How to rescue our coronavirus-infected economy from collapse
As our health officials strive mightily to battle the COVID-19 pandemic, it is imperative that we move rapidly to fix an already broken economy in which St. Louis Fed President James Bullard predicts unemployment may hit 30 percent in the second quarter with an unprecedented 50 percent drop in GDP.
Since we have all — appropriately — been asked to stay home, spending in the economy has collapsed. Simply put, our national GDP is the total of our spending, so a spending collapse is the same thing as a GDP collapse. A spending decline of $500 billion to $3 trillion in our $20 trillion economy implies a 2.5 percent to 15 percent drop in GDP; some estimates are higher. It was less than 5 percent in the Great Recession, and a cataclysmic 50 percent in the Great Depression.
The collapse likely means that perhaps 10 million jobs already have been lost, at least temporarily, and that hundreds of thousands or even millions of businesses have failed or are near failure. When that many businesses are allowed to fail instead of being preserved at least in some form, that means the economy can’t readily “bounce back quickly.” Too much damage will have been done and, instead, it will take months and years to recover.
What is important to know is that GDP is the sum of private-sector spending and government spending. So if spending by individuals or businesses in the private sector declines by, for example, $3 trillion, then an increase in government spending of $3 trillion will largely offset that — though not without disruption, because the places that money will be spent will be somewhat different. Without this offset, we will see a severe depression and a recovery that will take years.
Of course, a spending increase of this size would increase government debt by $3 trillion, but even in an amount this large, this would only be a 5 percent increase in the total amount of U.S. government and private-sector debt. That is an allowable amount in the face of one of the greatest crises in history, and given the critical help it will provide to households and small businesses.
To further support this idea, I would note that the current level of U.S. government debt stands at 106 percent of GDP, and a $3 trillion increase would raise that to 120 percent. That ratio would still be well within the ratio of Japan, so often considered a harbinger of future trends, which now stands at 238 percent — and similar to the ratio of France at 99 percent and of Belgium at 102 percent. These countries have not seen much, if anything, in the way of adverse consequences from their governments’ debt levels. This supports the idea that, in this time of unprecedented emergency, the U.S. could readily sustain a higher level of government debt. In fact, my work has shown that it is high levels of private-sector debt, not public debt, that most directly brings adverse consequences in an economy. And higher levels of government spending at this time will help mitigate dangerously higher levels of private sector debt.
So what should the government spend the money on? On giving large amounts of money to individuals and businesses as simply, directly and rapidly as possible, much as Congress and the Trump administration are attempting to do with the relief package approved and signed this past week.
You might ask, hasn’t the Federal Reserve already done a lot of this with its recently announced trillions in new quantitative easing and other programs? The Fed has been bold and decisive, and everything it has done has been pivotal. Yet, most of it is for banks and other lenders in support of existing loans, not payments that can be spent by individuals and businesses, so it only gets us part way there. To complete the equation, we need to extend support in the form of new money and cash flow support to individuals and businesses, perhaps in addition to what is already provided under Congress’s $2 trillion relief package.
That federal legislation included payments to individuals along with many more features. But much of that is aimed at debt rather than the more powerful stimulus of direct payments, and it is skewed more to businesses than people. In addition, there has been a helpful moratorium imposed on mortgage foreclosures and a program of forbearance prescribed for troubled mortgages.
I applaud all of these measures and believe they will all be highly beneficial — and yet, collectively, they don’t go far enough, especially for individuals, likely providing less than half of what is needed. The SBA loans/grants, for example, are highly welcome but will need more funding. The steps I believe are appropriate are below; they are necessarily vast in scope. Having for years studied financial crisis issues in depth, I don’t make these recommendations lightly.
The U.S. government should implement a program of monthly checks of $1,000 for three months — a timeframe which could be extended — to individuals above 18 and below some income threshold, say $200,000. A one-time check is not enough. The continuity of these payments is the most central, critical recommendation. Even if Americans stay cooped up, they can and should be encouraged to spend across the board, including on things like restaurant gift certificates, since the restaurant industry alone now estimates up to 7 million job losses.
Even ten years after the Great Recession, households and businesses still have near-record levels of debt and, with this GDP collapse, will now be drowning in that debt. The U.S. government should institute an immediate three-month moratorium on payments of mortgages, credit cards and student debt, along with a similar moratorium policy for business loan payments. This should be extended beyond three months if necessary. Having spent much of my career in banking, I view this approach as feasible, as long as regulators have the guidance to allow it. As part of this, the federal government would implement this policy for government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, for government-guaranteed student loans and other lending programs that have its full or partial backing; the loans could be extended or restructured to accommodate this, and borrowers could continue to pay if they chose. Regulators also should work with the industry to put together other prudent forms of loan forbearance.
The government should implement a three-month moratorium on all rent payments, and establish a fund to extend money to landlords to accommodate this rent forbearance.
It should implement a three-month moratorium on all federal tax payments, which could be extended if necessary.
It should commit to cover all healthcare costs associated with the coronavirus, structured such that care providers can bill the government directly so no forms or reimbursements would be required of individuals.
It also will be necessary to provide capital support for select, troubled industries beyond the airline, hotel and cruise ship industries. This part does not need to be a handout; it can take the form of a preferred equity investment.
It will soon need to provide substantial support to states and local governments.
This program will not provide a result that is perfect in its fairness, but the need to move quickly far outweighs that consideration.
Speed of action now is the key. The effects and after-effects of COVID-19 will be with us for an extended time. The financial crisis of 2008-2009, though terrible, was in some respects a dress rehearsal for this crisis, since this one will take more in the way of support and intervention. The program I outline here will work. Anything less will leave the economy in far worse shape.
NOTE: This post has been updated from the original to clarify the age above which people should receive monthly checks.
Richard Vague is Pennsylvania’s acting Secretary of Banking and Securities. He previously was a managing partner of Gabriel Investments, based in Philadelphia, and co-founder and CEO of Energy Plus, Juniper Financial, and First USA Bank. He is the author of “A Brief History of Doom” (2019), which analyzed the world’s largest financial crises of the past 200 years. The opinions expressed here are his own.