It’s inevitable: To contain the spread of the coronavirus pandemic and save thousands of lives, the economy is going to take a hit. As shutdowns disrupt businesses large and small, we may even fall into recession.
The Federal Reserve gets that we are at a critical moment, one on par with the 2008 financial crisis. On Sunday, the central bank cut its benchmark rate by a full percentage point to near zero — back where it sat for years during the Great Recession and beyond — and said it would purchase $700 billion in Treasury debt and mortgage-backed securities.
The moves, which came less than two weeks after policy makers lowered rates by a half-point, are designed to help restore stability to stressed credit markets and ensure that banks have enough cash to lend, even as the world seems to fall apart. They won’t send money directly to consumers or businesses.
The White House, by contrast, botched its initial response to the public health emergency, and the administration and Congress underwhelmed with their reaction to the looming economic crisis. As a New York Times editorial pointed out over the weekend, the bill passed by the House early Saturday to provide paid sick time and family leave for employees affected by the coronavirus has exemptions that limit its scope.
To be fair, the legislation, which President Trump supports, includes measures that would certainly help: free virus testing for those with no insurance, beefed-up unemployment benefits and food assistance, and more federal Medicaid funds.
House Speaker Nancy Pelosi said it was just a first step by Congress.
But unless she, Senate majority leader Mitch McConnell, and Trump can agree on a massive fiscal plan to cushion the coming blow, it’s likely the stock market panic will metastasize into a full-blown economic crisis, despite the Fed’s actions. While much of the financial aid may not be needed tomorrow, quick agreement would help restore confidence among consumers and businesses.
Treasury Secretary Steven Mnuchin said Sunday that he doesn’t expect a recession, which is defined as two straight quarters of negative growth.
That’s no surprise, given that his boss’s reelection bid could be derailed if the economy tanks. But independent economists say a contraction isn’t a foregone conclusion.
“Under the ideal scenario, the US economy or at least a huge part of it will shut down to slow the spread of the virus with the goal of allowing the health care system to cope. Then, in a few weeks, as the threat passes, schools, businesses, and life in general would re-open and get back to normal," Peter Ireland, an economics professor at Boston College, said in an e-mail. “Realistically, though, we can’t count on everything working out that smoothly."
Pierre-Olivier Gourinchas, an economics professor at the University of California Berkeley, cautions that even with a relatively quick return to business as normal, the damage could be significant. In a March 13 paper, he said US gross domestic product could be cut by 6.5 percent on an annualized basis under a scenario in which economic activity is reduced by 50 percent for one month and 25 percent for a second.
"As a point of comparison, the decline in output growth in the US during the 2008-09 `Great Recession’ was around 4.5%. We are about to witness a downturn that could dwarf the `Great Recession,’ " he wrote.
Gourinchas’s solution? Policies that would mitigate the economic losses, much like aggressive social distancing measures can reduce the stress on the health care system.
“It will require a massive program,” he wrote on Twitter. “No tinkering at the margins will do.”
With help from Gourinchas and others, here’s what the feds should focus on.
1. People first. Workers need to get paid even if they can’t get to their jobs because of lockdowns, they get sick, or they must stay home to take care of family members. The Pelosi package is an OK start, but more is needed to help people through this unprecedented situation.
“I’d love to find every Uber driver who is getting fewer rides or every coffee stand guy who is selling less coffee,” said Megan Greene, an economist and senior fellow at the Mossavar-Rahmani Center of Business and Government at the Harvard Kennedy School.
But since that’s not really feasible to be so targeted, she said, “I am in the camp that says just send checks. We’ve done it before. Other countries are doing it now.”
Greene was referring to an idea proposed by Harvard economist Jason Furman in a Wall Street Journal op-ed column: a one-time payment of $1,000 to every adult US citizen or taxpaying US resident, and $500 to every child who meets the same criteria. The payments would be fairer and more efficient than cutting payroll taxes, an idea that Trump has floated, wrote Furman, who was chairman of the White House Council of Economic Advisers during Barack Obama’s second term.
2. Businesses second. During the 2008 financial crisis, corporations — most notably banks and automakers — got bailed out, while ordinary people lost their jobs and homes. That was a mistake, but it doesn’t mean companies shouldn’t get some help this time around. Otherwise, layoffs will surge as employees seek to reduce expenses and avoid bankruptcy.
The government is increasing the money available through Small Business Administration loans, but, again, it’s not enough.
Greene suggests that the Federal Reserve be allowed to increase lending to small and medium-size businesses by offering cheap money to banks, with the loans guaranteed by the federal government. The European Central Bank has done this for years.
“The Fed can set up a similar program, though it has never been before,” Greene said. “It only works if the government goes ahead and provides loan-loss guarantees.”
Trump has suggested he would consider bailouts for the airlines and other industries directly impacted by the pandemic. Air carriers have been pounded by government travel restrictions, moratoriums on business travels, and consumers just staying home.
But where would industry bailouts end? Cruise lines and hotels are getting killed, too. But I worry more about smaller businesses, which have much fewer resources to survive until we get back to normal.
3. Don’t forget the financial system. People have been saying this isn’t a financial crisis. But it could become one if too many companies can’t pay back their loans and banks respond to the losses by reducing lending. That explains why the Fed has taken emergency action between its regularly scheduled meetings.
“As banks begin to suspect that customers will be unable to repay loans on a timely basis this could cause banks to raise borrowing costs and to tighter financial conditions which could cause a spiral of slower growth,” wrote Michael Klein and Miriam Wasserman in an analysis by EconoFact, a project of the Edward R. Murrow Center for a Digital World at the Fletcher School.
The Fed’s monetary moves can do only so much, and its chairman, Jerome Powell, said it is likely the economy will contract for at least one quarter. Credit was cheap before the crisis emerged, and the central bank’s lower rates will take months to work their way through the economy to consumers. US stock futures fell more than 4 percent when trading began at 6 p.m. on Sunday.
On the government-stimulus side, no package — no matter how expansive and well-designed — will be able to save every job and keep every company afloat. But Congress and the White House need to act nonetheless. Not to would be irresponsible and heartless.
How much will it all cost? More than $1 trillion, easily. Where will the money come from? Federal government borrowing. Now isn’t the time to suddenly be worried about deficits.
“With interest rates so low, investors are almost begging the government to borrow,” said Greene, the Kennedy School fellow.
Without aggressive action, the odds of a long and deep recession increase. If we do nothing, the costs —human and financial — will be far more staggering.