While public health officials grapple with containing the outbreak of the novel coronavirus in the United States, federal lawmakers are discussing emergency measures to help mitigate the associated economic fallout. A federal response is wholly appropriate, but Congress and the administration should carefully craft their policy response to address specific circumstances. Government should refrain from adopting broad-based tax or spending policies with limited short-term value that will exacerbate our nation’s long-term fiscal imbalance.
Treat the Virus First; Consider Stimulus Second
The first priority of government should be to mitigate the ill-health effects of the novel coronavirus on the population, particularly those deemed high risk. Even the most aggressive monetary or fiscal stimulus will not overcome public fears of routine activities such as going to work, shopping, attending classes, traveling for business or pleasure, or attending large public events. Nor will traditional stimulus plans plug gaps in international supply chains as manufacturing grapples with the spreading virus.
Moreover, the best way to minimize the economic fallout of the evolving public health crisis is to test, track, and treat the virus as fast as possible. Congress and the administration have already taken an important first step, passing an $8.3 billion emergency supplemental appropriations package with funding for disease detection and mitigation, and small-business loans to help smooth cash flow. Additional supplemental funding may be necessary, and lawmakers should prioritize those efforts. Economic stimulus can and should be a secondary concern.
Congressional Action Should be Targeted, Timely, and Temporary
The macroeconomic effects of the coronavirus outbreak in the U.S. are likely to be sudden, sharp and short. Unlike the Great Recession, this is not an open-ended crisis. Public health officials expect a vaccine will be available for global distribution in 12-18 months. The strong pre-virus state of the US economy suggests that as disease mitigation efforts take effect and vaccine deployment nears, the US economy should rebound quickly. Moreover, unlike 2009 economic recovery from the coronavirus panic will not require unwinding the global finance system. These unique attributes, combined with our long-term federal fiscal imbalance, suggest that the proper policy prescription is one that is targeted, timely, and temporary.
Targeted. It has been said with derision that Congress never lets a crisis go to waste. The temptation to pad must-pass legislation with pet projects, new entitlement benefits, permanent tax cuts and major spending programs that go beyond the scope of the crisis cuts across both parties. A well-designed stimulus should steer federal dollars only to those households and businesses most directly affected by the evolving pandemic, deploying solutions that help smooth cash flow until the economy rebounds.
At present, consumer-facing industries like travel, hospitality, and health care appear to be ground-zero for economic displacement caused by the spread of the coronavirus. Industrial sectors reliant on foreign supply chains in China, South Korea, and Europe are also vulnerable. A properly targeted stimulus package could include, for example, deferred taxes for large corporations in the airline, hospitality, and manufacturing industries; low- or no-interest federal loans for their small business partners; enhanced and extended income maintenance programs like unemployment insurance and food assistance for dislocated workers; and an enhanced federal match for joint federal-state health programs.
Timely. To be effective, a stimulus package must be capable of producing countercyclical benefits while the economy is weak, not after the crisis has passed. One takeaway from the 2009 stimulus is that “shovel-ready” infrastructure projects are hard to find. Although the economic displacement associated with the coronavirus pandemic could possibly be severe, it should also be short-lived. Emergency stimulus policies should be selected to match. Specifically, Congress should resist the temptation to add expensive, long-horizon infrastructure proposals to emergency legislation that is designed for speed, not deliberation.
Temporary. With $23 trillion in existing gross federal debt, and projected annual budget deficits in excess of one trillion dollars for the foreseeable future, it is imperative that any debt-financed stimulus package include an expiration date -- and that Congress adhere to it. Temporary, debt-financed workforce remedies like paid sick leave and childcare have merit, but the immediate crisis should not be an excuse to add a new unfunded entitlement benefit that Congress is pressured to extend year after year once the crisis has passed.
Payroll Tax Cut – Wrong Prescription for What Ails
Earlier this week, President Trump announced support for a payroll tax cut as part of a package of stimulus measures. The payroll tax -- a 15.3 percent tax on all employee wage income up to $137,700 -- is used to finance the two large social insurance programs, Social Security and Medicare.
While well-intentioned, a payroll tax holiday is exactly the wrong kind of policy prescription for the current crisis. The payroll tax is not paid by workers who lose their jobs as a result of a sudden downturn, nor is it paid by the growing number of workers in the gig economy or retirees living on Social Security benefits -- those groups most likely to need additional income support during an economic crisis. A payroll tax would also be expensive. A one-point reduction in the payroll tax would cost approximately $80 billion per year. A payroll tax holiday would also divert revenues needed to pay current benefits for Social Security and Medicare enrollees. The diverted funds would likely be repaid by general revenues, which risks altering the basic financing structure of these programs and would threaten funding for other domestic priorities.
Fiscally Responsible Deficit Spending Need Not Be an Oxymoron
In the most recent Budget and Economic Outlook, the Congressional Budget Office projected that without changes to current tax and spending programs, the federal government will run trillion-dollar budget deficits in every year of the forecast window -- an ominous development during a time of relative peace and prosperity. In addition, net interest -- the amount of interest the federal government pays on its debt -- is the fastest growing component of the federal budget in spite of historically low interest rates. Without a firm commitment to fiscal discipline, any action designed to mitigate the economic effects of the current public health crisis in the near-term will merely exacerbate our fiscal imbalance in the long-term.
“Fiscally responsible deficit spending” need not be an oxymoron. In debating how to best engineer a resilient economy in the face of the coronavirus pandemic, short-term fiscal responsibility means debt-financing only the most effective anti-recessionary policies. Over the longer term, fiscal responsibility means investing wisely in projects that will contribute positively to economic growth -- and paying for those projects over time. On both fronts, policymakers should not confuse the size of our economic problem with the benefits of various policy options. Cost is a poor measure of effectiveness.