(Bloomberg Opinion) — The Federal Reserve’s emergency interest-rate cut on Tuesday didn’t persuade investors to overlook the potential economic impact of the coronavirus epidemic.
Though the Fed made the right call, the market’s gloomy reaction on Tuesday was reasonable. Lower interest rates can’t send people back to work in a factory that has shut down, or to conferences that have been canceled. They can’t strengthen global supply chains that have weak links due to slowdowns in overseas production, and they can’t coax people back into concert venues, movie theaters, and restaurants, or to travel. And, without coordinated action from other nations, the Fed alone can’t stem a global economic slowdown.
If the coronavirus does keep workers at home and workplaces shut down — and, to be clear, there is no real evidence to suggest that it is hurting the economy at this point — then that supply-side disruption will end up reducing aggregate demand. Rate cuts alone won’t be enough to increase it. Fiscal stimulus measures will be required as well.
Congress is working on a $7.8 billion spending bill that includes funds for medical supplies, developing treatments for the virus, measures to prevent its spread, and tests, vaccines and therapies for low-income households. The lawmakers are right to finance the public health response to the virus. But that’s different from fiscal stimulus, which is spending designed to support the economy in an economic downturn. What should a stimulus package look like?
The traditional answer is to put money into people’s pockets, through measures like more generous unemployment insurance payments. Right now that could mean waiving the requirement that recipients be actively looking for work if they live in an area with a coronavirus outbreak. There could be temporary payroll-tax cuts. Congress could simply send a check to every U.S. household.
The challenge with these policies is getting the timing right. If the coronavirus causes a major slowdown in economic activity, it could be short lived if the virus stops spreading during the warmer months the way flu viruses usually do. If that happens after stimulus measures are enacted, there’s the risk that money will arrive in people’s bank accounts after they need it. Still, if economic data suggest a serious downturn, these steps would be reasonable, especially since the Fed can’t lower interest rates much below the 1% to 1.25% level they’ve already reached.
There are other stimulus ideas in the works, each with its own strengths and weaknesses. Reports suggest that Representative Richard E. Neal, the Massachusetts Democrat who chairs the House Ways and Means Committee, believes that a stimulus package should be based on infrastructure spending. Treasury Secretary Steven Mnuchin has reportedly expressed his support for including infrastructure spending in a stimulus bill.
Timing is even more challenging for infrastructure spending than for tax tweaks. The boost to aggregate demand from investment in roads, bridges and airports would probably arrive long after it is needed. Shovel-ready jobs are hard to come by. The best course would be not to include infrastructure in any fiscal response. But if it must be included for political reasons, then Congress should identify projects that have high social value — in other words, projects that would make sense to fund even in the absence of an economic downturn.
Cash-strapped states may be forced to divert spending towards health care — for example, the Medicaid program — and away from other priorities. The federal government should step in and provide states the money they require to adequately address the health needs of their populations without cutting spending in other areas in a way that could contribute to a reduction in aggregate demand and a slowing of overall economic activity.
Congress should also consider directing federal agencies to work with states that experience outbreaks to target financial assistance to people who are unable to go to work, and who are otherwise economically vulnerable to the virus.
Another way that Washington could help would be to counteract the economic distress that would result from international supply-chain disruptions. Congress could create a mechanism to give businesses taking hits from broken supply chains access to loans to meet payroll and other expenses. These loans should be repaid at reasonable, market-based interest rates. And a major friction in international commerce is President Donald Trump’s trade wars. The president should immediately rescind all of his tariff increases and commit to markets and trading partners that no new tariffs will be implemented at least until the economic threat from the coronavirus has passed.
This would help businesses and the overall economy. Importantly, it would inspire confidence in markets that the president takes the threat seriously and is willing to take necessary measures to address it.
In concert with other wealthy countries and international institutions, federal spending should also be directed to poor nations with public health vulnerabilities. And in addition to any fiscal stimulus measures, the public health response to this threat should be fully financed. That’s why it’s good news that lawmakers reached agreement on Wednesday on the emergency spending bill.
The U.S. is already running trillion-dollar deficits, which shouldn’t be increased unless there’s a real need to do so. Much of this would only be necessary if economic growth is near or below zero due to the coronavirus epidemic. I don’t know whether that will happen, of course. But even if it doesn’t, Congress should be making plans today so that if troubling economic data arrive, it can quickly pull the trigger on a stimulus package.
Skepticism about the ability of the Democratic House, Republican Senate, and Trump White House to come together on a stimulus package is warranted. So far, the administration has said it is not considering a payroll-tax cut or a reduction in tariffs on Chinese imports. Trump seems content to bide his time and batter the Fed. And the administration is sending mixed messages about its appetite for a stimulus package.
But in the event that stimulus is needed, this should be a surmountable barrier for congressional Republicans. After all, the president’s re-election could hang in the balance.
To contact the author of this story: Michael R. Strain at [email protected]
To contact the editor responsible for this story: Jonathan Landman at [email protected]
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
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