Economists watching Washington as it formulates a response to the COVID-19 pandemic said the unique nature of the problem means policy makers are pursuing sometimes contradictory economic goals in which the timing of an action could determine its effectiveness.
First, policymakers are trying to slow the economy to contain the virus. Sending tens of millions of workers home and telling them not to visit restaurants, bars, museums and sporting events is the opposite of economic stimulus.
Second, policymakers are trying to ensure the enforced idleness doesn’t deepen the economic problem by allowing unpaid mortgages or rents to turn into foreclosures or evictions, or by turning temporarily shuttered businesses into permanently closed businesses.
Third, the policymakers are trying to set the stage for the economy to come roaring back when the pandemic ends and the self-quarantines are lifted.
The three policy efforts overlap and the success or failure in addressing any one goal will partly determine how well policies achieve the others.
“This is a war, not just a financial crisis,” said David Beckworth, a senior research fellow at the Mercatus Center at George Mason University. He likened the sudden cessation of commercial activity now to London shutting down during the Blitz early in World War II.
Slowing the economy
Policy makers are still primarily trying to discourage economic activity — at least huge portions of it. Health policy makers have thus far steered the response and economic policy is following.
“You have to shut it down and you have to see,” President Donald Trump said at a news conference Sunday.
The president tweeted a day later that he might be reconsidering, saying he doesn’t want the cure to be worse than the disease. That would be a mistake, economists said.
“This is a public health crisis. That needs to be addressed, first and foremost, by a massive mobilization of scientific and public health resources aimed at bringing this COVID-19 virus under control,” said Stephen Roach, a fellow at the Yale School of Management and former Chairman of Morgan Stanley Asia.
Over the weekend, Federal Reserve Bank of St. Louis President James Bullard estimated that unemployment could hit 30 percent and GDP could shrink by half during the second quarter because of the pandemic.
Congress provided between $9 billion and $10 billion for direct containment efforts in its first two coronavirus bills. Sen. Joe Manchin III, D-W.Va., said Tuesday that Democrats had secured $100 billion in funding to secure the health care system in the third response bill now being shaped by the Senate.
Limiting the damage
Forcibly idling tens of millions of workers and limiting economic activity of even those who have jobs would typically lead to additional lasting damage to the economy: Mortgages and rents go unpaid. Businesses close. Relationships within businesses and between businesses are severed.
Negotiations continue between the White House, and Senate Democrats and Republicans on a fiscal stimulus bill to help households and businesses weather the quarantines and then bounce back when the health crisis ends. House Speaker Nancy Pelosi, D-Calif., voiced support for that effort on Tuesday.
The fiscal stimulus proposed by Senate Republicans would send most households a one-time check, depending on the size of the family. Democratic counter proposals would make the checks automatically renew until the pandemic ends and unemployment returns to pre-crisis levels.
Those automatically recurring stimulus measures are necessary because the political window for another round of stimulus may close, said Mike Konczal, director of progressive thought at the Roosevelt Institute. “The initial 2009 stimulus ask was built with the assumption that they could always go back and get a second chance at it,” he said. “They could not.”
This cash helicopter drop would help families pay bills and put food on the table while temporarily working less or not working at all. But they won’t do as much for the businesses that have shuttered during the national quasi-quarantine.
To address that, the GOP proposal includes a provision that would give the Small Business Administration $350 billion to dole out in forgivable loans. The money would go to small and medium-sized companies to continue paying employees; if they use the money for non-payroll expenses, then the loans wouldn’t be forgiven. The loans would be capped at an amount equal to 2.5 months of payroll, to a maximum of $10 million.
Stan Veuger, a resident scholar at American Enterprise Institute, applauded the idea but said it should be even bigger. He said the forgivable debts should cover the entire length of the national emergency.
“For some businesses, it’ll be good enough, but not the ones getting basically no revenue,” he said, arguing that the program should also cover fixed costs like rent and utilities in addition to payrolls.
Keeping companies open even when they’re effectively closed is critical to restarting the economy after the pandemic abates, Veuger said.
“It’s important to have those businesses in place when the crisis ends so people can go back to work, so we don’t have our entire small business, entrepreneurial class wiped out financially whenever the crisis ends,” he said, adding that Congress needs to act as fast as possible to staunch the massive layoffs now happening.
“There has to be some emphasis on making sure the economy is strong coming out of this,” said Skanda Amarnath, director of research at Employ America. “And I think that is missing right now.”
The forgivable loans would work in conjunction with actions taken by the Federal Reserve to encourage banks to offer as much credit as corporations need to bridge the crisis. The Fed slashed benchmark interest rates to zero, encouraged banks to borrow from its discount window, opened six credit facilities, and began buying unlimited amounts of U.S. Treasurys and mortgage-backed securities from banks to free up their balance sheets.
Politically, loans are more popular than bailouts, although the Senate GOP proposal includes $75 billion for airlines and other distressed industries. But loading up corporate balance sheets with debt to cover operating costs for an uncertain length of time could drag down the recovery.
The Fed’s actions should boost the supply of cheap credit to U.S. businesses. In normal times, such moves could induce demand somewhat — companies might take advantage of the easy lending to invest in an expansion — but these aren’t normal times. Especially for firms already heavily indebted, the prospect of borrowing to stay afloat now just to emerge saddled with huge debts later isn’t a bright one.
Before COVID-19 clobbered the economy, corporate debt stood at $6.15 trillion — nearly double the $3.3 trillion level held on the eve of the 2008 financial crisis.
Even if the forgivable loan proposal is enacted, businesses of all sizes would still need to borrow to survive the coronavirus without taking drastic measures to cut costs. That means they’ll need reassurance from the government that there’ll be an economic recovery when the crisis ends.
“If people are going to hold onto their workers, they have to believe there is a light at the end of the tunnel,” Amarnath said. “That requires more sustained fiscal support.”
“Otherwise if businesses are just loading up on debt, but have no prospect of revenue growth in future, there will be a temptation to cut jobs, cut payroll, cut expenses,” he said. “And that is going to set off a lot of negative spillover effects on the economy.”
Amarnath pointed to state and local governments, saying they need more financial support. As governors shut down economic activity in their states, the flow of sales taxes will dry up even as the virus adds huge strains to their healthcare budgets.
Konczal also worries that will force states and localities to cull workers in order to balance their budgets like they did in the last downturn.
“In the Great Recession, we saw a collapse of state and local budgets that was sustained for years, which largely offset what the federal government did,” he said.
Governors have been begging for monetary relief. On a call with Trump on March 19, Maryland Governor Larry Hogan, the chairman of the National Governors Association, asked the administration to “dedicate at least 50 percent of the supplemental funding to the states.”
Konczal said support for states and localities shouldn’t be limited to the fiscal response.
“I think the Fed should step in,” he said. “We’re seeing the cost for burrowing go up quite dramatically even in states with good balance sheets.”
That’s already rankled conservatives who point to states like Illinois that entered the crisis with already blown budgets. But Amarnath said there’s no moral hazard with the unseen pandemic. “When talking about the systematic impact of recessions and public health crises, this is not something that discriminates between your bond rating,” he said.
On March 20, the Fed expanded its credit facility for money market mutual funds, allowing them to pledge highly-rated, short-term municipal bonds as collateral.
But Konczal and Amarnath said that’s not enough: They want the Fed to purchase municipal debt directly, a power the central bank already has.
While policymakers need to act immediately to save lives and the economy, Roach said, they need to simultaneously consider the future.
“In moments of crisis, a policy process becomes highly reactive and driven by the here and now and there’s not a lot of appreciation for looking at longer term consequences.”