With a Uniquely Fragile Economy, Stimulus Is Not Enough
Our long-term goal must go well beyond the Senate bill to build a more resilient economy.
March 26, 2020
Mar 26, 2020
14 Min read time
Our long-term goal must go well beyond the Senate bill to build a more resilient economy.
Across the United States the economy is crashing.
As people dramatically reduce their spending to only the most essential goods and services, the COVID-19 pandemic has led to an unprecedented drop in aggregate demand. At least a hundred million Americans are staying home. At this moment, the best hope for our economy is that it goes into a deep freeze and revives in several months. The worst scenario—a steep recession followed by a sustained depression—could yet come to pass: panicked financial markets, diminished activity in the real economy, and incompetent executive response, feeding off each other in a downward spiral. The U.S. economy is vulnerable across many sectors, from airlines and other transportation to real estate. The burden of retrenchment will be made all the worse because of staggering and long-standing inequalities.
Merely stabilizing the economy, or preventing the absolute worst of all possible worlds, will not be enough.
The human pain is already real. In the last week unemployment claims have skyrocketed to nearly ten times normal rates. Thursday’s initial weekly unemployment claims came in at 3.3 million, outstripping by more than a factor of four the highest number on record since the Department of Labor began tracking the data in 1967 (which occured in 1982, with the Great Recession only slightly behind). Goldman Sachs and Morgan Stanley have both warned of a 30 percent drop in GDP next quarter. Such projections may very well be understating the severity of the moment. But even in the fog of economic war, with only piecemeal data and uncertainty about which sectors are the most affected, a few things are already clear.
First, the response must meet the seriousness of the crisis by focusing, laser-like, on relief and employment for workers most at risk. And it must be multi-pronged. Different mechanisms—cash, unemployment benefits, paid leave, business supports, and money to states at the front lines of the pandemic—are all essential to helping Americans survive the shuttering of our economy with as few lasting effects as possible.
Whether the $2 trillion rescue package just passed by the Senate—the largest by far in American history, an 880-page document written in a matter of days—is up to the challenge remains very much an open question. Essentially, Congress has approved a budget. If it is spent in ways that actually stabilize the economy and provide assistance to those most in need, then perhaps the recovery can be short and sharp (“V-shaped”). Otherwise, we may yet see economic suffering for years to come.
But merely stabilizing the economy, or preventing the absolute worst of all possible worlds, will not be enough. In a short few weeks, the COVID-19 recession has made painfully clear our profound economic weaknesses. We have long known that 40 percent of Americans cannot afford an unexpected $400 expense. Now we are beginning to understand exactly what that means.
The current rescue package, at its best, is designed to stabilize. Our long-term goal must go well beyond that, building a more resilient economy. Deep structural inequalities make the U.S. economy uniquely fragile. Those inequalities have been propped up by a neoliberal worldview defined by supercharged market fundamentalism—the relentless and misguided pursuit of private, individual solutions at the expense of public, universal ones. Even as we act to mitigate immediate harm, now is the time to begin making a different, post-neoliberal choice. Our solutions must not deepen our current inequalities and create even more underemployment and suffering. We must insist on a new way of doing business, focused on building greater societal health and economic resilience.
• • •
In the short term, the government must immediately put in motion a multi-pronged relief strategy—for individuals, for cash-strapped states, and for businesses alike. The good news is that the federal government has the right tools and the right capacity—both fiscal and monetary—to respond effectively. The rescue bill gives the government a framework to do so, but only if those now in charge of spending $2 trillion understand the nature of the economic problem and target funds accordingly.
The essence of today’s short-time crisis is a negative demand shock. Drops in demand require mostly fiscal action. If consumers aren’t buying, the government must step in to spend, either stimulating demand or acting as demand of last resort. Exactly what kinds of stimulus—for whom, for how long, and with what mechanisms—is precisely what Democrats and Republicans fought about over the last week.
Deep structural inequalities make the U.S. economy uniquely fragile. We must insist on building greater societal health and economic resilience.
Certain kinds of monetary policy are also useful during this crisis, especially because they can be wielded relatively easily. Spending and taxing (or tax cutting) require legislation. As we have seen, even with the enormous pressure of a national emergency, legislation takes time. The Federal Reserve, by contrast, can quickly inject liquidity into the system. Since the crisis began, the Fed has already lowered lending rates and promised to buy essentially unlimited amounts of corporate debt to keep capital markets working. This approach is unlikely stimulate as much demand as we need, but monetary policy is useful because it can be fast, and because it can be targeted where needed—especially to aid financially struggling states and cities.
As we devise solutions, it is important to note that the current crisis departs in essential ways from the 2008 financial crisis. This time the economic slowdown was caused by a bug not within the system but external to it. A decade ago, the problem was rot at the heart of the financial system—an overleveraged mortgage-backed asset bubble—that led to a wave of foreclosures, job losses, and an economic slowdown throughout the real economy. Today we are making the deliberate and painfully forced decision to shut the economy down.
Still, the Great Recession and this one share notable similarities. Now, as then, we have a shock to an economic system that is deeply unequal and heavily financialized. Perhaps the most important policy and political lesson of the Great Recession is that, in times of crisis, we must resist the temptation to prioritize the health of finance and capital—whether financial institutions themselves or large corporations focused on generating short-term profits. We learned ten years ago that if you merely put a band-aid on a deeply broken system, it will keep doing what it did before: concentrating power and capital in the hands of the few, to the detriment—economic, social, and political—of everyone else. As we seek a cure for what ails us, we should recognize that our economy was broken far before COVID-19 rendered it helpless.
Fortunately, we are already seeing some elements of a new economic consensus emerge.
For one thing, policymakers across the aisle agree on the cost of fighting this recession: it is substantial. The center and right, at least for now, have come to agree with the left on government spending. Economists of every stripe, from George W. Bush’s chief economist to Barack Obama’s, have argued for a big rescue package. Weeks ago, Ian Sheperdson, who advises Wall Street, said “I am in the one-to-two-trillion dollar camp, preferably by dinner time,” with promises of more to come.
We agree. Given the magnitude of the need and the very low cost of capital today, the federal government can’t afford to delay aggressive spending. Likewise, J.W. Mason, a Roosevelt Institute fellow, has estimated that the cost of stabilizing what might be a 20 percent shortfall in private demand could be as much as $3 trillion per year, on the order of 13 percent of GDP. Obviously these estimates are difficult to make. But given low interest rates and our overall macroeconomic conditions, this is a steep but affordable price tag.
Another point that has found growing consensus is that we should not trade off policy priorities. The question is no longer whether the federal government should just write checks to workers suddenly laid off and extend very low-interest or forgivable loans to businesses suddenly without customers. We have advocated that policymakers must do all, and argue for focusing on five fronts.
In order for any rescue package to really work, all relief must help workers and families directly. And all relief must be sustained until we know, based on unemployment or other data, that the economic effects of the crisis are over.
- Help people directly by providing cash now. This will help stabilize demand and address families’ immediate needs. The federal government can and should send checks immediately to households, on the order of $2,000 per individual, with some proposals getting checks out as early as April. We should push for money as early as possible, and that money should renew automatically every quarter until the economic downturn is over.
- Support workers with paid leave and unemployment insurance. Paid leave for most workers is still shamefully inadequate even after initial congressional legislation passed earlier this month. As Arindrajit Dube argued in these pages this week, workers who have been laid off must be made whole, immediately, with expanded and sustained unemployment insurance. Additionally, workers, especially those in public health jobs, must have more bargaining power and better labor law enforcement so employers do not exploit them at this time of crisis.
- Direct aid to states and municipalities. States and cities are on the frontline of the health and economic crises. They face four simultaneous problems: declining revenues from decreased economic activity; extraordinary spending obligations to meet urgent health needs; additional demand for social safety net programs; and legal requirements that they balance their budgets, which means they have little extra economic capacity at this moment of need. The federal government should expand its matching rate for payments on Medicaid and other related joint spending. Additionally, the Federal Reserve should purchase state and municipal debt at low rates, which they could do by opening a zero-interest loan window, as they are already doing to support the financial sector.
- Help business through federal loans. Small and medium-sized businesses, like restaurants and shops, require significant support as their customer bases crater. The government should use zero-rate loans to help stabilize these firms. It should also go further and consider directly making payments for payroll, especially in the service sector, as a kind of employment insurance policy. The Small Business Administration is too small to provide adequate support, so another option is to create a new agency, modeled on the Reconstruction Finance Corporation, to quickly execute payments. Essentially, government can act by supporting businesses on the condition that they keep people employed. The key to any business relief must be a requirement, as we have seen in Denmark and the UK, to not lay off workers during the crisis and to continue paying them all or most of their salaries.
- Structure industry bailouts: no layoffs, restructure to support workers and other stakeholders. Some industries, like airlines, are already arguing for federal support to ensure that they survive. The political instinct is to quickly bail them out, as the government did in saving the financial sector in 2008. Helping industries is important, but we cannot repeat the mistakes of 2008. All bailouts must require that industries not lay off employees, and also that they restructure and govern themselves so they are responsible for a range of stakeholders, rather than prioritizing their own stock prices above all else.
Most importantly, these five fronts strengthen each other. They create an important redundancy at a time of crisis. Unemployment support for workers is administered at the state level. It won’t be sufficient, or timely, unless states, which are overwhelmed by the crisis and are fiscally stretched, receive immediate federal assistance. Cash and paid leave work together. Less unemployment funds are needed if businesses get the support they need to keep workers on payroll. And industry bailouts, where necessary, cannot waste funds by funneling them to lavishly paid executives.
The question before us now is whether the current plan approved by Congress meets these needs. It is certainly good that cash payments sent directly to individuals are part of the deal. It is also good that unemployment insurance now covers people who used to be ineligible, such as gig workers and people who are self-employed, and that it adds $600 per week in benefits. But even these measures fall short. One-time payments are of limited value in a long crisis. And unemployment insurance is complex. It is administered by states who are overwhelmed themselves and is very likely to be underutilized.
Most importantly, the conditions put on corporate rescue are weak. Yes, the bill creates a five-person oversight panel, but much of that will be after-the-fact, and many of the conditions are “at the discretion” of the Treasury Secretary or the applicant businesses themselves. Firms, especially large ones, will likely be able to avoid extra terms and scrutiny as the Federal Reserve lends out money to the real economy. The truth is that the jury is still out, in part because the ink on the bill language is not yet dry and in part because so much depends on how funds are administered. Given the track record of this administration, vigilance now is paramount.
Despite the stock market peaks and unemployment lows the president loves to tout in every press conference, that economy was not, in fact, the best we have ever known.
If the congressional package meets our multi-pronged criteria, and actually helps workers and allows businesses to shutter properly, there is reason to hope that the economic downturn could be sharp. But the fact that so much remains up in the air about whether the rescue effort will actually work to stabilize demand, and given that we have spent weeks arguing about basics—such as paid leave and federal support for existing (if woefully inadequate) health insurance—in a time when the health and economic crises are obvious: all of this reveals a lot about the unique challenges we face in the United States. Time will tell. But there is every reason to expect that we will do far worse coming out of the COVID-19 crisis than other developed nations.
This is because of our extraordinarily weak social safety net. It is also because we do not have the political institutions capable of developing a coordinated economic policy. Imagine how different our COVID-19 response would have been if we had had a strong public sector, better federal-state coordination, and strong unions. In Denmark, union-government relationships made it possible for a swift agreement to cover 100 percent of workers’ lost wages (75 percent paid for by the state, the remainder by employers) for three months. U.S. attempts to fight a global pandemic are hampered because we have tied a potentially powerful hand—the hand of government action—behind our back.
• • •
While these short-term emergency measures are necessary, they are far from sufficient, and we must not set as our goal a return to the pre-crisis status quo. Despite the stock market peaks and unemployment lows the president loves to tout in every press conference, that economy was not, in fact, the best we have ever known. Everyday people have been struggling for far too long. Skyrocketing returns in the stock market do not benefit half of Americans, given the inequality of stock ownership. And strong unemployment masks the problem of underemployment—people who have either stopped looking for work entirely, or would like more work but cannot find it.
The problem is in part ideological—what Americans think is normal, or possible, in our economy and our politics. Neoliberal thinking continues not only to drive but to justify asymmetries of power. This has led—by way of weaker democracy, defunded public investment, and extensive deregulation—to ever-worsening economic inequality and greater racialization, with huge economic, social, and political costs, among them the worsening of climate change, very likely to be the driver of our next global humanitarian emergency.
Neoliberal thinking continues not only to drive but to justify asymmetries of power. But it is possible that this emergency will shock us out of old pieties.
It is possible that the emergency we are living through now will shock us out of old pieties and into a concerted pursuit of economic resilience. Indeed there is some evidence that idols are already falling: at this moment, no credible economists are budget hawks, condemning the wisdom of spending during crisis. Democrats have pushed Republicans on the need for immediate cash relief, increased social insurance (for both health care and unemployment), and rigorous stipulations on support given to corporations. We must continue to build on these successes to hammer home the fact that long-term power imbalances between corporations and ordinary people render us fragile, and more vulnerable devastating outcomes for workers, families, and the economy writ large.
Greater resilience can come in a number of forms. One is a stronger safety net, focused on public health and health access. Universal insurance and greater access to pharmaceuticals, including public pharmaceutical manufacturing, are already popular with a majority of Americans. Greater care infrastructure, including the public provision of child care and other supports for elder care, will help women, in particular, weather crises, and not take the economic hit of having to trade off between paid work and making sure that families are healthy. We should also consider a permanent stimulus. We have already seen how hard it is, politically, to federal support in times of crisis, when demand drops. Since another crisis is always inevitable, we should stop pretending like we can wait for the next one to happen before we did it all over again.
Making sure that our immediate response is multi-faceted, sustained, and at scale is essential. But the depth and speed of this crisis show that we must shift our long-term thinking toward government and public power as drivers of deep resilience, for our health and economic well-being.
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March 26, 2020
14 Min read time