think about other emergencies, natural disasters and whatnot, being a recovering public servant myself, that money does flow pretty quickly. Usually it can come within a week or so. So what are the impediments? Why can't the federal government get money moving faster?
LT: So when this first started, they were relying on employment insurance sickness benefits. So that was the initial, "Oh, we'll, we'll put everybody through there and it'll be fine." Except for employment insurance sickness benefits tend not to have the first flow of money until about the 28th day of you not working. And that's a typical cycle of it. Sickness benefits are not quick. In fact, most people are back to work before they even get their first payment under the EI sickness benefits. We have existing programs. This is one of these ones where I'm just not sure about the response, but we put out top-ups to the GST/HST tax credit, which a lot of low income households get. We also have a big amount of money going to parents through the Canada Child Benefit. Those are already existing. Those payments go out every month on the, GST is in the early in the month, and CCB is about the 20th of each month. But we've had to wait two months before those top-ups are going to go out the door. It can be done faster. It absolutely can, right. We make changes to payments all the time. What is causing this delay? We don't know because CRA is only saying, "That's the best we can do." But CRA is not known for being an entity that changes well.
CH: They change their name about every 10 years.
LT: They're very good at that. They are very good at that. Well I liken them to the Titanic trying to get out of the way of the iceberg, but Kevin Milligan doesn't like that because it means they're going to sink.
CH: Well, they're hard to turn for sure. And it does make me think about my general comment of government, which I mean as no critique but an observation as somebody who worked in it, which is it's set up to deal with normal times. 90% of the time your interaction with government is going to be fine. It's that 10% of the time when you've got to go off the standard script where things tend to gum up and things tend to break down. And I guess we are way outside the standard script at this point. We're in a totally different movie.
LT: We are outside the script, but what's interesting is when you look at some other countries who are able to respond more quickly, it's because they actually have packages that have been in existence for a while for to help people through shocks. And I'm getting into arguments with Ken Boessenkool all the time on Twitter about this, because he's saying, "We need special programs for this crisis." And I say people face crises all the time, just because it doesn't affect you, doesn't mean it doesn't affect other people. People are in crisis all the time. They face shocks all the time. There is no reason why we can't have programs in place that address this for when individuals have shocks that are also responsive when the entire country has shocks. So the wage subsidy program that the federal government has just announced, trying to make sure that people don't get laid off, Germany has had a program like that since the 1900s.
LT: And they bumped it up after the 2008 financial crisis to better support labor market transitions after that big crisis. And so when this happened, they said, "Well that's okay, we'll just use this program and it's already in place." And the program like that would have actually really helped, gee, I don't know, a lot of companies in the oil and gas sector in 2015 when we had the oil price shocks going on. So to me this is the time to do a little bit of a gut check if we need it now, we also need it in other times as well because people face crises all the time.
CH: Well that is a perfect lead into a conversation about longterm. Let's say it's a hockey stick, let's say it's a V, let's say at some point normal life resumes. A general theme of a lot of the conversations I've been having in the past couple of weeks with experts such as yourself are, this is going to foundationally change things. We are not going back to normal. How do you see us adjusting our economy in the longterm to deal with these situations? How do you see us dealing with this in the longterm?
LT: Well, I mean people and the economy are resilient. I mean, the economy is nothing more than us as individual actors. There's nothing secret or scientific about it. It is us. And as long as we are resilient, the economy is resilient. What we do have to be very careful about is, something that governments like to do is not let the natural changes happen. We see a lot of bailouts like the auto sector after the 2008 crisis. We've got subsidies going to SNC-Lavalin and Bombardier and we just desperately feel like we have to hold on to some sort of nostalgia. In order to, I mean we're never to get back to where we are. It's going to be a different economy, and it's going to be a different, it's going to look different, we're going to interact with it differently. And the best thing we can do is make sure that we let the changes that need to happen, happen. For example, online shopping was increasing quite a bit. It was about 14% of retail transactions. This has changed online forever. We're using it more than we have before and our behavior is likely to continue after this. This means that brick and mortar stores, especially the small mom-and-pop ones probably aren't going to be able to come back from this. That has huge implications. But one, online shopping means that we're better able to price check and so it has a deflationary standpoint. It opens up competition which is good. We like all of this stuff, but if bricks and mortar stores go by the wayside, then municipalities that rely on property taxes are going to face a very, very fundamental change in where their revenues come from. So there's good. And then there's this, what do we do about municipalities who in about 80% of the revenues typically come from property taxes. There's going to be longterm consequences from that. Whether or not we're ever going to go back to dining out in restaurants, I think is a good question. A lot of restaurants are not going to survive through this. We're already seeing, the reason why we're seeing so much pressure on grocery stores is because people are back to buying groceries and cooking. Will that continue? Possibly. And so I think thinking about how to react to that and whether or not restaurants will be able to pivot to that new reality. Some will, some won't, but you have to let the... Oh, I know there's an analogy here that I can't quite say, but there is going to be a necessary churn and burn so to speak.
CH: Well, and you raise an interesting point about the ever-shifting economy here. There is often a desire to stand up and say, "Well let's slow down that change." And there are just so many changes coming that are going to be so cascading through the system. I feel you will be busy from a public policy point of view for some time to come.
LT: Well, I always find these times interesting because there's a lot of academics. I've always done policy relevant research and it's what I find interesting, is what I find exciting, but it doesn't get me a lot of kudos from my more academic colleagues who believe that all that matters is publishing the Quarterly Journal of Economics, for example. But they're all having these psychological gut checks of, "Oh my God, my research means nothing in this world." And I say, "Well, mine means a lot." We're continuing with our research. Our team has been advising governments across Canada to help them with policy responses. That's based off of our knowledge and our expertise and the kind of work that we do. We are tracking policy responses from governments across Canada and we're building an interactive website to host them. And then once we have all of that information, we're going to be able to put together a compendium of research about who did what, when, how did it work, what can we learn from all of this? So my research agenda has just exploded as a part of the pandemic. It's sad to say. That's the exciting part about policy. It's real.
CH: Yeah. In many ways it becomes applied economics, right? You're moving out of theory and you're seeing these things affecting people directly. So let's end on a positive note here. Give us a glimmer of hope. What do you think is something positive that can come out all of this as we go forward?
LT: Hopefully we will see... I'm worried about where the United States is going to go, but from what I'm seeing going on in Canada, I'm very, very hopeful that we are going to come more together in terms of our Canadianness, and our society is going to be stronger afterwards. That we're going to start to understand that we are here for each other, that we need to work together, we need to support each other, and we need to have a different approach to public policy and political discourse coming out of this. I mean certainly I haven't noticed people being rampant about what Alberta, the Brexit, the Alberta, what was it called?
LT: Wexit, yeah, sorry. Thank you. I haven't seen that. Anybody talk about that in the last two months we're starting to see the value of having a federal government that has compassion and is able to respond quickly to help people. We're seeing some provinces move dramatically. British Columbia and Ontario are probably the leading provinces in responding to this, which is making people look at Doug Ford in a completely new light. Some leaders do really well in the in these kinds of times and a lot of the reasons why I think Doug Ford is doing well is because he understands the common working man, the common working people. And he sees how this is absolutely, dramatically affecting individual lives on a day to day basis. And so yeah, those two provinces seem to be doing well. Ours here in Alberta is not responding well, it's continuing with layoffs, it's continuing with austerity, and yet it has the strongest balance sheet of all of the provinces in Canada. Yes, even now with WCS trading at $6 a barrel. Yes. We still have an incredibly strong balance sheet and so it's disappointing to see more hurt being levied as this pandemic is unfolding.
CH: Okay. And if people want to follow your work, you talked a bit about some of the things to come, where can they do that?
LT: Yeah, well, the best thing to do is to find me on Twitter, which I'm easy to find. I'm the only Lindsay Tedds in the whole wide world. I'm serious.
CH: That's good.
LT: And so whoever you find, it's probably me. And we release everything up on Twitter. My research associate, Jillian Petite, is also up on there. We're very sharing with everything that we do. And yeah, hopefully our websites will be live within a couple of weeks.
CH: Well, I am not the only Corey Hogan. There is a lawyer in New York and there's a criminal in California.
LT: Oh dear.
CH: But it was a delight to talk to the only Lindsay Tedds today. So thank you so much for your time.
LT: Well, thank you very much for having me.
CH: Thanks to Lindsay Tedds for taking the time to chat with us today. And thanks to all of you for listening. You can subscribe to COVIDcast on Apple, Google and Spotify. You can also find episodes, and other community resources including webinars and expert advice, at ucalgary.ca/covidsupport. Ideas for future episodes can be emailed to podcasts at ucalgary.ca. COVIDcast is a production of the University of Calgary. Thanks for listening.