The coronavirus is spreading quickly around the globe. Governments, businesses and families respond to the pandemic in unprecedented ways, massively and necessarily disrupting the economy in the process. Policymakers are now considering or already taking quick, large steps to both ease the health care challenges and stem the economic pain. Here are seven things we know about the economy and economic policy that should guide the design of additional policy steps:
1) This is first and foremost a health care crisis
The underlying cause of the economic slowdown is a global pandemic. The spread, and thus the economic impact of the virus, are highly unpredictable. But it affects people in all countries, states and localities to some degree.
The pandemic also hurts almost all industries, turning the health care challenge into an economic one. People can no longer travel and go out. Supply chain disruptions idle manufacturing plants. Warehouse workers are becoming ill and increasingly worried about getting ill. Health-care workers on the front lines of the virus could become infected and need to self-quarantine.
The health and safety of the population remain the highest policy priority. Congress and the administration need to make sure that sufficient diagnostic, protective and therapeutic equipment are available. Policymakers also need to make sure that economically vulnerable health care workers and health aides in particular, do not have to choose between work while sick and staying home. They will need paid sick leave as well as paid medical and family leave. This will mean expanding already enacted protections, so that the self-employed also receive benefits.
2) The demand side of the economy is primarily hurt
Most of the economic disruptions affect the demand side. People can no longer go to work and often lose their jobs and incomes as businesses shutter their operations. Businesses are holding off on investments amid the growing uncertainty. And, exports will inevitably falter as other countries are taking similar actions to slow the spread of the virus.
There will be some limited supply side effects. Businesses will fail as they lack customers and cash to sustain them for extended periods of time. Small and medium sized businesses, especially in low-margin industries such as restaurants, will be among the ones most acutely hit by the economic fallout.
Any economic intervention needs to primarily focus on boosting the demand side of the economy. This means replacing incomes, especially among lower-income and middle-income families. They are more likely to work in affected industries and they are less likely to have sufficient savings to tide them over weeks or even months of income losses.
Senate will also have to consider measures to support the supply-side if those effects devastate strategic industries or excessively worsen the demand side effects, for instance, by a concentration of hotels and restaurants in tourism-dependent regions. But any bailout effort will have to come with strong strings attached, so that the aid helps workers and not the top.
3) Uncertainty over the economy reins high.
There is a lot businesses, families, governments and economists who don’t know about the economic fallout from the spreading virus. The depth, length and regional dispersion of the economic decline are largely unknown. Nor is it clear whether measures taken now to contain the spread of the virus will be effective.
This uncertainty exacerbates the economic fallout. Businesses are pulling back, not just because they have no customers, but also because they don’t know how much worse it will get. Families are cutting spending in part because they are worried about drastic drops in their incomes. These reactions to the unknowable risks exacerbate the economic downturn.
The federal government can address this massive, widespread and growing uncertainty. It has the ability to quickly spend large sums of money wherever problems rapidly rise. At this point, Congress and the President need to clearly signal their willingness to undertake any steps necessary to stop an economic freefall, no matter where the problems occur and how long they will last.
4) States and local governments will quickly feel the fallout from the pandemic
State and local governments are at the front lines of the current crisis. Many people in their communities will have to quickly rely on public services. And, local businesses such as restaurants, hotels, and event venues are shuttered for the time being, reducing employment, jobs and tax revenues. And, many of these effects will vary from state to state, from city to city, and even from neighborhood to neighborhood. Finally, states and localities often do not have the wherewithal to commit to supporting their local businesses and families to any meaningful degree. The current crisis puts state and local governments in an untenable position, where they may be forced to choose which parts of their communities will get help and which ones won’t.
5) The fallout from the pandemic highlights the problems of massive economic inequality
Income and wealth inequality are at or near record highs.
These inequities now create untenable vicious cycles for many families. Lower-income workers tend to not only have lower pay, but also fewer benefits such as health insurance and paid sick leave. Many lower-income workers now face a heightened chance of getting infected, losing their jobs and incomes, and getting stuck with large health care bills. But those same families have few savings to fall back on, are already mire in costly consumer debt thus could quickly fall further behind in paying their bills. Worse, many of these families need to actually rely more on their own savings than higher-income, more financially secure families, because they have less access to public benefits such as unemployment insurance.
Any help from Congress thus needs to be progressive, targeting the largest benefits to those most in need. Expanded paid sick leave, paid medical and family leave, and unemployment insurance benefits are a first step to boost incomes where this help is most needed. Policy responses also need to account for the fact that many of the most vulnerable have few savings by, for example, instituting moratoriums on student debt, car loan, and credit card payments.
6) Focusing on the stock market sends the wrong signal
The stock market has gone through massive gyrations over the past few weeks. Investors have oscillated from panic to euphoria and back to panic. President Trump and his advisors have often expressed more concern over what is happening on Wall Street than what is happening to families. Yet most Americans own few or no stocks on Wall Street. The financial market ups and downs have little immediate impact on them. Boosting the stock market will do little to their current and future financial health.
Worse, focusing on stabilizing or even rescuing Wall Street will create massive problems for average Americans. Giving broad tax breaks to corporations that already sat on large amounts of cash is an inefficient use of money. Many of them will survive the downturn without a short-term cash infusion. And many CEOs will feel empowered by the rhetoric on saving the stock market to prioritize profits and shareholders by squeezing workers now and during a recovery. This is exactly what happened after the stock market crash of 2001 and the Great Recession. Congress and the administration need to be ready to avoid a repeat.
Importantly, Congress should provide only targeted and limited relief to businesses and simultaneously ensure that workers benefit from such assistance before shareholders and CEOs do.
7) The reach of the Fed is limited.
The Federal Reserve has aggressively cut interest rates to zero. Lower interest rates will have little effect on the economy, at least in the short-term. Key interest rates for mortgages and business loans were already low. And, other interest rates such as those for student loans, car loans and credit cards have regularly remained impervious to changes in the federal funds rate, the key monetary policy tool used by the Federal Reserve. Moreover, businesses are not hurting for capital to invest, at least for now. Large corporations already had massive amounts of cash on hand totaling more than $4.7 trillion, which was more than ten percent of total corporate assets, by the end of 2019. Companies had the money to invest, they just decided not to. At this point, the uncertainty over the economic outlook will likely stymie business investment and there is little that low interest rates can do to stop that.
The same is true for would-be home buyers. Worries about their paychecks will overshadow the benefits of lower mortgage payments. And, the Fed’s interest rate cuts will do little for the interest payments on the more than $4 trillion in consumer credit. Lower interest rates from the Federal Reserve are helpful in the current situation by lowering the costs of credit for those who still want to and can borrow, but that effect is likely limited.
The Federal Reserve has also increased liquidity. It has already reintroduced two programs used during the last crisis to ensure that banks and corporations have sufficient liquidity to execute all short-term deals. The Fed will continue to monitor and support credit markets, so that they don’t seize up. These moves help and will continue to make sure that credit market problems don’t exacerbate rapidly deteriorating economic conditions, but it will do little to push economic growth upward.
The ball is now in fiscal policymakers’ court as monetary policy has done as much as it can in this situation. Large fiscal interventions that allow federal, state and local decision makers to address the economic problems where they appear will be necessary. This will allow governments to quickly address the immediate health care challenges but also the quickly escalating economic fallout