As the nation grapples with devastating healthcare and economic consequences of the spreading COVID-19 pandemic, policymakers in Washington have been ratcheting-up their responses. Bills and proposals have included actions to fight the virus, maintain employment and stimulate the economy. Given the unique nature of the crisis we are facing, vigorous efforts are needed on all these fronts.
To be effective, fiscal responses to the COVID-19 pandemic should be timely (get the money out fast), targeted (get the money to those who need it most) and temporary (permanent changes to spending and tax policy can wait). They should also be large enough to have an impact. While the costs will be substantial ($2 trillion at least), and will inevitably result in a major spike in the debt, this concern must take a back seat for now to protecting the nation’s physical and economic health.
The first thing to recognize about the current situation is that the developing economic downturn, almost certain to become a recession, is a direct and necessary result of fighting the virus. Stay at home orders, closed businesses, cancelled events and postponed travel are all part of an effort to limit the scope of the healthcare damage by limiting daily routine commerce. Economic assistance, no matter how broad or how deep will be an ineffective bottomless pit unless the spread of COVID-19 is brought under control.
The second thing to recognize is the enormity of the economic hit that will come from deliberately shutting down the economy for an indefinite period. Second quarter gross domestic product (GDP) could plunge by as much as 24 percent according to Goldman Sachs. This would be much larger than the 8.4 percent quarterly drop at the height of the Great Recession in 2008 or the 6.1 percent drop during the 1982 recession. It goes well beyond what can be treated with traditional economic stimulus. It will require a major and immediate infusion of cash just to stabilize the economy.
The main concern is to maintain cash flows for employers, states, families and individuals in the face of efforts to keep people at home and close non-essential businesses. As income plummets, businesses will face insolvency through no fault of their own, layoffs will surge,”gig” workers will go broke and states will run through available cash. Making sure that businesses can stay afloat and that individuals can pay their essential bills such as rent, mortgages, healthcare, food and utilities is necessary to prevent a much deeper economic problem.
As we begin to emerge from the crisis, traditional economic stimulus may be needed to coax Americans out of their self-isolation and encourage businesses to ramp-up operations. In the meantime, direct payments to those most in need can help limit the damage and better position the economy for a rebound.
The nation will recover from this pandemic. The sooner we stop the spread of the virus, the sooner that will happen. When it does, policymakers will need to turn their attention to the fiscal fallout. We will have a much larger debt but more importantly we will still have the pre-existing condition of an unsustainable gap between routine spending and tax policies. The latest projection from the Congressional Budget Office (CBO), which was issued on March 19th, showed a $13.1 trillion increase in debt held by the public over the next 10 years with the annual deficit reaching $1.8 trillion (5.5 percent of GDP) by 2020. That is why it’s important for the pandemic response to be aggressive but “temporary” in the sense that it does not make the pre-existing structural fiscal gap even worse.
It is sometimes said that the deficit is more like having termites in the basement rather than a wolf at the door. Right now we have both. First, get rid of the wolf. Then fight the termites.