Usually the recipe for fiscal policy in a recession is simple: shell out lots of cash. Yes, the politics gets piggy because our lawmakers have an excuse to hand out money by the truckload. But the economics are simple. Giving folks cash energizes aggregate demand. Better still, you might even get a multiplier effect so every dollar from Treasury yields more than a dollar hike in GDP.
The only important policy dial to keep an eye on is avoiding excess generosity to the well-off. It is not a class warfare thing. It is just that the wealthy are far less likely to spend additional cash, and that would considerably mute the multiplier effect.
The great COVID-19 recession of 2020 is not your usual economic downturn. For starters, there’s the staggering size and slap-in-the face rapidity of the collapse. In its January forecast (unchanged through February), the Congressional Budget Office estimated that the U.S economy would grow at an inflation-adjusted annual rate of about 2 percent in calendar year 2020. On April 24 the CBO revised its growth rate projections downward by 10 percentage points. That's a reduction in GDP of about $2.2 trillion. Similar shortfalls are estimated for 2022. And those estimates account for the expansion effects of all stimulus so far.
That suggests we can use an additional $2 trillion of stimulus per year if, as is likely, the multiplier effect of spending is close to 1— or only another $1 trillion if we design policies cleverly and get a policy multiplier closer to 2.
Since mid-March, 26 million Americans have applied for unemployment insurance benefits. That suggests a 16 percentage point increase in the unemployment rate, which pre-crisis stood at 3.5 percent. (The official rate may be lower because millions will simply leave the workforce.) The new CBO estimates predict an official unemployment rate of 12 percent at the end of 2020, and 9.5 percent at the end of 2021.
In addition to providing effective stimulus — which has nearly 1-to-1 overlap with maintaining income levels for low- and middle-income families and the unemployed — and in addition to stimulating employment, the promotion of a variety of other policy goals has been voiced as justification for the array of relief measures included in recent legislation. Because of the massive shutdown of business operations where social distancing is difficult or impossible, sales revenues for many have plummeted to fantastically low levels or disappeared entirely. The situation is so severe that we are talking not just about a business slowdown or even a temporary business shutdown, but a permanent shutdown.
In normal times, maintaining valuable intangible assets such as goodwill and workforce in place is not a broad-based policy concern. But widespread evaporation of ongoing business operations would deliver a costly supply shock. Keeping temporarily troubled businesses afloat with cash, tax cuts (including tax refunds), and low- or no-cost credit seems like a policy goal particularly applicable in today's environment.
One vexing and perplexing complication of this recession is that public health policy can be squarely at odds with economic policy. Here is not the place to engage in the wider debate about when to reopen the economy. But it seems important at some point to consider disentangling the new hundred-billion-dollar policies that encourage workers to stay at home from the other hundred-billion-dollar policies that encourage workers to get back on the job. (See the table below.)
Yes, we should be understanding of drafters of legislation who worked around the clock to deliver the fiscal relief packages. But now they have had time to rest and reconsider, and they should be back at work correcting mistakes, recalibrating, and simplifying.
Probably the least justifiable provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) are the retroactive relaxation of loss limitation rules for corporate and noncorporate businesses. In normal times, expanded loss use rules are a good idea because they provide a more complete picture of profitability and ability to pay. (Those benefits must be balanced against administrative and compliance costs and the desire to limit losses when it is more likely that tax losses are caused by excessive tax benefits than by poor underlying economic conditions). And in the current situation, losses occurring in 2020 are a good and easily detected indicator of COVID-19-related distress.
But considering the priorities we have and growing concerns about mounting federal debt, why should it be important to provide cash refunds for losses occurring long before the onset of the COVID-19 pandemic, with no assurance that businesses receiving benefits are now in distress, with no assurance that funds will be used to maintain employment, and — particularly in the case of pre-2020 noncorporate losses — with the vast majority of the benefit inuring to wealthy business owners?
Rechanneling this forgone revenue to any of the other newly enacted crisis-related provisions would seem to be a way to improve our response to the crisis. House Ways and Means Committee member Lloyd Doggett, D-Texas, and 39 cosponsors of H.R. 6579 have proposed reinstating some of those losses.
