Martin A. Sullivan, Tax Analysts' chief economist, discusses how the United States is headed toward a recession unlike any other due to the economic fallout of the coronavirus pandemic and how to provide relief.
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: coronavirus recession. With shuttered schools and mandatory lockdowns, the U.S. and much of the world is grappling with the coronavirus and trying to limit its spread.
What short and long-term effects will this have on the economy, and how are policymakers responding? Joining me now by phone is Tax Analysts Chief Economist and Contributing Editor Martin Sullivan. Marty, welcome to the podcast.
Martin Sullivan: Thanks for having me, David. How are you today?
David Stewart: Doing well. Keeping healthy. Here in the U.S. and around the world we've been asked to do social distancing, which is basically bringing all non-essential activity to a halt. Are we now in a recession from that?
Martin Sullivan: The data is not in yet, but I don't think we need data to understand with all the stores closed and all of the revenue not coming in to retailers and restaurants that we're going to have a severe slowdown. The projections right now for jobless claim numbers are over 3 million.
About 10 million people in the U.S. work in restaurants and about another 10 million work in the retail sector. If even one quarter of those 20 million people get laid off, that's 5 million.
That's an increase in the unemployment rate of three or four percentage points. I'm afraid we are right about to enter a recession.
David Stewart: Once you find yourself in a recession, what's the best way to get back out?
Martin Sullivan: Let me answer that in two parts. First, I want to give the textbook answer, which is partially the right answer. What we want is the government to act fast, which it is doing now. We want it to have big stimulus, and since we're talking about $2 trillion, that's big in anybody's playbook.
Then, we want to direct those monies to people who are going to spend, and that's low-income people and people who are unemployed. That is what the government's fiscal plan is doing right now. On all those counts, we seem to be doing pretty well.
The second part of the answer is that this recession is different from other recessions because it's health related, and so we need a different type of response on the supply side. Obviously, to any extent we can help snuff out this virus and the illness that comes with it, that is beneficial to the economy.
We want spending and smart thinking on anti-virus measures as a first priority. After that, we're looking to help the victims, whether they be from health or financial circumstances, and target the benefits to them and to small businesses.
David Stewart: How do you get money to the people that need it right now?
Martin Sullivan: We've gone through a little evolution over the last few weeks. First, we were talking about payroll tax relief. Then we were talking about sending checks directly to Americans and also about providing extra unemployment benefits. Now, the payroll tax relief is falling off the table because you're not going to get enough money to people fast enough, and it's not so well targeted.
The checks to individuals, which will probably be administered through the IRS, will go to anybody who is filing a tax return. The big question is: If you don't file a tax return, how will you get the money?
The other delivery mechanism is to extend unemployment benefits. That's especially good from the humanitarian side and from the economic stimulus side, because that's going to the people who most need it, like people who have just lost their jobs.
There's a variety of mechanisms out there for providing those direct funds.
David Stewart: What sort of measures can you use indirectly?
Martin Sullivan: There's a lot of discussion about lending to large businesses. Hopefully they will maintain their employment and not just the provisions of these loans, which may be conditional upon maintaining employment levels. As for small businesses, there are similar provisions, perhaps not with the conditions that you maintain employment.
The hope is that the businesses getting these loans will maintain employment. Also, there's a lot of discussion about tax deferral, or the postponement of tax payments for a year or two, which is very important for us tax people. This will give businesses extra liquidity, again with the hope that they will maintain their payrolls.
David Stewart: Every recession seems to have its own challenges, and this one seems unique within my lifetime. What are the unique features of this recession, and the challenges that it faces in answering it?
Martin Sullivan: In prior recessions, the easy objective to follow was we want to stimulate. We want you to go out and spend. We want you to go back to normal. We want you to do all those economic activities that you normally do as soon as possible and proceed with confidence.
This is a health-related recession, and in particular having to do with transmittable disease, so health policy pushes us in exactly the opposite direction. We want you to stay home. We want you to not do things that you normally do, like go out to work and go shop.
This is a fundamental dilemma that we're facing now. On the one hand, economic policy wants us to stimulate, but as far as health policy is concerned, we need to isolate. This is causing us to really rethink the way we do macroeconomic policy in this recession.
David Stewart: With everything grinding to a halt so fast, what are these concerns I'm hearing about liquidity?
Martin Sullivan: In the prior recession, the 2007-2009 financial crisis, the root cause of that economic collapse was in the financial markets. In this situation, the root cause is health related and the secondary effect is problems in the financial markets and problems with financing.
As in the prior recessions, we need to pump liquidity into financial markets and financial institutions to prevent a breakdown of the financial system. That doesn't matter to everyday folks, but it's certainly matters to the financial markets.
Financing for small businesses is immediately a problem. If you're a restaurant owner, nobody's coming in your door. You have no cash coming in, but you still have to pay bills, and hopefully you're still paying payroll. The need for bridge financing for liquidity is immediate and severe because small businesses don't have access to credit markets.
Finally, large businesses also have financing problems, but the nature of that is different. They do have access to financial markets. They are sophisticated players. Nevertheless, because everybody is pulling back in the dash for cash, they also are needing extended credit facilities. The liquidity problems are central to this recession.
David Stewart: How do you best address a liquidity crunch in a time like this?
Martin Sullivan: One thing that's different about this recession from prior recessions is that the Federal Reserve has limited capabilities in what it can do. Interest rates are already so close to zero that they really can't lower them much anymore.
What can be done is on the Federal Reserve side is a massive injection of liquidity from the central bank. They're lending to money market funds. They're extending terms of credit to banks. Now there is a facility which is going to provide direct lending to businesses. This is just an incredible injection of cash on the tax side.
On the fiscal side, Congress is poised to approve lending facilities provided by the Treasury Department to large and small businesses. I think this is an intriguing idea. It's an interesting delivery mechanism that instead of having a government send you money or making you a loan, why don't we have you not send the government those tax payments that are due? That's what you're seeing with these postponements of cash payments. Some of it's already in the works because Treasury has the administrative authority to do that.
David Stewart: How would you rate the federal government's response to the current crisis?
Martin Sullivan: I think Congress and the administration deserve credit for acting boldly and quickly, and targeting relief to the sectors that need it most. Is everything in this bill pretty? No. If you had to ask me three weeks ago, what do I hope they would do? They're basically doing it. I'd give them at least a B+.
David Stewart: With a $2 trillion program coming, should we be concerned about the deficit at all going forward?
Martin Sullivan: We should always be concerned about the deficit. But if there's ever a time not be concerned about it, it is right now.
This is a crisis. This is the time to borrow. This is the time to pull out all stops.
The other thing to note is that interest rates are extremely low right now, and so the financial costs to the government of doing this are less than they would have been 20 years ago, when we had a recession at the turn of the century. No time be worrying about the deficit. In fact, if you didn't have a strong economic policy response, the deficit might grow even larger because of the weakened economy.
David Stewart: Marty, this has been great. I thank you for joining me, and I hope you stay healthy.
Martin Sullivan: You too, Dave. Take care. Thanks for having me.