Eakinomics: Do
We Need a Coronavirus Stimulus?
The health threat from the coronavirus is a pandemic threat. The need for
an aggressive public health response is thus very real. This, combined with
an emergency Fed rate cut and equity markets imitating a yo-yo, has raised
a further question: do we also need an aggressive economic stimulus?
For the left, the answer is reflexively “yes.” It has given up on the
notion of private sector-driven growth and believes that a spending bill is
a growth policy. This was a cardinal error of the Obama Administration,
which seemingly believed that having passed a stimulus bill it could
subject the economy to any sort of torture from its labor, green, and
social policy agenda and still get growth.
Wrong, but it built on a bipartisan series of attempts at discretionary fiscal
micromanagement over the past 20 years. To provide “stimulus,” the federal
government sent checks in 2001, cut taxes in 2003, had a repatriation tax
holiday in 2005, sent checks in 2008, and had a huge stimulus in 2009. (The
2017 tax cut would also provide stimulus, but was primarily focused on tax
reforms.) Despite this – or perhaps because of it – the 2000-2020 period is
largely characterized by disappointing economic performance. This stands in
sharp contrast to the 1980-2000 period, where fiscal policy was set for
long-term growth performance and short-run responses were left to the Fed.
So, as a general matter I think it is time to be skeptical that stimulus is
always the cure for what ails us. Nevertheless, Obama-era Chairman of the
Council of Economic Advisers Jason Furman has already opened the old
playbook and called for
a big stimulus.
There are some important considerations to sort through in thinking about
whatever economic policy should come next. First, Congress and the
administration have already put
stimulus in the 2020 pipeline. In December, the pithily named Consolidated
Appropriations Act, 2020 and Further
Consolidated Appropriations Act, 2020 became law. The
combination of spending increases and tax cuts in the two laws will add
nearly $400 billion in additional tax cuts and spending, front loaded to
include $60 billion in 2020 alone. What seemed excessive at the time may
turn out to be entirely fortuitous.
On top of that, there should be a fair amount of money delivered via the
public health response. There is already $8.3 billion, but it is easy to
anticipate that price tag going up as states and localities deal with the
fiscal fallout of addressing the crisis.
Second, the mechanics of the impact of the pandemic are not always
susceptible to being fixed by tax cuts or sending checks in one disguised
form or another. A tragic impact of a pandemic is the loss of life, which
in raw economic terms is a pure loss of productive capacity. No stimulus
will offset this downdraft.
As we have already witnessed, the pandemic is throwing supply chains into
upheaval and making it harder to deliver final goods and services. We had a
similar experience in the aftermath of the terrorist attacks on 9-11, where
the nation had to “harden” economic activity against terrorist attacks. It
was an expensive supply shock and none of the Bush-era fiscal stimulus
efforts worked to offset it. Giving the customers more money won’t mitigate
this supply shock either.
In some cases, there are declines in demand, but not declines that a
stimulus can offset. You can send $100 billion in checks to Americans but I
doubt that international airline travel, cruise ship bookings, or the
conference industry would recover a bit. In those situations, it may be
necessary to provide targeted financial support directly to the affected
industries. (The White House is reportedly looking
at these options.)
The third point is that some of the extreme uncertainty will resolve itself
fairly quickly. We still know very little about the prevalence,
propagation, and perniciousness of the virus. We will learn more about the
pandemic in short order.
We will also learn more about the economy. Each week there are data on new
claims for unemployment insurance. A sharp spike in such claims would be an
indicator suggesting that the cumulative impacts were leading to layoffs
the might limit the ability of some households to maintain their purchasing
power. If there is a sharp move up, and if it is sustained, and if it is
large enough, Congress may wish to take additional steps. But it has a
chance to become informed and think about options first.
It would be silly to rule out the need for additional fiscal policy before
the coronavirus episode is in the rearview mirror. But it strikes me as
premature at best to pull the trigger on an ill-designed $1 trillion
check-writing effort.
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