The Trump administration deserves high marks for putting forward its ideas for a big and fast “stage 3” fiscal stimulus plan. A two-page outline from Treasury that began circulating on Capitol Hill March 18 includes (1) two rounds of direct payments to individuals totaling $250 billion each April 6 and May 18 and (2) loan guarantees and secured lending for borrowings of at least $500 billion for small business, airlines, money market mutual funds, and other distressed sectors.
This is a work in progress. The administration’s views have evolved and are likely to continue to evolve. Clearly, policymakers have moved away from the idea of a payroll tax cut. That’s a step in the right direction. A payroll tax cut doesn’t provide relief as rapidly and in as well-targeted a manner as direct cash payments.
Looking forward, we know businesses lacking customers will be facing an enormous cash crunch. So providing liquidity is central to any relief package if we want them to remain going concerns. Note that this may not stop layoffs in the short run. But it is worth pursuing if only because the economic and out-of-pocket costs — and the permanent damage to the economy — from widespread bankruptcies can be enormous.
Providing credit where it is most needed is easier said than done. We must figure out exactly which businesses and industries deserve secured and guaranteed loans. This line-drawing exercise presents enormous political, policy, and administrative issues. How will “distressed sectors” be determined? How much credit should be extended? When should loans be repaid? Should access to new lines of credit be conditioned on protections and support for workers?
The Old Playbook
Much — but certainly not all — of what policymakers should be doing can be found in introductory economic textbooks. To stimulate aggregate demand in a recession, the government needs to get cash to those who will spend it. That means getting cash to households with low incomes and to those that are cash-strapped, like the unemployed. Besides being good demand-side economics, from a humanitarian perspective, such policies provide relief to those most in need.
Timing is always critical for effective countercyclical fiscal policy. Historically, Congress has always moved too slowly with fiscal stimulus. It is especially important in this recession because unlike in the past, the fast-acting Federal Reserve cannot do the recession fighting on its own. If, as we hope, the direct health impacts of the coronavirus have abated by midsummer, an aid package that takes full effect in July won’t be much help, and it could even be harmful.
So kudos to the administration for embracing fast and large cash payments that will be proportionately larger for low-income and larger families. (No detail available on that as of this writing.) The same arguments for direct cash payments also generally apply to expansion of unemployment benefits.
Because it is hard to gauge the size of the upcoming recession, it is hard to know how large cash payments should be. As better data and (hopefully) more reliable forecasts become available, we can use them as a guide to the magnitude of fiscal stimulus. For example, if we expect GDP to decline by 5 percent (about $1 trillion in today’s $22 trillion economy), macroeconomists might recommend an increase in government spending of $500 billion given that they might assume a policy multiplier of 2. (See, for example, this study from the Congressional Budget Office.)
Dash for Cash, Flight to Safety
If customers aren’t buying, businesses immediately face cash flow problems. Unlike the 2008 economic collapse, the looming recession won’t start in credit markets. Nevertheless, the government needs to be keenly alert to possibilities that this virus crisis may lead to seismic financial stresses. Financial market bailout policies like those put into place during the financial crisis may be returned to active duty.
For large businesses, the problem of unanticipated drops in sales revenue hasn’t been helped by their recent share repurchases and their binge borrowing at low rates. Large businesses are now making a dash for cash — tapping their existing lines of credit at banks. Those businesses also need to continue to revolve their short-term borrowing on the commercial paper market. The Fed announced emergency policies to shore up the commercial paper market March 17. As in 2008, money market mutual funds (whose shares are a close substitute for bank deposits) may be in trouble. The administration is proposing using the exchange stabilization fund authorized by 2008 legislation to guarantee mutual fund shareholders their principal.
For small and medium-size businesses, the liquidity squeeze is an even bigger problem. They don’t have direct access to credit markets. They must borrow from intermediaries who themselves are facing new financial stresses. The administration is proposing a $300 billion small business interruption program. According to the two-page Treasury memo, the federal government should provide employers with fewer than 500 employees loans equal to six weeks of payroll. In return, employers would face a pretty stringent requirement in these troubled times: Employee compensation must be sustained for eight weeks from the date the loan is disbursed.
Another financial phenomenon provoked by these troubled times is a flight to safety on a massive scale. Around the world, investors are flocking in droves to the relative safety of U.S. Treasury bills. This is driving short-term rates negative. This will also increase the demand for dollars, which causes the dollar to appreciate. This won’t help the U.S. recovery as it will make U.S exports (equal to approximately 13 percent of GDP) more expensive on world markets.
The Singularity of the Coronavirus Recession
Textbook tools as well as policies from the 2007-2009 playbook should play a major role in the government’s response to the current economic downturn. But in several ways the current recession is unique and therefore may require unique policy responses. Let’s mention two.
First and foremost, it is difficult to see why the government shouldn’t lavish support for coronavirus mitigation measures — testing, treatment, vaccines, public education. This includes direct cash outlays, subsidies for private sector and charitable healthcare providers, and support for state and local governments. Such policies direct resources to the root cause of the current economic problems and therefore are a well-targeted supply-side response. Overspending isn’t much of a concern because even poorly targeted money provides demand-side stimulus.
Second, it may be time to address a fundamental dilemma of our current situation that hasn’t yet received enough attention. In many respects, health policy and economic policy are working at cross-purposes. For the collective health of the population, we are urged to stay at home. For the health of the economy, we are being urged to spend. If we stay at home, we will probably spend less. If we are given more cash, we may head out to the stores.
Of course, the solution to this problem is online shopping and the provision of online services. Economic policymakers loathe picking winners and losers. Health officials who must deal with life-and-death issues aren’t so squeamish. Perhaps we need to consider economic policies that better align with health policies. Perhaps we should be encouraging online shopping with more access to the internet and credit lines that make that shopping possible. The lack of access and credit cards is particularly an issue for low-income households to whom we are targeting cash payments.
A 2019 Federal Communications Commission report says 24 million Americans have no access to broadband internet. Worse than that, according to one news report, 1 in 4 Americans don’t qualify for credit cards. And on top of that, many more Americans have reached their credit limit. For public health reasons we don’t want cash payments to encourage more frequent on-site shopping, but if proposed cash payments don’t easily translate into forms of payment that can be used for online purchases, that may be exactly what we are doing.