The American economy is in crisis, with record-setting new unemployment insurance claims likely pushing the overall jobless rate to its highest point since the Great Depression.
And even as President Donald Trump talks optimistically about “opening up” the economy again, the serious plans for doing so make it clear that even under the best-case scenarios, there’s going to be no rapid return to normal.
Developing and distributing a vaccine for Covid-19 will likely take at least a year, and until that happens, no edict from the White House is going to change the fact that significant sectors of the economy are going to be hamstrung by either state and local closure orders or basic individual or community-level caution about avoiding crowded places and unnecessary outings.
Meanwhile, the recession itself can easily become a self-propelling machine. People who lose jobs can’t spend money, which reduces others’ incomes. State and local governments are strapped for cash and need to cut back, which creates another cycle of falling incomes and spending. Since the virus is global, the United States can’t export its way out of the problem. And since this collapse is happening with the Fed’s main policy rate already at zero, there’s no easy lever to push to generate an automatic bounce-back.
The US government ought to think of this as the equivalent of wartime, economically as well as epidemiologically, and take drastic steps to mobilize the economy for a long-term period of crisis.
Here are 11 specific ideas about how to do it.
1) Spend freely to fix the problem
One of the most striking things about the three rounds of stimulus Congress has passed so far is the relatively small sums of money going to research and production of the tests, therapeutic drugs, and vaccines that are ultimately needed to bring the public health emergency under control again.
Keeping the country on lockdown costs the economy hundreds of billions of dollars a month, and just waving a wand to “reopen” things won’t actually solve the problem if people don’t feel safe. That means even small accelerations in the pace of treatment are incredibly valuable. If spending an extra $10 billion on something could cut the time between when a vaccine is approved and when enough people have been inoculated to establish herd immunity by one week, that would be money well spent. Some things can’t be rushed, but every single bottleneck that can be alleviated with money should have tons thrown at it.
2) Extend aid to state and local governments
Economic downturns reduce state and local tax revenue, at which point balanced budget requirements force state and local governments to cut spending. Those spending cuts cause tangible harm by reducing the quality of public services. But they also exacerbate the downturn by reducing incomes.
Congress has taken some small steps to alleviate the pain by helping state governments out with their specific health care expenses. But the budget crunch is much more general than that, and Congress could simply use its ability to borrow cheaply to transfer large sums of money into state and local coffers.
3) Level targeting
The Federal Reserve has announced a smorgasbord of new programs to bolster the economy, but its overall framework for conducting monetary policy remains the same — do a lot in the throes of a crisis, but always keep a steady eye on inflation to make sure prices don’t pop up by more than 2 percent a year. An alternative approach is what’s known as “level targeting,” where instead of staying below the 2 percent rate of inflation, the government tries to “catch up” to where inflation would have been had the recession never hit in the first place.
This helps not because inflation is good, but because it creates confidence that emergency programs won’t be withdrawn at the first sign of green shoots.
4) Transfers to households
Congress agreed to send $1,200 to each American adult whose income was below a certain threshold, plus a smaller amount per child. In light of the depth of the economic despair, it would make sense to just do this again. And next time, Congress should be a little more open-handed about it — give everyone the same amount of money regardless of age or income.
The point isn’t just to identify people who “need help” and give them relief; it’s to bolster incomes and therefore spending levels all across the board to keep the economy humming. Why not do $100 a month for everyone and keep the money flowing until the emergency is over?
5) Money for critical supplies
Nobody likes to see price gouging during a crisis. But America has a shortage of critical medical supplies. And while it may be cheap to manufacture an N95 respirator mask once a factory is up and running, it costs quite a bit more to launch a whole new factory (or retool an existing one set up to make something else) than to recruit and train a new workforce. And people are especially unlikely to do that if they think excess demand is going to vanish in a year.
The federal government should identify a set of critical supplies — ventilators, respirator masks, face shields, disposable gloves, hand sanitizer, and hospital gowns seem like the big ones — and establish a large fund to offer zero-interest loans to finance retooling costs and to guarantee large purchases of these products at higher-than-normal prices. If this results in more supplies than needed, they could be given away to lower-income countries and stockpiled for future emergencies in the US.
6) Hazard pay for critical workers
While white-collar America works from home and millions lose their jobs, millions of other mostly working-class people are keeping society functioning by delivering parcels, staffing grocery stores, driving buses, and otherwise keeping the lights on. Meanwhile, front-line health care workers are risking their lives to save others. People working in these sectors — which the country absolutely does not want to shut down — should have their normal pay supplemented by a few extra dollars an hour at federal expense to address growing grievances. That will not only help stabilize the economy but will help the most important sectors of the economy actually add staff at a critical time.
7) Payroll tax cut
Early in the crisis, President Trump called for a payroll tax cut as the main tool to bolster the economy. Congress rejected that in favor of targeting assistance to those who need help through a more generous unemployment insurance program. That was the right priority, but a cut in payroll taxes is a reasonable additional step that would have three big benefits — more money in the pockets of everyone still employed, less pressure on businesses suffering revenue drops to lay off workers, and easier expansion for companies that are seeing rising demand and considering adding staff.
8) Infrastructure for the long haul
Infrastructure stimulus faces a basic paradox — every politician likes the idea of taking advantage of low interest rates to build something useful over the long run, but spending on infrastructure is rarely a good short-term fix for a crisis. It’s clear that worries about coronavirus will continue to next year and beyond, so Congress can act now to make sure projects start rolling in 12 months.
Generic aid to state governments will bolster the pipeline of transportation projects, but the time is right to generously fund the construction of zero-carbon electricity sources, all of which tend to be characterized by high initial startup costs but low longer-term operating costs.
9) Set long-term interest rates
One of the things the Fed is currently doing is “quantitative easing,” where the central bank makes large-scale purchases of long-term government bonds to keep interest rates low. The Fed should enhance the potency of this move by setting explicit targets for how low it wants long-term rates to be, and commit to buying however many bonds it needs to buy to hit that target. Fed officials keep emphasizing that monetary policy alone can’t get the US through this crisis and they need big assistance from fiscal policy. Explicitly setting low long-term interest rates is the way to guarantee that Congress, and the public, knows the US can afford to borrow on a massive scale.
10) Safe schools and child care
It’s extremely difficult to “open up” the economy again on any level unless children can safely attend school and day care facilities. But maintaining higher levels of distance, more frequent cleaning and sanitization, and more intense supervision of younger children to make sure they’re washing hands frequently and thoroughly will be costly. Big surges of cash to make sure schools have ample supplies and personnel will help create jobs in the short term, and make sure that children have someplace safe to be all day.
11) Make it all automatic
Congress works under the tyranny of dates and calendars. But it’s foolish for members of Congress to try to guess how long emergency measures will be needed. There is no guaranteed way to know how rapidly scientists will develop a vaccine, how well new therapeutic drugs may work, how much shifting weather patterns will ameliorate the virus this summer and exacerbate it next fall, how developments in China and Japan will impact the global economy, or a dozen other relevant factors.
Emergency measures should be pegged to objective criteria. Spending directly linked to public health should taper off once a vaccine is developed. The Fed should stop capping long-term rates when it achieves its level target. Payroll tax cuts, aid to state budgets, and special infrastructure money should end when long-term rates rise above a certain level. And the direct checks to households should expire when the unemployment rate is low.
A depression is not inevitable
None of these measures is a panacea. There is no way to get around the reality that this deadly pandemic has led to a diminution of material living standards. Certain things a person might want to do will not be possible for a while. Others will be more cumbersome and expensive than they have been in the past.
Americans ought to take the analogy between the pandemic and a major global war seriously. Even in the US, which had the good fortune not to be bombed or invaded, World War II was a time of relatively low living standards on the home front, with people forced to constrain consumption by rationing measures designed to maximize output of military equipment. But what did not happen during the war is mass unemployment, or a message that there was nothing to be done about the economy until the war was won.
The large segments of the American economy dedicated to leisure, hospitality, and food service are facing a temporary period of shrinkage. But rather than generating sustained mass unemployment and a prolonged depression, the government can and should take decisive action to reemploy people in making useful supplies, staffing grocery stores and pharmacies, enabling home delivery of necessary goods, and conquering the virus. The economic catastrophe can’t be wished away, but people also don’t need to simply endure it.