On Friday, with the House of Representatives passing a two-trillion-dollar emergency-spending bill, and Donald Trump signing it, the U.S. government put in place the most extensive economic support operation ever seen in peacetime. The crisis measures go well beyond the big fiscal stimulus. From its headquarters, in Washington, D.C., the Federal Reserve Board has committed to creating as much money as it takes to keep credit flowing throughout the economy, which could ultimately be many trillions of dollars.
Over the past couple of weeks, the Fed has launched a whole series of lending and liquidity programs. Going beyond what it did during the great financial crisis of 2008 and 2009, it has provided substantial support for the markets for Treasury bonds, mortgage securities, long-term corporate bonds, short-term commercial paper, and credit-card debts. It has also acted to bolster money-market mutual funds, and it has promised to unveil a lending program for Main Street, which will probably involve the Fed working hand in hand with commercial banks like Wells Fargo and Bank of America. “You can be sure that we are working furiously here at the Fed to have this in place and work out the details,” Robert Kaplan, the head of the Federal Reserve Bank of Dallas, said on Friday.
In an era of unceasing partisan warfare, and serious tensions between the Trump White House and the Fed, this two-pronged policy response to the coronavirus has come together quickly. To be sure, it’s been far from perfect. On Thursday, I pointed out some of the stimulus bill’s ugly features, particularly those relating to its treatment of corporate bailouts. More shortcomings have now emerged, including a set of provisions that could save wealthy real-estate developers like Trump and Jared Kushner tens of billions of dollars in taxes.
The U.S. political system has been corrupted through and through, of course. But, if you compare the passage of the stimulus bill with the halting efforts of the European Union to produce a coördinated economic response, the difference is telling. For all the dysfunction and partisan warfare that have afflicted the U.S. institutions of governance, they did act pretty rapidly in the face of an unprecedented crisis. The result is a series of programs designed to keep households and businesses on economic life support until the public-health crisis recedes.
If the Trump Administration had shown a similar alacrity in responding to the outbreak of the virus in China, the country would be in a much better place, in terms of both a public-health and an economic perspective. It didn’t do that, of course, and that’s why, despite the passage of the stimulus bill and the Fed’s measures, the immediate outlook for the economy remains dire. With rates of infection rising alarmingly in many parts of the country, it is far more likely, despite what Trump has been saying in the past few days, that the emergency health measures will be extended rather than relaxed. That points to more closures, more job losses, and more economic misery.
“I think this is going to be deeper than the great recession of 2008-2009, probably twice as large,” Claudia Sahm, the director of macroeconomic policy at the Washington Center for Equitable Growth, told me on Friday. “I think the unemployment rate could skyrocket to more than twenty per cent.” But Sahm, who used to work at the Fed, also stressed that these predictions were provisional, and that until we get a grip on the pandemic it is impossible to know just how deep and long the slump is going to be. “The only thing that is going to stop the economic plummet is killing this goddam virus,” she said. “Public health is going to determine how low we go. We’ve never seen the U.S. economy and the world economy shut down like this. The people who are saying ‘V-shaped recovery’—how would you even know?”
Ian Shepherdson, of Pantheon Macroeconomics, agrees. He said that the effort to stabilize the economy had three pillars, all of which were essential: keeping credit flowing (the Fed’s job); providing financial support for households and firms (Congress’s job); and checking the progress of the disease, an effort that has devolved to the state level in the absence of effective leadership from the White House. The lesson of Hubei Province, in China, where the first cases of COVID-19 occurred, Shepherdson said, “is that it took almost two months from the start of the lockdown to a point at which some economic activities could resume. So the United States potentially has quite a long way to go.”
Arguably, that is an optimistic analysis. The comparison with China rests on the assumption that isolation measures will be effectively implemented everywhere there is a sizable outbreak. In the United States, there is evidence that the lockdowns in Northern California and Washington State are having some effect. But the failure to act forcefully and quickly on the part of the governors in Florida, Mississippi, and other states where major outbreaks are developing is willful negligence. So is Trump’s talk about reopening the economy on Easter Sunday.
In any case, the most effective stimulus policy is doing whatever it takes to get some control over the virus’s trajectory. Right now, much of the economy has stopped, and people are simply trying to get through it. If the rate of new infections were to fall, it would restore the spirits of everyone—consumers, businesses, and investors—and at least raise the possibility of resuming some activities before very long.
“When we get to the bottom economically, we will know it because the public-health crisis will be starting to abate, and the case numbers will be starting to drop,” Sahm said. Getting there won’t be easy, of course. It will involve a great deal more suffering and loss; expanding testing until it is ubiquitous; continuing the lockdowns, and expanding them where necessary; and procuring much more medical equipment and protective gear. “I have confidence in the public-health professionals,” Sahm added. “If we get them what they need, they will beat this thing.” At the end of a week when the United States became the world’s leader in the number of COVID-19 infections, let’s end on that optimistic note.
