Allison Schrager joins Brian Anderson to discuss economic trends in the wake of the coronavirus pandemic, how the stock market has performed during the crisis, and why expensive infrastructure projects are a risky strategy for reviving the economy.

Audio Transcript

Brian Anderson: Welcome back to the 10 blocks podcast. This is Brian Anderson, the editor of City Journal. Joining me on today's show is Allison Schrager. Allison's a senior fellow at the Manhattan Institute, where her research focuses on public finance, pensions, tax policy, labor markets, monetary policy, all things economic. She's written a number of interesting pieces for City Journal over the last several months. So we thought it would be a great time to invite her back on the podcast to talk about what's going on with the economy. As our listeners may recall, Allison is the author of a fascinating book that we talked about on a podcast a couple of years ago, An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk. You can follow her on Twitter @AllisonSchrager. Allison, thanks again for being on the show.

Allison Schrager: Thanks for having me.

Brian Anderson: It's been three months now, since the US economy, hit with this pandemic, started going into lockdown. Over that period, 20 million people, at least, have lost their jobs. I'm wondering where's your assessment. We're seeing some positive indicators now, as the lockdowns have eased. But where do you think the economy stands right at the moment and what steps have been taken by the government to respond to the crisis? And what's your view of them?

Allison Schrager: Well, I think we're going to learn a lot in the next two weeks. And because it's, we're having these spikes in the Sunbelt and in the South. And this is going to be a big test of can we withstand spikes. Clearly in New York, it threatened our hospitals overrun, tons of people died. So this is the test of can hospitals handle it? Will death rates remain relatively low? And if so, we'll learn, "Okay, we're going to live with this. People are going to get sick, but we can manage it."

Or it's just going to be as bad as it was in New York. And we're going to have to sort of have prolonged shutdowns and a lot of businesses are going to have to stay closed. And then really rethink our policy response. Because if you look at our policy response, both monetary and fiscal policy, they're crafted in like end of March, early April when we thought, "Okay, we'll shut down the economy for a month or two. We just have to keep everything on pause." And you know, you can pause the economy for a month or two and then reopen it. Like people pointed out we more or less pause the economy for two weeks around Christmas every year.

But if we're actually going to be in this until there's a vaccine or herd immunity or whatever comes first, then I think we really have to start rethinking policy. And right now I don't think anyone could really tell you what's necessary until we see how these new spikes play out.

Brian Anderson: You're just looking at these outbreaks in Texas and in California and Florida. So far it does seem that the age of the people who are getting sick now is much younger. And so the death rate hasn't spiked. But if that does worsen or if it starts enormous pressure on the hospital systems in these cities, that they may go back towards some kind of lockdown, in other words.

Allison Schrager: Yeah. And not only that, we learned that if New York has another spike, we'll also have to go back into lockdown. The thing is they haven't locked, they have only shut down a couple of targeted industries right now. So if this works and this subsides, and not that many people die or hospitals to get overwhelmed, then I think we get a message of we can keep the economy open and live with this. And we haven't known that. That's been a big unknown. I think we went to sort of the most extreme policy stance we could. Lets just shut down everything, not really knowing if that was truly necessary. And now we'll find out.

Brian Anderson: What about the federal programs that have been launched to get us through this period of lockdown? What's your view of their efficacy so far?

Allison Schrager: Well, I mean the Fed policy, I guess, has been quite effective. In that it's remarkable that the economy is such a disaster and has so much uncertainty, yet financial markets are pretty robust. And the stock market is in decent shape. I mean, it's down from the top of the year, but not as much as you would expect. Corporate bond markets are apparently doing more issuing and have lower rates than in history. I mean, so they've definitely kept that market liquid and larger companies can definitely get credit, provided they're well rated. I think, and even small, a lot of small companies, I know a lot have gone out of business, but not as many as I would have expected. And I think, because everyone's still expecting things to go back to normal sooner rather than later.

And I think policy was sort of predicated on that. I mean, nothing about the CARES act would have been what we got from the fiscal side, which provided grants or loans to small businesses and extended unemployment insurance. I mean, this was all built for this to maybe last a couple months. So again like the $600 extra payment for unemployment expires the end of this month. So we have to, I think really, as I said, and when we see how these spikes play out, sort of now really recalibrate our tools and see, "Okay, how long is this going to last? And what sort of policies can we have that can sustain businesses as long as possible?" In the meantime, not propping up like some zombie companies or having benefits that are so generous that people don't go to work at all.

Brian Anderson: Right, because that could keep the unemployment rate artificially high. Speaking of the stock market, you recently wrote a very interesting little piece for us. We are living through this incredibly risky moment in the economy, and you've got many millennials and even younger cohorts using their time in quarantine to become day trades, stock pickers, All of the major online brokers have had this huge surge in the number of new accounts this year. As you noted in your piece, part of this is due to, I think, Dave Portnoy, who is the founder of Barstool Sports, who's kind of reinvented himself as a self proclaimed investment guru since the beginning of the crisis. What's your view of this day trading and what can we learn from it? And is it really having any kind of impact on the market we're seeing right now?

Allison Schrager: Yeah, no, I cut it from the original draft, because it kind of meandered, but I find it interesting that so many people are so quick to assume that, in this grand scheme of financial markets, relatively small investors, and not really that many of them, can have such a big impact on markets. Because it seems like for the last couple of years all we heard about was how index funds were taking over markets. And there was no price discovery anymore. And small, and like the average investor, even like a big hedge fund, who's an active manager, couldn't move markets in the same way. Now all of a sudden... it's a relatively small market. I think the whole sports betting market, which is what people suspect is now moved to financial markets, is only $155 billion, which isn't really that much.

So it seems strange to me that people want... Like a couple months ago were saying index funds have ruined markets. There's no price discovery. But now assume that a small band of very small investors can completely alter stock market prices and even be responsible for all the volatility we're seeing. It doesn't make sense. I think what we could worry about is the sort of personal finances of these guys. I mean, these are people sitting at home playing with money. It's a very uncertain economy. Are they going to... Most speculators, most day traders do lose money on markets. It's really hard to make money consistently with stock market speculation. Especially when you're up against algorithms that can trade much faster than you.

So provided they don't lose that much money and this is money they can afford to lose. I think it could even be a good thing. I think we should be more engaged with financial markets. People should understand them and understand how hard it is to make money, but that investing is important. So there is a case that this could be a net positive and people learn their lessons. Not to day trade options if they don't know what they're doing. And at the same time stock investing is a healthy thing and they should buy an index fund.

Brian Anderson: On another topic you've written about, as States are looking to rebound from the lockdowns, from the effects of the pandemic, a lot of people are talking about infrastructure projects as a great idea. That we certainly do need new infrastructure investment. And so state leaders talking about this, the President has even mentioned this as a possible goal for this year. What's your view of infrastructure projects as a way to generate some economic growth?

Allison Schrager: Well, I mean like everyone wants to train to LaGuardia. I mean, I think everyone likes infrastructure in theory. And there's certainly some projects that are worth doing. But I think counting on infrastructure as a means, as like our salvation, I think it's very tempting to say this is the worst economic crisis since The Great Depression and infrastructure saved people from The Great Depression. And so I think I hear a lot of politicians going there. I think Boris Johnson, as well, is going there. So this is definitely all political stripes.

But really if you look at the history of The Great Depression, that's not entirely clear that infrastructure was this great salvation. It looks like, first of all, they didn't have any sort of safety net going into the depression. So giving anyone a job to do anything would have, or giving money to do anything actually did a lot. Because there's no unemployment insurance. But it doesn't even look like it really, the idea is with infrastructure spending is, one, you get these great projects that boost economic growth because good highways facilitate growth.

But most of it was, or a large share of it, was just paying people to do smaller things around, in local towns and they were less skilled. It was sort of like put a dollar in, they got a dollar out. So it wasn't this, these knock on big effects. And in fact it might've even slowed job creation because there's evidence that people were reluctant to take non government jobs which they saw as less stable. So then the question is, is if it's worth it, is do these infrastructure projects actually support longterm growth? Like are we going to sort of all have better internet access and better highways that will support growth for the future? I mean, people don't appreciate that construction has become a lot more skilled than it used to be. I mean, you can't, it was one thing to sort of ask a farmer to dig a hole. But now I think it's a bigger stretch to ask a laid off hotel concierge to build a high speed train.

Brian Anderson: Right. A last question, Allison. The pandemic, I think you'd agree, will have longterm consequences for the country's economic policy. One idea though, that's gained a lot of traction, grew out of the pandemic response. And this is again shared across the political aisle. Is this idea that, of the supply chain when it comes to pharmaceuticals and medical supplies in particular, and you've even had buy American as an idea being broached in Washington. The statistic that's usually cited in favor of this kind of policy, that our medical supplies should be made in America, is that 80% of the drugs in America come from China. And while this claim, you note isn't accurate, you do note that we probably do need to make changes in how we source and make drugs available. So could you describe the state of play over that argument and what your view is on the kind of buy American idea?

Allison Schrager: Yeah. It's a strange argument for me, as I said, as someone who has a background in finance. Just because when I think of risk mitigation, I think of diversification. So whether or not your supply is coming from one outside country, your own country, you're concentrating your risks. So this idea that if we make things domestically, we're somehow going to be safer, I just don't think it's very accurate. Ideally would be diversified across several countries. Because something, if we needed an important drug, and we're only making it here, and only have the capacity to make it here, that would actually expose us to even more risk. So I think it's misguided.

Not to mention the fact that paying for drugs is already a huge issue, incredibly expensive, and just said, concentrating our supply chains here would make them more expensive. So I mean, that's certainly an issue. But I mean that said, ideally you have freer markets. So there are distortions, regulatory distortions, that put US manufacturers at a disadvantage, so you can get rid of those. And that would certainly create, align better incentives. But I think it would be a mistake to think that we should concentrate all of our drug production here.

Brian Anderson: So the idea really is to apply the notion of diversification from finance to the way we think about supply chain issues. And to make sure we're just not fundamentally reliant on one country, especially one like China, where we have a very fraught relationship.

Allison Schrager: Exactly. Like I worry, not just for drugs, but for all sorts of supply chains of all sorts of goods. I think we learned the wrong lesson of thinking, "Oh, well we should trade less because we're so dependent on China." Like I said, it's worse I guess even to depend on one country for all of your goods. But I mean, with the diversification, you should depend on as many as possible. That way you're never or not depend on any one by being very well diversified. So if your relationship or something goes wrong in one country, you have a lot of different sources.

Brian Anderson: Great. Thanks very much. Allison. Don't forget to check out Allison Schrager's work on City Journal's website, She's writing very regularly for us. We'll link to her author page and a few of her recent pieces in the description. You should also check out the book I mentioned earlier, it's called An Economist Walks Into a Brothel. It's received a lot of attention. It's a terrific book. You can find it on Amazon or wherever books are sold. You can follow Allison on Twitter @AllisonSchrager. And you can also find City Journal on Twitter @CityJournal and Instagram @cityjournal_mi.

And as always, if you like what you've heard on the podcast, please give us a rating on iTunes. Thanks for listening. And thanks very much, Allison for joining us.

Allison Schrager: Thanks for having me.

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