We are already in a deep recession — can we make it a short one?
It is now clear that the U.S. economy is in a recession that began in March. Policymakers have stepped up, but they will need to do more to prevent this recession from causing even more damage.
The April 3 employment report shows an unemployment rate of 4.4 percent and 700,000 jobs lost in March. While it is a negative report, it understates the situation dramatically. It describes the labor market based on the reference week ending March 14, before the bulk of the social distancing policies were in place.
The scale of jobs lost seen in other data already has made clear that we are facing a shocking economic downturn. In the week ending March 21, more than 3 million new unemployment insurance (UI) claims were filed, nearly five times the previous record. The next week, claims doubled again. At the height of the Great Recession of 2008-2009, it took nearly four months to add 10 million new UI claims. This March, it took two weeks.
The Congressional Budget Office has forecast that U.S. economic output will contract at an annualized rate of 28 percent in the second quarter of 2020 — a reduction in activity more than three times worse than the worst quarter of 2008. Policymakers will not be able to stop a downturn. The crucial challenge will be to minimize the damage and to make sure the economy is ready to recover when health precautions allow a resumption in activity.
Policymakers have begun their response. The Federal Reserve has responded aggressively — keeping financial markets functioning and avoiding sharp reductions in liquidity or credit. Furthermore, the financial system has better buffers and resiliency than at the start of the Great Recession, following the reforms passed over the last decade. In addition, Congress has shown considerable urgency, passing three packages that total well over $2 trillion to fund the health system, support households and provide loans and grants to keep firms alive during the slump.
Despite these actions, the scale of the human and economic damage makes clear that additional fiscal policy action is needed. It should aim to:
- Control the public health crisis.This is the most important step for both the health and economic welfare of Americans. This will require more testing, more medical equipment and protective gear, and a clear plan for how the health crisis will be controlled.
- Help state budgets. State and local governments are seeing massive reductions in revenue but are being asked to be the front line against the pandemic. The economic downturn will likely reduce their revenues by hundreds of billions of dollars. If that is not reversed, states will likely cut spending and hiring, possibly extending and deepening the recession. In addition, the surge in unemployment will require federal support for states’ UI trust funds.
- Keep workers connected to their employers. New loan programs are designed to help small firms maintain payroll. If these are successful, they will likely require more funding for loans or grants. Also, programs like short-term compensation or partial unemployment insurance may be able to keep people on payrolls even with limited hours. In order to succeed, these programs likely need more funding and administrative support.
- Provide more help to the most vulnerable. Americans who did not have enough income to file taxes may not get their direct payments. In addition, programs like Temporary Assistance for Needy Families (TANF) will likely run out of funding. Increasing support via SNAP (formerly known as food stamps), TANF or by sending additional cash payments to beneficiaries of these programs could help people during this extraordinary time.
- Provide additional demand in the economy, especially if the downturn is a long one.There is no way to stimulate an economy on pause. But as the public health restrictions ease, the economy will need something to help restart it. One way to do this is with policies that provide more support if the recovery lags and the unemployment rate remains high: Delivering more aid to the states, making SNAP more generous to help vulnerable households, waiving work requirements from safety net programs, continuing to make the unemployment insurance system more generous and extending additional direct checks to households.
It is important to underscore that it is not simply the social distancing policies weighing on the U.S. economy. Both household wealth and consumer confidence have declined sharply in a matter of weeks. A slowdown in the world economy also will be a drag on the U.S. economy. Furthermore, the magnitude of the health and economic damage is still unknown. If economic activity remains constrained for more than a few months, the current policy response will clearly be insufficient.
The United States is facing a severe health crisis. Continued economic policy support will be needed to make sure the economic damage is not even more lasting. Whether historians regard it as a short, sharp downturn or as one of our worst recessions will depend in large part on the speed with which public health officials can contain the virus and how effectively policymakers respond to the economic damage.
Jay Shambaugh is a senior fellow in economic studies at the Brookings Institution, which focuses on economics and tax policies, urban issues, governance, foreign policy and global economic development. He directs Brookings’ Hamilton Project, which proposes policies to create a growing economy that benefits more Americans. He is a professor of economics and international affairs at George Washington University and served as a member of the White House Council of Economic Advisers.