Hit by the COVID-19 pandemic, the global economy is facing great challenges. What is the future of the global economy? How should the market in China, the United States and Europe respond to this situation? How far away is the next financial crisis?

To discuss these key issues and promote communication and cooperation in this critical period, China Development Forum held a webinar on "Global Economy and Financial Market" on March 17, 2020.

One of our speakers is professor Jason Furman from Harvard University.

Jason Furman was once at the core of decision-making in US economic policy. He is the former chairman of Council of Economic Advisers, and a top economic advisor to President Obama.

· He is also an old friend of China Development Forum. In a previous interview, Furman said that China should cut consumer-oriented tax and help boosting internal demand. Now he suggests that US governments should adopt even more aggressive cash assistance to help households.

Furman believed that the impact of the pandemic on the global economy is strong, highly uncertainty, long term, global, recovery from this will take longer than the immediate effect of the pandemic.

The reduction on economic activity immediately could be quite large. It's also depends on the choices we make. The economic effects could persist and outlast even the pandemic itself.

He acknowledged that the US had previously underestimated the effect brought by the epidemic. The US needs to promote coordinated action in fighting the epidemic globally, because the risk of acting too little is much greater than the risk of acting too much.

The following speech is edited for clarity.

We are going through something unprecedented, the likes of which the world has never seen. It's like a hurricane has hit every city on earth at the same time, and will continue hitting it day after day for no one knows how long.

Many economists have had different theories about how to think about this.

Some say it's a supply shock, because workers can't work and supply chains will be cut off.

Some say it's a demand shock because consumers will pull back their buying.

Some say it's a liquidity crunch because individuals and businesses won't have the cash they need.

Some say it's a solvency crisis as businesses that were solvent on old assumptions are not solvent now.

The answer is not which one of the four of those it is, it's all four of those. It's a supply shock, a demand shock, a liquidity shock, and a solvency shock.

While the pandemic is spreading, the impacts on the economy will be very severe.

I think in the United States, forecasters have underestimated those impacts. Annual rate will fall by 3% or 4%.It's not just the leisure and hospitality industries. More and more industries across the United States are closing.

I think the impact of the epidemic on the global economy is characterized by strong destructive power, high uncertainty, chronicity, globalization and time-dependent asymmetry.

Why might the effects be persistent? I would cite four reasons:

Number one, the economic effects could last because of the way labor markets function. It's easier to fire someone than to hire someone. Historically, it is a uniform truth that unemployment rates can go up very quickly. They went up six percentage points in two years. In 2008 and 2009, they only came down slowly. It took six years to undo that damage. So, labor markets function asymmetrically.

Number two is business bankruptcies. I look around the businesses around the corner from me. There is a restaurant, a shoe store, a dry cleaner, a pizza shop. Those may go out of business because of this. When we get out of the pandemic, the people who live in my neighborhood will still want a restaurant, a shoe store, a pizza shop, and a dry cleaner. But it will take time to reconstitute those businesses. By the way, those businesses are probably easier to reconstitute than many of the medium sized ones. So, bankruptcy is an asymmetric process.

Number three is the financial system. Banks went into this with a very good capital cushion. They were built for a flood. And we're going to get a flood. And if the problems translate into the financial system and into the banks, that would be a problem.

Number four is the global spillovers. If one country solves this quickly, for example, China may have contained it, but China will deal with the economic fallout of the fact that the United States won't be buying many products from China. Europe won't be buying many products from China, because we won't be buying much of anything from anyone, including from ourselves.

The global aftershocks could be asynchronous. For all those reasons, a sharp downturn immediately, but also a potentially prolonged downturn that outlast the virus.

What are policy makers doing?

They're doing everything they can on the health front. The United States, for example, we're in the process of making testing free for everyone and doing a lot to get tests online.

The next big challenge for us is hospital capacity. So far, the government is not doing anything to assist in the purchase of ventilator as respirators and expand hospital capacity. But my guess is they will and they'll do it very soon.

Number two is targeted assistance to those most effective people that are unemployed and lose their jobs, that need to take sick leave, and that are low income. Some of that is expanded on legislation that is making its way out to passed the House of Representatives. I think some version of it will pass the Senate and become law this week.

Phase three needs to include large scale cash assistance. I'm in favor of a family of four getting at least 3000 dollars and getting it over and over again as long as the need is there. This will help with the demand problem and the liquidity problem. Some families could stay at home because of this and not spread the disease.

The final part of the policy response is where countries around the world are frankly improvising. The central banks have a relatively easy task of maintaining liquidity in financial markets. The trickier thing is how to deal with illiquidity of especially non-financial businesses and potentially insolvency of those businesses. Large scale lending programs of the type in Germany may be part of the answer. Expanding workout and bankruptcy procedures in Singapore may also be part of the answer.

In summary, the risk of acting too little is much greater than the risk of acting too much.We also need to figure out how to protect businesses, and most importantly, their workers as well. And I hope this is a collaborative global effort. The signs that it will be so far are very good in needs to stay that way.

Question: The biggest question right now is how to avoid another global recession. How fiscal policies can help the middle-class, disadvantaged people and small business？

Furman: I think there's very little good news here, but one bit of good news is we're all in this together.

You're not hearing a lot of arguments over Brexit right now. You're not hearing a lot of arguments between the United States and China over the exchange rate. You're not hearing complaints about the German current account surplus. Every country in the world is being affected by this virus. They're being affected in similar ways. And the policy answer is similar across countries. Here, everyone's in the same boat. Everyone needs to do the same things, and the more they do it together, the better it would be.

The existing social safety net in the United States is wholly inadequate. So I just think giving a lot of cash to as many people as you can. Some of that money will be wasted. Real interest rates are negative right now. Wasting money is the least of the problems that I'm worried about.

Question: What do you expect on the coordination between the US and China in crisis of our virus? Is that the chance to hold the G20? Is that the better a platform for the dialogue?

Furman: I thought the G7 Statement was terrific, but what's more important are the G7 actions. Most countries’ fiscal response has been inadequate.

Absolutely the G20 will be essential as well. I wouldn't underestimate how difficult communication is at a time like this. They're dealing with eight crises at once, and many of them are doing it from their homes. I don't think anyone should wait for coordination. I think a lot of actions need to happen individually, need to happen bilaterally.

For example, the United States may need a lot of help from China on ventilator respirators，given China`s capacities.

Question：The question is about the stock market shut down. Is it only about virus or is about deep problems in the economy?

Furman: I thought, prior to going into this, that there was a decent defense of the valuation of the stock market. Low interest rates imply a higher value for equities, but that more likely than not, the stock market was overvalued. When you have a pandemic crisis, it takes a long time to recover. I think the risks in the market now might be more symmetric than they felt a few weeks ago.

Question: When do you think the peak will appear in the United States?

Furman: I've talked to a lot of epidemiologists and scientists in the last week. None of them have the answer. I think at some point, we'll have a treatment for people with the disease at the end of the year.

The question is, can we reopen our economy while having people continue to maintain a certain amount of intermediate social distance, testing people and doing contact tracing, and isolating where necessary. I am worried that we just don't have a culture, a set of political institutions, or any mechanism to do half measures.

Question: Is it possible for the world to take this global outbreak as a turning point to build a new global governance system?

Furman: Crises like this historically have expanded the powers of government. It's the first time the entire world has been at war with the same enemy at the same time. I would love to see some institutional changes come out of this that have benefits both for pandemic specifically, but also the other thing that's most closely to a global war against a common enemy, which is climate change.

Disclaimer – this transcript has not been reviewed by the speaker