The Munk Debates Podcast - Be it resolved: The COVID-19 bailout of financial markets and big business will end up hurting not helping the economic recovery

Episode Date: August 5, 2020

To address the devastating economic impacts of COVID-19 Western governments have unleashed an unprecedented wave of monetary and fiscal stimulus. The US stimulus package includes trillions of dollars of liquidity for financial markets, the direct purchase of billions in corporate debt by central banks, and billions more in low interest loans and wage supports for big businesses. Supporters of these measures believe they are vital to preventing a severe recession from turning into a Great Depression. Critics charge that we are repeating the mistakes of the Great Financial Crisis by once again bailing out big business on the backs of taxpayers.  In this episode of the Munk Debates Podcast, Nomi Prins, a former senior Wall Street insider, and Douglas Holtz-Eakin, former Director of the Congressional Budget Office, debate the essence of these two competing arguments.Sources: CTV News, Global News, MSNBC, MSN, Bloomberg Politics, Quick News, CBS, WNCT-TV9, CNBC, UniversalBecome a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

I think it's time for this toxic binary zero-sum madness to stop. We're not an imperial power. We're a revolutionary power. We are no longer in a world where you can plot out moves statesmen to statesmen like a chessboard. You don't know anything about my background to where I came from. It doesn't matter to you because fundamentally I'm a mean white man. We can't do this to the next generation because America will cease to exist. Welcome to the Monk Debates podcast. Every episode we provide you with a civil and substantive debate on the big issues of the day. Free of spin, focused on the facts and animated by smart conversation.

To arm you the listener with enough information to make up your own mind. Today's debate, be it resolved, the COVID-19 bailout of financial markets and big business, will end up hurting, not helping the economic recovery. The Pittsburgh Gazette captured video of hundreds of cards lining up for the Greater Pittsburgh Food Bank before it... Months into the pandemic and yet another business is calling it... What happened in March was devastating and was repeated in April. We've only regained about 10% of what was lost.

Hello, I'm your moderator, Rudyard Griffiths. Soaring levels of unemployment, surging bankruptcies, lines at food banks that echo the Great Depression. To address the devastating economic impacts of COVID-19, governments have unleashed an unprecedented wave of monetary and fiscal stimulus. The government is preparing to unleash another stimulus package which could mirror the wartime initiatives. In these extraordinary times, our government is taking extraordinary measures. Calling it a wartime-level investment in our economy, some major. your breaking news overnight. The U.S. Senate has reached an agreement on a rescue package. This includes trillions of dollars of liquidity for financial markets, the direct purchase of

billions in corporate debt by central banks, and billions more in low-interest loans and wage supports for big business. Supporters of these measures believe that they are vital to preventing a severe recession from turning into a Great Depression. Large corporations and the financial markets they rely on support tens of millions of jobs and are the key to any economic recovery. Critics argue that we are repeating the mistakes of the great financial crisis by once again bailing out big business on the backs of taxpayers. What did the Senate majority fight for? One of the largest corporate bailouts with as few strings as possible in American history.

And billions of dollars, which will be leveraged into trillions of dollars to contribute to the largest income inequality gap in our future. The result, just like 2008-2009, will be soaring economic inequality and a stalled economic recovery that further concentrates economic power in the hands of big business and the 1%. To get our economies moving again,

Main Street, not Wall Street, should be the focus of the COVID-19 economic response. On this installment of the Monk Debates podcast, we challenged the essence of these arguments by debating the resolution, be it resolved, the COVID-19 bailout of Wall Street will end up hurting, not helping the economic recovery. Arguing for the motion is Nomi Prins, author of numerous best-selling books, including all the president's bankers, and her latest, collusion, how central bankers rigged the world. Arguing against the motion is Douglas Holtz-Eacon, president of the American Action Forum. He's a former chief economist of the President's Council of Economic Advisors and the former director of the U.S. Congressional Budget Office.

Noemi, Douglas, welcome to the Monk Debate podcast. Thank you. Thank you. I'm really looking forward to this conversation today. One of the key policy responses to this pandemic has been this extraordinary tsunami of monetary and fiscal stimulus that governments around the world have unleashed to respond to this collapse. in aggregate demand, these effects, the profound effects, rising unemployment, that this pandemic is having on all of our economies. So to have the two of you with your expertise and insights to kind of guide us through this critical moment and these critical policy responses and what they all

mean is a privilege indeed. So I thank you both on behalf of the audience for being on the show today. As per our convention, we're going to put two minutes on the clock for each of you for opening statements. Our resolution today, be it resolved, the COVID-19 ban. out of financial markets and big business will end up hurting, not helping the economic recovery. Nomi, you're arguing in favor of a resolution, so please take us away with your opening statement. So even before the COVID-19 crisis, the global economy was starting to falter. So the Fed stepped in with balance sheet growth in late 2019 with something called repo operations that are a form of short-term lending, normally between big banks and their big corporate clients.

And even with $4 trillion of deposits between the top four American banks, they require that help. The result was an inflation of its balance sheet to $4.1 trillion by the end of 2019. The Fed also pivoted back to easing mode in 2019 to supplement the slowing down of GDP growth. Other central banks took that same queue around the world and 60% of them pivoted from tightening to easing in 2019. The debt in late 2019 for the world was three times GDP, so for every $3 borrowed only a dollar of economic real activity occurred. That's how we started 2020. It's thrown a pandemic, acute shutdowns, uncertain reopenings and reclosings, and we're in for a long-drawn-out financial and economic crisis. However, the financial side's done much better, is exemplified by the

$2 trillion increase in big bank deposits since the pandemic began and disproportionate availability of sustenance through the Fed's 11 facilities, the federal government, to larger corporations, and thus Wall Street. Meanwhile, the foundational economy, including the dire unemployment situation, is still in a state of shock. There's been a widening gap between capital use to increase debt and flow into financial markets, which is why the stock markets hit quarterly high percentage increases in the NASDAQ is at an all-time high, while the Main Street's economy is nowhere near that capacity. Big corporations are using cheap rates and fed facilities to borrow and receive assistance with no guarantees of rehiring. This means all the new debt created is even cheaper

than the debt created in the wake of the 2008 crisis. More debt, more cheaply means less incentive to repay it, more incentive to push it down the road. So you have the snowball of debt coming down this high mountain of an avalanche growing and getting bigger while the mountain is that Main Street economy avalancheing down. I call this a permanent distortion because the disconnect between financial assets, equity markets, and the real economy has now become irreversible. There will be an endless supply of artificial stimulation into Wall Street, large companies, and the markets with less money deployed to the real economy, small businesses, and people. The bigger that gap gets, the greater the likelihood of another financial crisis on top of an existing economic recession or depression. Noemi, thank you. Let's go to Douglas Holtz-Egan for his opening statement. Douglas, you're arguing against our motion today. Be it resolved that COVID-19 bailout of financial markets and big business will end up hurting, not helping the economic recovery. Let's have your opening remarks, please. A bailout is the infusion of taxpayer funds into a targeted entity to avoid insolvency as a result of mismanagement. And that's simply not what we have here. When the pandemic hit, customers across the,

the economy disappeared, and large swathes of Main Street businesses experienced genuine cash flow crunches. In those moments, they sold everything they could to raise cash. The Fed saw the duress in financial markets and set in to provide liquidity. The Congress responded in turn and provided large amounts of liquidity in the form of the Paycheck Protection Program. $500 billion went out in the month of April to smaller businesses in America. It did set up facilities at the Federal Reserve, the Main Street lending program, but thus far it has not been used. And so the result is that we have a genuinely well-targeted attempt to preserve the cash flow needs of the private sector by the federal government, federal government, federal reserve, plus the Congress. It will be an invaluable exercise in the history books.

It preserved the economy for two and a half months. And now the hard work of resuming growth has begun. But this is not a bailout in any sense of the word. It's simply an effective cash flow replacement program. Okay. Thank you, Douglas. I like where this debate is going to clearly different views on our motion before us. Nomi, let's have you react now to what you've just heard from Douglas.

What are the key points that you want to make in rebuttal to his opening statement? There was definitely a need for help. And the Federal Reserve and Congress did rise to that need. However, it's in the way that that help was created and the disproportionate availability of certain facilities to corporations, to Wall Street to allow them to increase debt without necessarily guaranteeing that they would rehire the people, because you know what, they can't necessarily guarantee it. The way in which these facilities and the fiscal stimulus was constructed, that guarantee is not necessarily even something that can be done by corporations. Yes, the Main Street lending

program, as well as asset back programs, which are ways of injecting financial capital into the system, but not requiring it to go into the real economy. And so that's where that disconnect actually happens. Not that there wasn't help created that was needed, but it was in the disproportionality of how that help was created and where it's gone. So if we talk about two trillion dollars worth on bank balance sheets, a lot of

that is from corporations who did have to draw down on their credit lines, then rates got cheaper, then they had other sorts of subsistence, and now the banks have larger deposits because of that. Cosmetically, that looks like more capital. But in fact, it's actually creating

a larger, unstable situation if we don't get to that real recovery, a sustainable recovery in the real economy in the foreseeable future. Thanks, Nomi. Douglas, your opportunity now also to kind of rebut what you've heard from Nomi in her opening statement or in her reply to your opening remarks. I think it's important to remember the scale of the impacts on this economy. We have seen in the past couple of months a record one month decline in consumer confidence, a record one month decline in retail sales. Six million individuals apply for unemployment insurance 10 times larger than the largest previous week. 20 million jobs destroyed in the month of April,

10 times larger than the single largest previous one-month loss. Unemployment rate jumping by 10 percentage points or more, again, 10 times larger than ever before. And projections that the economy will contract by about 11% in the second quarter of 2020. During the worst year, the Great Depression, 1932, the economy contracted by 12%. So the scale of the economic downings, draft is comparable to having the worst year of the economic depression in the spring of 2020. In those circumstances, there are going to be enormous responses, but they're to everybody. They're not disproportionate. The Fed saw huge amounts of financial market turmoil because everybody was trying to get their

hands on cash. They pledged to provide as much liquidity for as long as possible an open-ended guarantee. That wasn't to a firm. It wasn't to a class of assets. It wasn't to any particular financial activity. It was to make sure markets continue to full. function in the face of this down draft. And it did. The Congress similarly provided large amounts of help to households, unemployment insurance that was available to people previously not eligible,

self-employed, part-time, independent contractors, lasted longer than ever before, 39 weeks at the outset, added $600 of federal money, wrote checks to individuals, $1,200 for each adult, $500 for kids. The result of that was a transfer of government benefits of about $3 trillion in annual rate in the month of April. And that continued into May. Households now have two trillion more in their bank accounts than they did in February. That's the source of the increase in the balance sheets. That's not coming from disproportionate help to the corporate sector. It's because Congress took care of the families. It then set to take care of small businesses, paycheck protection program, the most successful thing it has done so far,

got $500 billion out the door in the month of April. And it did some other things, give the Treasury half a trillion dollars to backstop Fed facilities, municipal liquidity facility, Main Street lending program, those have been essentially missing in action. So if there's any disproportionality here is toward households and families and the small business sector, not large corporations, they have yet to actually benefit from the CARES Act in any significant way. Thank you, Douglas. Let's kind of dig into our resolution before us. And I really want to get at the last part of our resolution, which is, is it helping or hurting the economic recovery? Because I think that's where my mind is certainly at. And I think many of our listeners is, what does all this mean for the

recovery. So let's shift our view forward, Nomi. And I'd like to better understand your argument about why you think these policies will have a pernicious negative effect on the economic recovery. Because as Douglas just explained, you know, the house was on fire. We had to put the fire out. There were seemingly the seeds of a financial crisis. They have been extinguished. But why do you feel this is going to have a negative long-term effect on the prospects of economic recovery? I just wanted to address something that Douglas had said about the $2 trillion sitting in bank accounts just being households. And yes, households did get help. We agree on that. There was the unemployment insurance extension, which was necessary. And there's also the Payment Protection

Program loans. Although the fact that there was $130 billion worth of remaining of those loans going into when they had to be extended is indicative of the access of small businesses and individual businesses to those loans. President Trump has signed legislation that extends the deadline for businesses to apply for a loan under the Federal Paycheck Protection Program. Hours before it was set to expire on June 30th, Congress passed the bill. So it wasn't that money wasn't made available, but it's the fact that a lot of people had to either have existing accounts with the larger banks.

And so if you didn't have a large bank account, or you weren't great at dealing with forms or, you know, sort of dealing with the mechanics of trying to get a loan, you were necessarily left out of that. And so that $130 billion has been extended, which it should have been. And to a large extent, the people that didn't get it actually represent a component of the real economy that aren't necessarily getting that help. And it's not one or two people. The $2 trillion that are in big bank balance sheets, a lot of it really was corporations that drew down their credit lines. And yes, they absolutely had to. Their businesses were shut down. There's no disputing that. But what's happened,

is they've increased their debt load, have received sustenance from these facilities. The Fed has created. That's why not only have we had a rebound in the NASDAQ, we have had new records, but the real economy, the real people detached from real jobs in a situation where those jobs are going to look very different going forward. That's going to be a massive drain. So capital going to one place, the real economy, not getting the same benefit. Thanks, Naomi. Douglas, a similar question for you again, trying to get us to... look forward and what might happen in the months and the next period of time to come. And I think if we look back at the 2008, 2009 great financial crisis, we saw at that time

a similar response, a large monetary and fiscal effort on the part of governments to address a collapse in demand in the economy. That recovery, some people have argued, was slow. They allowed zombie companies, as some people have characterized them to kind of limp along and retard the more vigorous upswing in growth we've traditionally seen after recessions. Why do you think that 2021, 2022, 2023 could be different than what we saw in 2010, 2011, and 2012? What's your view on that? So most importantly, this is not 2007, 2008. It's bigger, way bigger, 10 times bigger in terms of. impact on the labor market. And it had a different genesis. The 2007-2008 crisis was a man-made

self-inflicted wound. It was characterized by poor products, bad management, and the difficulties originated in the financial sector and eventually spilled over into the Main Street economy. And in those circumstances, there were capital infusions financed by the taxpayers that were bailouts. And there were no consequences on management. And there was moral hazard created as a result. and all of that, I think, has hampered the recovery. This is a very different animal. The crisis started when the pandemic showed up, and affluent individuals, people in the high incomes of codes, stopped spending on anything that involved personal contact.

They didn't travel. They didn't go to hotels. They didn't go to restaurants. They didn't go to barbershops. They didn't do any of that. And it was a sharp drop off in high-income consumption that triggered the down. That's a very different start to the problem. it involves no mismanagement.

So there's no moral hazard created by going out and trying to replace the cash flows and keep these businesses in suspended animation to get through the peak of the pandemic. So the Fed saw massive demands for liquidity, and it used its authorities, nothing from the Congress, nothing from cares, its standing authorities to try to produce financial stability that's part of its mandate. In a series of very aggressive and historic actions by the Federal Reserve that go well beyond what they did in the financial crisis. the Fed, first of all, saying that it will purchase treasuries and mortgage-backed securities,

quote, in the amount needed. But that's just the beginning. In other actions, they did a remarkably good job of keeping this pandemic crisis from turning into a financial crisis. It hasn't been a financial crisis. Financial markets have continued to work pretty well. Banks are well capitalized. They just went through their stress tests and they have been certified to be likely to survive the worst of the pandemic downturn in good financial shape. And so that's a real accomplishment by the Fed. And there's no moral hazard created by that. So we aren't in the same situation as in 2007-2008. My concerns are some that I share with NOMI. The Paycheck Protection Program was the best thing the Congress did. It still didn't do very well in many ways. The Treasury insisted

on not waiving the anti-money laundering provisions, which meant they had to scrub all the borrowers to see if they're financing terrorists. They'll take time, it takes money. And so they gave the money to their existing customers. They were certified. Here you go. And so it did not work smoothly to get money out to everybody. And the smallest businesses, the ones that are not going to have relationships, have very little cash on hand. I think we probably already lost hundreds of thousands of them, quite frankly. And that damage will be the hard part going forward. It is going to be very hard to replicate those losses, the jobs and the products that they serve. So the legacy of this will be that we didn't get enough to everybody. We got a lot out, but we did have some losses

there. Now we have to turn forward. It's a different proposition. What we tried to do in the crisis is provide enough cash for everyone to survive for a couple of months. Now we actually have to go figure out how to make the economy grow. And I don't think the Fed's the answer to that. It wasn't the answer post-2008. You're going to have to get genuinely good growth incentives out of the Congress and out of fiscal policy. And we didn't do that the last time around. It's a challenge that remains.

Thank you, Doug. It's really interesting analysis. So, Nomi, let's have you respond to, I think, a couple key points that Douglas has made here. Number one, no moral hazard. This was a natural disaster. not a man-made disaster, and therefore we have to look at the consequences of the response in a fundamentally different way. And we're not, as we did in 2008-2009, basically bailing out investors, letting them

gorge themselves on these high-risk, high-return assets. What's your take on that? In this situation, we have to be concerned that the banks are using this situation to actually push off some of their constraints. for example, what they are allowed to buy in terms of private equity funds or hedge funds or other riskier types of assets, how they can stick those into something called CLOs, which are packages of corporate loans, which are having obviously problems because of this pandemic, but also because of how they were already over leveraged those companies that took out those loans

going into this pandemic period. So there is an implicit doubling down of risks that were inherent in the system, before this pandemic came and created a more acute economic crisis. If we do deregulate some of the more risky activities, and we do actually see people and investors and companies going into higher risky assets right now in order to leverage whatever capital they're getting cheaply, whether it's through a Fed facility or just from the fact that rates are at zero again,

that is a concern that I have. Because now all of a sudden you're sort of re-entering, this period of an arsenal of risky assets and high-yielding assets that are now more leverage than they were into the 2008 crisis. When that goes wrong, which it absolutely can from an economic shock or a financial shock, that's going to be a problem. Meanwhile, in terms of the real economy, in terms of real people, in terms of real programs set by the government, to retool people, to look at how jobs are going to be different, how lower-wage workers who are disproportionately affected by these economic shutdowns with less cushion, no money at all and no jobs,

they're the ones that are going to be struggling the most, and that's going to impact the local economies where they live and how they pay and how those grow at the foundation of the entire economy. Thanks, Tommy. Douglas, in your impressive career in economics, one of the roles you held was director of the Congressional Budget Office. So you spend a number of years deeply immersed in understanding the debt liabilities that governments carry and how these impact economic growth.

Are you concerned about the effects of an exploding national debt on America's future prospects for economic growth? So prior to the pandemic, the federal budget was on a sort of structural unsoundness in which spending exceeded revenues as far as the I could see. As a result, debt relative to GDP rose as far as the I could. see interest payments is a fraction of our national income rose as far as the I can see. And this unsustainably was sending us straight into a debt spiral where you borrow to pay interest of previous borrowing. That was the situation. And that had been the situation for the entire 21st century because

the country had never stabilized its debt relative to its GDP. It had just continued to rise. Enter the pandemic, where there have now been extraordinarily large taxpayer resources devoted to the response. And this has involved large amounts of borrowing. I anticipate that the federal deficit this year will go from a trillion last year to over four trillion this year. We're going to see debt relative to GDP jump over 100 percent, something that has never been outside of World War II. And I begrudge none of those dollars if they are effectively used to respond to the pandemic and its economic down draft. I believe thus far Congress has been remarkably disciplined in that regard. It will, as it goes forward, have to change its tune. No means right about that.

The strategy in April and May was throw money at the problem, provide just a bath of liquidity and cash to households and businesses, whatever shape they might be in to allow them to bunker down and make it through the worst of what we thought was that sort of two and a half month period. We're not coming out of that two and a half month period. It's clear we're going to have to learn to live and operate the economy in the face of that virus. And we will have to have a different set of strategies going forward. They cannot be used to support zombie firms.

and there are going to be lots of zombie firms. This economy will restructure itself to acknowledge the realities of living with the coronavirus. And Congress has to be quite disciplined again, and that will be hard, I think, going forward because the pleas of those who have become obsolete want to stay in business are really loud and very fervent, and it's hard for Congress to resist that.

But they're going to have to do that. If they do, there will be a point in 2003, 23, 24, 25, when it will become necessary for the U.S. to somehow stabilize its debt relative to its GDP. I'm much too old and jaded to believe we will ever bring it down, but at some point you have to get it to stop going up. That's a minimal requirement for a country. That will involve all the growth we can generate, so do your job well. It will involve higher revenues, and it will involve taking on large spending programs that are very popular, like Social Security, Medicare,

Medicaid, Affordable Care Acts, those kinds of entitlement programs. And if you listen to what I just said, I just said that in the aftermath of the worst economic event that you can imagine for the United States, one that is going to be politically divisive and very difficult on members of Congress and administrations, we're going to do something that they've been unable to do thus far in the 21st century, and that's going to be really, really hard. And so it is not free what we are doing now. It comes with a big future cost, and we are going to have to live through that as well, but it is necessary and it should be done. Thank you, Douglas. Nomi, let's get your take on debts and deficits, because it is a major consequence of these extraordinary

fiscal and monetary responses. Douglas is saying, in fact, this could have a cathartic effect. It could force a final reckoning with out of control spending and some discipline, some difficult conversations around these key entitlement programs. Is that the future you see? I would like to believe that could be the future. However, the reality is, if we are going to get to a point where we do reduce our debt levels relative to our growth. It's going to require investment. The reason that the markets are going up so quickly is because they're effective investment is the capital that's basically flowing there and achieving those returns. If you rejigger that entire concept and put that into real infrastructure development, sustainable

social programs, retooling of the labor force, not just to help our growth, but to have help our position internationally as other countries are doing the same sorts of things with potentially more fiscal stimulus than we are doing in the United States. That would be an absolute plus and I do hope that can happen. We have those expansionary programs in the wake of the Great Depression. FDR came in, expanded multiple social programs and created building infrastructure, create the TVA, created private public partnerships, and could effectively employ people. My most immediate concern is in carrying out the purposes of the great work program just enacted by the Congress. Its first objective is to put men and women now on the

relief rolls to work, and incidentally, to assist materially in our already unmistakable march towards recovery. Because what we need to do right now is to get people to be a part of an economic recovery, and that ultimately helps the debt to GDP levels. I do fear, however, that as the result of this phenomenal expansion of the Fed's balance sheet without many strings attached to it. You know, the purchasing of individual corporate bonds, without the accountability associated with that purchasing of helping those companies using that money to develop jobs right now is a bit of a problem because that kind of money tends to get lost in the ether of debt, whether that's corporate debt or whether that's public debt.

So I think the problem that we also have to deal with is the accountability, of where capital has flowed during these unprecedented times and with some of these facilities and programs that will be ongoing, the net effect of that could be more debt, more risky investments in terms of financial assets, potential falling of those which could refall further on the real economy, on the Main Street economy, which at the moment is struggling beyond those Great Depression levels. Yeah, let me say three things about what Nomi just said. For the listeners, first of all, this is not the Great Depression.

And one of the reasons it's not the Great Depression is in the Great Depression, policymakers did either nothing or the wrong thing, a lot. And we have seen policymakers move, move quickly, move on an appropriately large scale. The CARES Act was 10% of GDP because we're losing 10% of GDP this quarter. And as a result, it will not be the Great Depression. And I think there to be applauded for that. We should be grateful. That's tremendous.

Second is the sort of complete disjuncture between the equity. markets that we see every day and their pricing and what's going on out there in the world, which makes people crazy, remember that what equity markets price is the future, so they're pricing a year from now, not now. Now is terrible. They're saying a year from now, it'll be better. And they're not pricing the whole economy. They're not pricing the Performing Arts Center in New Haven, Connecticut. They're not pricing not for profits in Wisconsin. They are pricing publicly traded corporations and the cash flows that holding their stocks will bring them. And those Cash flows can be generated in many ways, including growth, but also by laying people off and

increasing margins through cost cutting. That might be a good thing for the stock market, but that's a terrible thing for the rest of the economy. And so I would encourage number three, my third point, pay no attention to the stock market. If you care about public policy, put that aside, and let's pay attention, as Nomi has said again and again, to the real economy, to the main street economy to its actual growth, its actual re-employment of people, and what is necessary to generate that growth in employment. That's the litmus test. Douglas, that's a great segue to get your views on another issue that's kind of key to trying to figure out the effects of these policies on an economic recovery or the absence of one,

and that's economic inequality. I think there's a growing body of evidence to suggest that as you get greater levels of economic inequality, not only do you get the political. political instability that goes with that, it also can have a real impact on long-term secular growth. So I think it'd be interesting for the listeners to hear what are your thoughts about how these policies that right now have seemed to given the 1% a pretty darn good pandemic in terms of their asset values versus average people, small business owners who have seen just an absolute destruction in their net wealth. What do you see the effects of these policies on economic inequality and what could the impact be on the economic recovery? So again, I encourage people to go back to

what we now know from the real-time data about the onset of the recession. Remember, this economy was growing at about 2.3% at an average rate in January and February. And even in the middle of March, things were fine. And in the final two weeks of March, things went sufficiently badly that we had negative growth for the first quarter of GDP at a 5% annual rate. And the fully two percentage point, to that five percentage point drop was people stopping consuming health services. Like literally, people stopped going to the doctor, they stopped going to the dentist, they got phone to the eye doctor. We saw a massive aversion to those things that required physical contact. And in the real-time data, it took place, especially in high-income zip codes. And guess who supplied those services

in high-income zip codes? Low-income workers in small businesses. And so the fallout of the pullback was to exacerbate everything we know about income inequality. Low-income workers got laid off, lost their jobs, and small businesses largely, I think, got destroyed. We lost a lot of them. And so we've seen between the disproportionate health impacts on communities of color, the consumption decline in high-income people, we've seen exacerbated inequality. The first thing to do to close that back up is to get the economy going again and to

deal with the genesis of the problem, which is that people were afraid to go to those businesses. The workers are now afraid to go back. The consumers need to feel safe to go there. That's not a spending stimulus checks kind of problem. That's a supply-side problem where you have to find a way to make employees feel safe at work. That might involve PPE. It might involve restructuring the workplace, like in the meatpacking, to give more space. It's going to require some money.

It's a supply-side problem. And you might have to do the same thing for your customer area. So we're going to have to do some things to allow us to work in the presence of the virus and get the economy going again. That would require smart policymaking, not just throwing money at it as we've done so far. And that will sort of get us back closer to pre-pandemic levels of inequality.

And then the hard work begins because we know that there are existing barriers to success in K-12 education, which then snowballs into a lifetime of poor work opportunities and low incomes in the United States. So, you know, there are a multitude of factors that contribute to these things. but that will have to be a piece of the focus.

In the end, you get richer as a nation and you grow when you put money aside and you invest in something productive. And the most productive thing we could invest in would be American workers. To not invest in them is to condemn those workers to a lifetime of below average productivity and life. And it also hurts the economies a whole. So we need to do that. You're listening to the Monk Debates Podcast. If you like this podcast, check out our other episodes, including debates, on everything from the U.S. election to the accuracy of COVID-19 data to whether billionaires should exist.

All free to download or stream on our website, monkdebates.com. Nomi, let's get your take on economic inequality and the potential impact that these policies are going to have on stratifications of wealth in society. Douglas painting a picture here that it's really about simply getting the machinery, the mechanics of the economy working. you can't even think about addressing economic inequality until that basic foundation is in place, and that's what these extraordinary monetary and fiscal measures have done. They've put that structure in place to now begin the longer journey to try to find a greater sense of economic balance between classes, races, and groups. Well, I think we need to really be doing both at the same time.

There's a couple things that stand in the way of that and that would be necessary to do that. And certainly in terms of the jobs that were lost because businesses just shut down or reduced their workforces or couldn't operate because of the virus and because of health concerns and lockdowns, disproportionately came from those who had lower wages. So about 35% of the jobs that were lost were lost to low-wage workers versus about 9% in the higher wages and with people who could take their jobs and work from home. So there was inequality to begin with. And the inequality has grown just in the terms of the mechanisms of the shutdown and the mechanisms of how money has been created by Congress and has been leveraged substantially by the Fed through for other people besides low wage workers. So I think you have to do both. I think we have to find a way to effectively retool at the same time lower wage workers as things restart. But where the inequality also grows from a wealth asset perspective is that these people who had higher low,

levels of wealth to begin with. Individuals, small companies, financial firms, corporations, have the ability to more quickly use the help that they are getting and deploy it into, we've both talked about the equity assets and in some cases debt assets, which allows them to increase the value of their wealth, whereas people at the lower end of the spectrum aren't involved in those types of wealth-producing environments. I think we have to find a way to figure at how we deal with the fact things in the economy have changed. We know certain jobs are not going to come back. We know that there are certain sectors which will be destroyed or severely hampered for a very long time, services, airlines, certain air elements of the health sectors. And we need to

find a way to sort of retool people might have been in some of those sectors into the technology sectors or other places where they can actually be productive more quickly. Thanks, Tommy. Let's go to closing statements. This has been a terrific debate. I've certainly learned a lot, and I want to hear the two of you, sum up your arguments, underline the key points that you want to leave our listeners with. So, Douglas, we're going to put two minutes on the clock for you. Let's have your summation to this conversation. The Federal Reserve's actions were a large, broad-based response to financial market turmoil that emanated from cash flow crises in the private sector due to the pandemic. And its response has restored and maintained financial

market functioning, which is important in our economy. The response by the Congress and the administration has been large scale, 10% of GDP and more, and swift as needed. Both of these will have proved necessary for a better feature for the U.S., but not sufficient. What will matter for whether we look back and decide that was money really well spent is the next steps, whether we generate the capacity for continued real investment in the form of human capital, technologies, equipment, infrastructure, and structures, whether that happens and we see rising employment wages, that's the challenge that remains. But nothing that's been done so far was a mistake. It was all beneficial ways to get us to the important next step. Douglas, thank you for your concluding statement. Nomi, we're going to

give you the last word in our debate today. Two minutes on the clock. Let's have you wrap up for us. I think though it was necessary to help an economy that had stopped and to help liquidity be provided to the financial markets, but through banks. to small businesses, to individuals, which would have been the better way to proportion it, although that's not what happened, with the Fed almost doubling its balance sheet, between $3.7 trillion last year to $7.1 trillion so far this year, with potentially up to $10 trillion to go, without the accountability of where that capital flows and us seeing that, in fact, where it is flowing is into riskier assets, into equities,

which exacerbate inequality. They exacerbate the future potential of that risk to be incurred by, the financial system and therefore also the economic system, the general economy, that that is a problem. I think we should have been more strategic in terms of both the Fed response and the fiscal response because they were done at the same time. And they did disproportionately go to the larger corporations, the benefits went to the wealthier individuals, and although they also went to small businesses, and also benefits helped individuals who didn't have anything or less to begin with, that we could have done that in a different way.

The Main Street lending program, for example, from the Federal Reserve that was designed and narrated in order to be able to do that has not really been utilized and it hasn't therefore been effective. So think going forward, we need to calibrate the accountability of where capital is available and where it goes, be more strategic about it, consider the foundational economy, the Main Street economy, individuals who are affected disproportionately from the stoppages in their own personal economy. And we need to proportion back and plan back in order to grow that foundational economy, reduce inequality, and allow more of the workforce to participate in economic recovery and positivity. Thank you, Nomi. And just to say to both of you, you know, this podcast exists to try to bring back the art of civil and substantive public debate, something that we feel is all too missing in the public square today. So I think both of you have engaged with that spirit, first and foremost, and the result has been just what we were looking for.

A rich, deep debate, civil and substantive in just the way that the monk debates try to convene and curate all of our conversations on these important topics. So on behalf of our listeners, Nomi Douglas, thank you both for your time today. Thank you. Thank you. Well, that wraps up today's debate. I want to thank our participants, Nomi Prins, and Douglas Holtz-Eakin. they certainly gave us a lot to think about. The Monk Debates podcast is that special place for civil and substantive debate of the big issues of the day.

To listen to more debates on everything from life after COVID-19 to our changing cities to the new geopolitics and the future of human progress, visit our website, monkdebates.com. You can also find detailed show notes on today's debate. Thank you for helping us bring back the art of public debate one conversation at a time. The Monk Debates are produced by Antica Productions and supported by the Monk Foundation. Rudyard Griffiths, Marilyn Missouri, and Christina Campbell are the producers. The Monk Debates podcast is mixed by Steve Lewin. The president of Antica Productions is Stuart Cox. Be sure to download and subscribe wherever you get your podcasts.

And if you like us, feel free to give us a five-star rating. Thanks again for listening.