OPINION:
Most recessions that have occurred in the United States in the last 40 years or so have been caused by some sort of decline in aggregate demand.
This time, the incipient decline in economic activity from the COVID-19 will result from both a decline in aggregate supply and demand.
Schools are closing, and millions of people are being told to not report to work. There is a presumption that at some point stores and restaurants may close in some portions of the country as well. The airline industry has seen more cancellations than bookings this month.
There is no standard playbook for the federal government in such a situation.
In the short term, it is difficult to see what sorts of actions taken by the government can ameliorate the short-term impacts of these things on the economy; nothing can be done to keep more businesses open and maintain employment, and it will be difficult to spend money if few places are open for business.
The Federal Reserve can do little to ameliorate the downturn as well; it has already reduced interest rates to zero, sent a signal to the markets it will act to help the economy where it can, and took steps to ensure that the vagaries in financial markets won’t threaten liquidity and create some sort of short-term crisis. But it is not clear that any sort of standard fiscal or monetary stimulus will lessen the inevitable decline.
The federal government should try to make sure that when the pandemic threat has receded that businesses can quickly restart their operations and that people return to their normal lives. If the federal government can devote resources to reduce the spread of the coronavirus or mitigate its impact on those who do catch it, that might shorten the pause and allow us to resume economic activity more quickly once it has receded.
Scholars Michael Strain and Scott Gottlieb suggest that one way we can both reduce the threat and provide a limited economic subsidy would be to provide direct cash grants to low-income workers, a good number of whom may soon be temporarily without a paycheck.
They also suggest waiving the requirement that people receiving unemployment insurance show evidence they are looking for work (there will be virtually none available for the duration of the crisis) and consider boosting the federal government’s share of Medicaid expenses to reduce any incentive for states to skimp on public health expenses in the near term.
Such a move would help those most likely to be hurt by the crisis, reduce their incentive to go to work when they may be feeling ill and should stay home, and provide a modest economic stimulus to boot.
It should also take steps to prevent otherwise solvent businesses from going bankrupt due to this downturn. Extending the tax filing date for a couple of months will act as an interest-free loan for businesses (and families) that owe the IRS money; for larger businesses especially hard hit such as the airlines it should set up a board that provides them ample liquidity until flights return. Such a mechanism is already being discussed.
The hope is that if the threat from the coronavirus recedes in a reasonable period of time we might be able to achieve a V-shaped recovery rather than the tepid, drawn-out expansion we saw in the first few years of our current business cycle. We have some reason to believe that may occur: There is evidence that economic activity is already beginning to rebound in Hubei province, home of Wuhan.
Economists always have three answers for every problem, two of which are invariably wrong. However, with our current, we have three interrelated problems — a nascent pandemic that will bring with it an economic pause, with a disproportionate amount of short-term financial pain — and a single, limited policy response: A rapid medical response to the crisis and short-term aid for hourly workers.
• Ike Brannon, an economist, is president of Capital Policy Analytics.
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