A National Lockdown Could Be The Economy's Best Hope, Says Minneapolis Fed President

Originally published on August 9, 2020 3:16 pm

The United States has now surpassed five million confirmed cases of COVID-19 and 160,000 deaths from the virus as tens of millions of Americans file for unemployment, causing experts to debate how the nation should respond.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, says the answer should be a return to mandated lockdowns in every state for up to six weeks in an effort to save both lives and the economy.

"If we aren't willing to take this action, millions more cases with many more deaths are likely before a vaccine might be available," Kashkari wrote in a New York Times op-ed on Friday alongside Dr. Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota.

Kashkari says lockdowns were having a positive effect during the spring. The problem, he told NPR's All Things Considered on Sunday, is that "we threw in the towel before the health officials had actually gotten control of the virus."

Giving up too early cost the economy, says Kashkari. What the country needs now, he says, is "a more stringent, uniform lockdown state-by-state" until the virus can be brought under control. "Then we can return to normal economic activity with more confidence."


Interview Highlights

On the economic argument for a more strict lockdown

The economic argument is what we're doing right now isn't working. We did a modest lockdown and then we let up far too quickly according to the public health experts, and now our economy is only very slowly recovering. Many people feel scared to go back into restaurants, so restaurants can't return to normal.

We're not really going to be able to return to a robust economy until we get control of the virus, and at 50,000 cases a day it's spreading like wildfire throughout the country. So unfortunately, yes, a lockdown for six weeks would impose short term pain, but I believe we as a country can afford to support Americans through that short term lockdown so then we can reopen and have a vigorous economy, have kids returning to school.

I want us to get back to a robust economy as quickly as possible. This is much faster than allowing the virus to spread uncontrolled.

On the concern that increasing federal unemployment benefits will wrack up federal debt

Well one of the things that has happened in this recession that is unlike any recession in modern times, our savings rate has taken off. It's really curious. Those of us, like me, who have been able to keep our jobs, we're actually saving more money because we're not going out to restaurants or movies or on vacations. So the personal savings rates soared from about 8% to 20%.

The way it works is that money then gets put in the bank, or put into a money market fund, and those resources are available so that when the government runs deficits, it doesn't have to borrow as much from abroad because we're generating savings domestically. It is much safer for a country to fund its own government deficits from its own people than it is to borrow from abroad.

So it turns out, we can actually fund the additional unemployment benefits, for example, or additional support to small businesses from our own domestic resources. That is much, much better than having to borrow it from abroad. So this recession is very unique in how we've shut down part of the economy because it's also generating savings that can support the workers who are most affected. I know it's complicated, but this is a unique moment when the traditional concerns about government deficits, debt to GDP, do not apply.

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LEILA FADEL, HOST:

We're going to begin today's program with the chilling news that the United States has now surpassed 5 million confirmed coronavirus cases - this on top of 160,000 deaths and tens of millions of unemployed Americans. And yet, five months after the first wave of lockdowns in the U.S., the country is experiencing roughly 50,000 new cases every day. Scientists say we're likely months away from vaccine, meaning the pandemic will continue to rage unless drastic measures are taken to contain it.

Neel Kashkari is the president of the Federal Reserve Bank of Minneapolis. He has called for a return to mandated lockdowns state by state for up to six weeks to save both lives and the economy. And Neel Kashkari joins us now to share his insights.

Hello.

NEEL KASHKARI: Thanks for having me.

FADEL: So you wrote an op-ed in The New York Times with infectious disease expert Michael Osterholm calling for a more restrictive lockdown. You argue that states must mandate sheltering in place now. I'm quoting you now. If we aren't willing to take this action, millions more cases with many more deaths are likely before a vaccine might be available. Now, the public health reasoning here is pretty clear, but this will surely mean more lost jobs, closing of small businesses. What's the economic argument?

KASHKARI: Well, the economic argument is what we're doing right now isn't working. We did a modest lockdown, and then we let up far too quickly, according to the public health experts. And now our economy is only very slowly recovering. Many people feel scared to go back into restaurants, so restaurants can't return to normal.

FADEL: Right.

KASHKARI: We're not really going to be able to return to a robust economy until we get control of the virus. And at 50,000 cases a day, it's spreading like wildfire throughout the country. And so unfortunately, yes, a lockdown for six weeks would impose short-term pain. But I believe we as a country can afford to support Americans through that short-term lockdown so then we can reopen and have a vigorous economy, have kids returning to school. I want us to get back to a robust economy as quickly as possible. This is much faster than allowing the virus to spread uncontrolled.

FADEL: Now, people listening might be thinking, well, we already tried a lockdown and only leaving the house for essential activities. How is what you're suggesting different than what the country - or, at least, state to state - tried this past spring?

KASHKARI: Well, two things are different. One is a much more uniform, stringent lockdown. So I've seen estimates that around 39% of workers in the country are, quote-unquote, "essential," in essential businesses or categories. Yet if you look at Minnesota, 78% of workers were deemed essential by the state. So there was great variation around the country on how stringent the lockdowns were.

And then, second, we just declared victory far too soon while cases were declining. The modest lockdown was having a positive effect in the spring. We threw in the towel before the health officials had actually gotten control of the virus. So Dr. Osterholm and I are saying we should do a more stringent, uniform lockdown state by state, and then we should hold it until we actually get control of the virus. And then we can return to normal economic activity with more confidence.

FADEL: And I think what you're suggesting might sound scary to many people who maybe have just gone back to work, who weren't deemed essential, who weren't collecting a paycheck. What would you say to them?

KASHKARI: I would say I understand it. To do this lockdown right, we need to provide the assistance to those people who are going to lose their jobs even temporarily. We as a country have the resources to do it. According to the health experts, this is the single best way to really get our arms around the virus, to squash it...

FADEL: Yeah.

KASHKARI: ...Control it and then allow the economy to open. If you look around the world, many other countries have done this successfully. The United States is an outlier that we have failed to control our virus, and that's why it's spreading like wildfire. If all these other countries can do it, we should be able to do it, too. And their economies are recovering more quickly as a result of it.

FADEL: There's concern, often from fiscal conservatives, that extending federal unemployment will rack up federal debt. You dispute this. Why?

KASHKARI: Well, one of the things that's happened in this recession that's unlike any recession in modern times - our savings rate has taken off. It's really curious. Those of us like me who've been able to keep our jobs - we're actually saving more money because we're not going out to restaurants or movies or on vacations. So the personal savings rate has soared from around 8% to 20%.

The way it works is that money then gets put in the bank or put into a money market fund, and those resources are available so that when the government runs deficits, it doesn't have to borrow as much from abroad because we're generating the savings domestically. It is much safer for a country to fund its own government deficit from its own people than it is to borrow from abroad.

So it turns out we can actually fund the additional unemployment benefits, for example, or additional support to small businesses from our own domestic resources. That is much, much better than having to borrow it from abroad. So this recession is unique in how we've shut down part of the economy because it's also generating savings that can support the workers who are most affected. I know it's complicated, but this is a unique moment when the traditional concerns about government deficits and debt to GDP do not apply.

FADEL: Now, you live in Minnesota, as we mentioned. The state health commissioner there, Jan Malcolm, was quoted in the Minneapolis Star Tribune saying a lockdown would be, quote, "an unfortunate step that could become necessary down the road if we don't have enough people step up and make the everyday decisions needed to slow the spread." And I wonder how you would respond to that.

KASHKARI: Well, first of all, her leadership - she's doing a lot of work on behalf of the people of Minnesota, and I applaud her for that. So far, we're not seeing it. So far, you know, we're seeing the Sturgis Rally, a couple hundred thousand people, motorcycle riders, showing up apparently not socially distant in South Dakota. And so I go around, and quite a few businesses are now imposing mask mandates, but I still see some people not wearing masks. And so, so far, what we are doing is not working, controlling the spread of the virus.

We need to do something else. Otherwise, we're going to be at this for the next couple years - next 18 months, next two years - until we have a vaccine that is widely available and widely adopted. And that is a muddle-through strategy that's going to be a very slow economic recovery with a lot of health consequences and economic consequences. Dr. Osterholm and I are arguing we can do much better if we're more aggressive.

FADEL: That was Neel Kashkari, president of the Federal Reserve Bank of Minneapolis.

Thanks for being with us.

KASHKARI: Thanks for having me. Transcript provided by NPR, Copyright NPR.