Where are we going to be in early September? We are going to be in a massive recession. We’re going to have one in 10 workers unemployed. The economy is going to be significantly smaller than it was 12 months earlier. We’re going to be in a situation in early September that is worse than the economy ever was during the Great Recession.

Those numbers sound like they’re worse than any numbers we’ve had since the Great Depression. Thirteen percent unemployment is a prewar number.

It’s going to be very bad. Yeah, that’s right.

Giving help to states and local governments seems to be a very controversial thing — while we’d like the private economy to roar, we don’t want our government to get too big and all that. But it sounds like that’s still a pretty important piece of this puzzle over the next three months.

Yes. I think that is an important piece. This is one of those debates on Capitol Hill where both sides are making really good points. Congressional Republicans are right not to want to use federal tax dollars to bail out state pension funds, many of which have been pretty poorly managed and are in bad shape. Congressional Democrats, and some Republicans as well, are right that it’s really important for the federal government to fill the hole in tax revenue that states are going to experience. Why is that important? It’s important because states can’t run deficits. If tax revenue plunges, and we saw this in the Great Recession, then states are going to have to lay off a bunch of workers. Well, that takes us in the wrong direction. We want the unemployment rate to come down, not to go up. And so there’s a really important role that federal aid to the states can play in keeping the unemployment rate down.

In addition, states have to do all sorts of stuff right now that costs money. School districts have to figure out how to handle reopening in the fall in the face of a potential second wave of the coronavirus. States have to spend more money on public health measures. And that spending is occurring at a time when their tax revenue is falling, so it really does mean that there’s even more pressure to lay off workers than would be the case in a normal recession. They may also just not provide some of those essential services as well as is needed, and that would be really bad too.

So the need here is very clear, but I think there should be some guard rails put around that money to make sure it doesn’t go to bail out pension funds. And I think that’s something that Congress should be able to handle.

So what will the economy look like six months from now? And how policy-dependent is your forecast?

Well, the economy six months from now is still going to be in very, very bad shape. It’s conceivable, I think, that the economy six months from now will have an unemployment rate of 8 percent. It’s also conceivable that the economy six months from now will have an unemployment rate of 10 percent. A lot really depends on how aggressive the virus is this fall. A lot depends on how state governments respond to that, with respect to social distancing measures. A lot depends on whether or not people’s desire to pull back from normal economic activity is driven by concern from the virus versus government-mandated lockdown orders. A lot depends on whether or not we have two months of social unrest around protests and concerns about racial equality or whether that only lasts a couple of weeks. There’s just a lot up in the air right now.

If people really do kind of rush back into normal life in the month of June, and if there’s a lot of pent up demand and people go out to dinner much more often than they normally would, and people do much more than they normally would, then the recovery is going to come back a lot faster. If people are more tentative and we have a couple more months of early steps like in May, the unemployment rate is going to be higher six months from now.

And so there’s just a lot of uncertainty, but policy has a huge role to play here. And I think we saw that in the employment report for the month of May. I suspect we’ll see it in the employment report for the month of June. Putting hundreds of billions of dollars into the hands of small businesses has done an enormous amount of good for workers, an enormous amount of good for the economy, and an enormous amount of good for those businesses. Putting hundreds of billions of dollars into the checking accounts of American households allows them to support the economy and get workers back to work faster.

If Congress should do something for state governments, you would see a similar proposition. The Fed’s programs have helped preserve the functioning of financial markets and to extend liquidity to large businesses as well. These fiscal and monetary policy measures have a huge impact on the course of economic recovery. And it’s just imperative that the good news from the May jobs report and the good news that we’re going to continue to see throughout the summer do not obscure the need for continued economic recovery legislation and economic recovery programs. If we lose that support, it will be a major setback for workers, for families, and for businesses.

My guest today has been Michael Strain. Mike, thanks for coming on the podcast.

Always happy to come on.

This article by James Pethokoukis and Michael R. Strain first appeared at the American Enterprise Institute.

Image: Reuters.