Lawmakers got it roughly right with the fiscal stimulus deal reached Wednesday. It will go a long way to cushion the economic body blow from COVID-19. But, given the gravity of the crisis, it won’t be enough, and they must begin work on the next tranche of stimulus.
The virus has created a worldwide economic tsunami that is now slamming us. As businesses have shut down, millions of jobs have already been lost, trillions in wealth wiped out, and the financial system is teetering. How much economic damage the virus ultimately inflicts depends significantly on what policymakers do next.
Lawmakers should be applauded for the massive package of fiscal measures to support the economy after just a few days of debate. During the financial crisis of 2008-2009, it took months for policymakers to get it together and pass the fiscal stimulus package that ultimately ended that severe downturn.
They understood they had only days to get it together this time.
There also is no question of whether we should use all of the government’s resources to fight this virus and its economic fallout. Government deficits and debt were a worry that slowed down the policy response to the 2008-2009 financial crisis. There are no such fetters today. The Federal Reserve will finance the bulk of this fiscal stimulus, which, at close to $2 trillion, is equal to almost 10 percent of GDP — twice the size of the stimulus provided during that decade-ago crisis.
Lawmakers’ fiscal plan is broadly focused on the right things — that is, providing immediate cash and credit to families and businesses. Close to one-half of Americans live paycheck to paycheck and have almost no savings for an emergency. Without a job, or with lost hours and pay, these families have no prospect of paying their rent, let alone money for utilities, or even food.
Most small businesses – those with fewer than 500 on their payrolls and that employ nearly half of all American workers – also have little to no cash cushion. With no cash coming in and little access to credit, these businesses have no choice but to lay off workers, stop paying bills and prepare for bankruptcy or liquidation if they aren’t able to restart their operations soon.
However, lawmakers need to do more, quickly.
This stimulus plan will likely add nearly 10 percentage points to real GDP growth in the coming second quarter, but real GDP will still decline by an astounding 17 percent. Unemployment could well surge into the double-digits. And the benefit of the stimulus will quickly fade by summer.
Lawmakers thus should make the financial support to lower- and middle-income families in the stimulus — $1,200 per individual, $2,400 for a couple and $500 per child — explicitly open-ended. As long as much of the country is on lockdown, this cash should be provided each month. This would help shore up families’ finances and calm frayed nerves.
It makes sense that lawmakers expanded eligibility for unemployment insurance to anyone impacted by the virus, as does their increasing of benefits by $600 per week. But why limit the emergency increase in benefits to just a few months, when we are being told by health experts and policymakers that the virus will plague us for much longer? Workshare, which provides unemployment insurance for workers who lose hours but not their jobs, should be a big part of any future legislation as well.
Lawmakers have appropriately extended a lifeline to small businesses by expanding Small Business Administration lending and by establishing a facility that will be funded by the Federal Reserve to provide credit to all businesses. However, this financial support should be more closely tied to whether these companies avoid layoffs, ensuring that the money they receive goes at least in significant part to pay worker salaries.
Bailouts of airlines and companies critical to national security almost surely will be necessary, just as the banks and the auto industry were bailed out during the 2008-2009 financial crisis. A lesson from those previous bailouts is that companies receiving help should have clear limits on what they can do with the funds, and any bailout should come with a government stake in the company to ensure that taxpayers eventually get repaid.
Lawmakers also left short some critical financial support. Increasing the availability and amount of food assistance, formerly known as food stamps, should be straightforward; this aid proved to be highly effective during the earlier financial crisis. The three-month time limit on food assistance for unemployed adults not raising children should be suspended as long as the economy is struggling.
Inclusion of more aid to state and local governments, whose finances are being shredded by the surge in expenditures and collapse in revenues, was a no-brainer. Any funds they receive will quickly go to supporting hard-hit lower-income households and communities. However, the federal government should do more by taking on a larger share of the cost of Medicaid, for which states partially pay, since the freed-up money will quickly go to good use.
The legislation that lawmakers just passed to shore up the economy is a worthy effort. It is a testimony to Americans’ ability to quickly put aside our differences and work together creatively to address an existential crisis.
The economic damage caused by COVID-19 will be significant, but it can be managed if lawmakers continue to go big and then even bigger.
Mark Zandi is chief economist of Moody’s Analytics, the New York-based firm that performs economic research and consulting. He is the author of “Financial Shock: A 360° Look at the Subprime Mortgage Implosion and How to Avoid the Next Financial Crisis” (2008) and “Paying the Price: Ending the Great Recession and Beginning a New American Century” (2012).