It’s Not 9/11 or a Housing Crash. So What’s the Coronavirus Fiscal Playbook?
NewsColony
The government can’t prevent the coronavirus from damaging the U.S. economy.
The usual tools that economic policymakers rely on, like tax cuts and stimulus spending, won’t restore canceled conferences, unclog supply chains or persuade wary consumers to go out to bars and restaurants. Even if such policies would help, they conflict with the advice of health officials who are urging “social distancing” to slow the spread of the virus.
But that doesn’t mean policymakers are powerless. Economists say well-designed programs could limit the damage and help ensure a quick rebound.
President Trump said Monday that he would meet with congressional leaders to discuss a “very substantial” payroll tax cut and other measures. Many economists are skeptical of that approach, arguing that a payroll tax cut would be too small and too poorly targeted to be of much help.
Instead, they recommended a variety of other steps, some narrowly aimed at addressing the outbreak and some intended to bolster the broader economy. One lesson from the last recession is that the government has to move quickly.
“You’ve got to go big, and you’ve got to go fast,” said Claudia Sahm, a former Federal Reserve staff member who is now director of macroeconomic policy at the Washington Center for Equitable Growth, a left-leaning research organization. “If you don’t go fast, you’re not going to short-circuit it.”
Here are some forms that such intervention could take.
Fight the disease.
The surest way to limit the economic damage, of course, is to limit the spread of the disease itself. That is mostly the responsibility of health officials. But policymakers can take steps to make the job easier, said Jay Shambaugh, director of the Hamilton Project, an economic policy arm of the Brookings Institution.
The federal government, for example, could offer to cover some of the Medicaid costs that states usually bear. That would make it easier for states — which, unlike the federal government, generally must balance their budgets each year — to respond forcefully to the virus. It would also make it less likely that states would have to raise taxes or cut programs to pay for coronavirus spending, which could further damage the economy.
“The front lines in all of this is going to be at the state level, and so anything we can do to free up their budgets a little bit will help,” Mr. Shambaugh said. “You want to make sure the states aren’t making choices that are fiscally constrained.”
More generally, Mr. Shambaugh and others said, the federal government should spend whatever it takes to address the outbreak. Yields on government bonds have fallen to record lows in recent days, meaning the government can borrow money at little cost.
Cushion the blow.
The early stages of the coronavirus outbreak have had an acute impact on a relatively narrow set of industries and places. Airlines are warning of huge losses. Cruise operators are reeling. Restaurants are losing business in cities with substantial outbreaks, or where large events have been called off.
There are clear humanitarian reasons for helping the people who will lose jobs or income because of the outbreak. But there are also economic reasons. The clearest way for the virus to cause a recession is for the impact to spread beyond directly affected sectors, as people who lose jobs are forced to cut spending, leading to further job losses. Government programs could help prevent that.
“What a fiscal stimulus can do is try to erect firewalls as much as possible and try to make sure it doesn’t ripple out and affect the rest of the economy,” said Josh Bivens, director of research for the Economic Policy Institute, a progressive think tank.
Those programs could take various forms. Mr. Trump on Monday floated the idea of offering loans through the Small Business Administration to affected businesses, something that economists said could help minimize layoffs and keep companies from going out of business. The Federal Reserve on Monday also indicated it would allow banks to be flexible with customers if they fell behind on loan payments because of virus-related disruptions.
Adam S. Posen, president of the Peterson Institute for International Economics, likened the situation to the financial freeze-up after the collapse of Lehman Brothers in 2008. Back then, the Fed provided liquidity so that financial institutions could ride out the crisis. The federal government could play a similar role now.
“You got a bunch of people, small businesses — particularly in retail, transportation, hospitality, tourism — that are going to be temporarily disrupted and might go out of business and shed jobs, but that’s only because of this one-time shock,” Mr. Posen said. “So fiscal policy should be the bridge to get them over that shock.”
Other programs could focus on individuals. The unemployment insurance system, for example, generally requires people to be actively searching for work to receive benefits, something that could be difficult if they are quarantined or are avoiding in-person interactions. Food stamps and other anti-poverty programs have work requirements, meaning people can lose benefits if they don’t work enough hours. Waiving or changing those rules could help people affected by the virus, and support efforts to contain the outbreak by making it easier for people exposed to the virus to stay home from work.
Stimulate the broader economy.
The trouble with carefully tailored stimulus efforts is that they could take time to design and carry out, and might not reach all the affected people and industries. Airlines and cruise operators are easy to identify, but it is harder to identify the Uber driver in Austin, Texas, who lost out on business when the South by Southwest conference was canceled, or the coffee cart owner in Midtown Manhattan who is suffering because people are working from home.
“Lots of people will be affected in lots of ways, and you can’t find them quite as perfectly as you’d like,” said Jason Furman, who led the Council of Economic Advisers under President Barack Obama.
Mr. Furman, in a Wall Street Journal opinion piece last week, proposed an immediate, one-time payment of $1,000 to every adult, plus $500 for every child. For families hurt by the virus, such payments would provide a cash infusion to help cover rent, food and other costs, without having to determine exactly who those people are.
That kind of broad-based program would also serve as a stimulus, helping to kick-start the economy once the outbreak passed. Targeted programs aren’t big enough to affect the overall economy, but a program like the one Mr. Furman is proposing — he estimated the cost of it and some other stimulus proposals at $350 billion — would be.
Stimulus efforts like Mr. Furman’s are an established part of economic firefighting. President George W. Bush tried a similar, albeit somewhat smaller, cash rebate program in 2008.
But not all economists are convinced that such a program makes sense when the damage is still unclear. Despite the turmoil in financial markets, there has been almost no hard data suggesting an economic collapse.
Michael R. Strain, an economist at the American Enterprise Institute, a conservative think tank, said Congress could pass a stimulus now that would take effect only if economic indicators showed signs of trouble.
“We don’t know what the impact of this is,” Mr. Strain said. “We don’t know what the impact is going to be. And we aren’t in a situation where our only choice is to act today or not to act at all. That’s just not the choice.”
Glenn Hubbard, a Columbia University economist who led the Council of Economic Advisers under Mr. Bush, said the biggest economic damage so far had been to confidence. The best remedy for that, he said, would be for the government to make clear that it was ready to act to support the economy if necessary. He suggested a long-term infrastructure program, something that both parties have supported in the past and that would be comparatively inexpensive given low interest rates.
“You want to persuade businesspeople that demand isn’t going to go off a cliff,” Mr. Hubbard said. “You need to make a commitment that demand will be there and will continue to be there.”
What about payroll taxes?
In his comments to reporters on Monday, Mr. Trump highlighted a different way to put cash in consumers’ pockets: a payroll tax cut. That approach has been tried in the past, including under Mr. Obama.
Studies conducted since the financial crisis, however, have found that small, gradual tax cuts were less effective at stimulating the economy than larger lump-sum payments. Consumers are more likely to spend a one-time windfall, these studies have found. And crucially for forestalling a recession, they are more likely to spend it right away, when the economy needs the boost.
“Whatever they’re going to spend out of the $1,000, you want them to spend it now,” said Ms. Sahm of the Washington Center for Equitable Growth.
The most imminent threat to the economy, she said, is that people start to worry they will lose their jobs and pull back on spending as a result. A few extra dollars in each paycheck won’t change that calculus. A larger lump sum might.
“That would be the bigger problem right now, is people just stop buying cars and washing machines,” she said. “You give them money, and they will spend it.”
There are other potential downsides to a payroll tax cut as well. Because the payroll tax is calculated as a percentage of earnings, the biggest tax cuts would go to people who need the money the least. And people who lose their jobs or whose hours are cut to zero wouldn’t get any benefit.
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