In America’s Virus Economy, Government Is the Last Spender Left

The scariest words in the English language, President Ronald Reagan once said, are: “I’m from the government and I’m here to help.”

The opposite fear is stalking America right now. The coronavirus has turned almost every corner of the economy into a bailout candidate, and forced policy makers to spray cash around on an unprecedented scale — and the chief worry is that it won’t be enough.

Congress is set to pass an emergency package worth about 10% of America’s economic output. That’s likely the biggest ever in peacetime — and will push the budget deficit toward levels reached in World War II, above 20% of GDP. Meanwhile, the Federal Reserve has rolled out a credit lifeline worth trillions, exceeding even the measures it took during the 2008 financial crisis.

There’s strikingly little pushback against all this intervention — in an economy where the free-market mantra has reigned supreme, especially since the Reagan days. Democrats and Republicans have haggled over details of where virus relief should go, but there’s no dispute on the principle that huge amounts of money are needed.

In fact, many analysts — including on fiscally conservative Wall Street — say authorities will have to go further.

‘Keep Everybody Whole’

The bosses at Jefferies Financial Group suggested that government should stump up the cash for businesses to retain employees and pay them — echoing what the U.K.’s right-wing government, until recently committed to fiscal austerity, has done.

Barclays Capital economists said “mass government-financed forbearance on credit cards, mortgages, and small business loans” may be needed.

James Bullard, president of the St. Louis Fed, floated the idea of a three-month holiday for most economic activity, during which policy makers should provide whatever financial support is needed to “keep everybody whole.”

That once-unthinkable proposals have become almost routine is a testament to the pandemic’s devastating impact across the whole economy.

Cries for federal help are arising everywhere: from giant industries like Boeing and the major airlines warning of imminent collapse; small businesses like restaurants whose customers have disappeared; state and local governments at risk of a budget meltdown; and workers suddenly deprived of the incomes they need to make rent.

It’s natural in those circumstances that all eyes should turn to the one actor with the ultimate power of the purse, according to Nobel Prize-winning economist Joseph Stiglitz.

‘In That Direction’

“The federal government is the only body that can run a deficit,” said Stiglitz, a professor at Columbia University. “World War II and the New Deal are the other examples, but this period is the most visible example of needing a strong government.”

The wartime precedent has increasingly been invoked in the fight against coronavirus.

Economists like Olivier Blanchard, formerly of the International Monetary Fund, have cited World War II-era budget shortfalls — which in the U.S. peaked at more than a quarter of the economy — as they exhort policy makers to think big.

President Donald Trump, who’s up for re-election in November, has frequently accused Democrats of plotting a socialist takeover of the economy. Trump now says he’s ready to assert government control over private industry and divert production toward the needs of the hour — which back then meant tanks and planes, and now means things like medical ventilators.

“I don’t think we’re going to go to that extreme,” says J.W. Mason, a fellow at the Roosevelt Institute, of the 1940s comparison. “But I think we’re going to go in that direction.”

Blank Check

The U.S. fiscal response has indeed escalated dramatically, from an initial virus bill worth about $8 billion. There’s still a sense that policy makers are struggling to keep pace with the demands pouring in.

In the second package to reach Congress, for example, efforts were made to expand paid sick leave — especially to workers precariously employed in service industries. But by then, the escalating emergency was creating new and bigger problems, and many of the workers were no longer employed at all, amid a nationwide shutdown of restaurants and bars.

The surge in jobless claims raises knock-on concerns about how people who lost their incomes will make rent or meet loan payment obligations — failures which could spread into other parts of the economy or financial system.

“There is no level of targeted stimulus that will do the trick,” said Troy Ludtka, an economist at Natixis. “You have one problem that turns into 15 problems,” he said, and it’s only a matter of time before something “just breaks.”

The risk of a cascade of catastrophes has led some economists to advocate for fiscal intervention that is across-the-board rather than piecemeal — something more akin to writing a blank check, instead of a series of large ones.

‘Anger of 2008’

French economists Gabriel Zucman and Emmanuel Saez, who worked on Elizabeth Warren’s presidential campaign, captured the idea by calling for a government that acts as “buyer of last resort.”

Glenn Hubbard, a White House economist for the George W. Bush administration, said the government could make loans to companies then later write them off, provided employees weren’t fired.

There are plenty of hazards with sweeping financial rescues, as well as the targeted kind. Stiglitz points to widespread resentment after the Great Recession because the policy response was seen as favoring Wall Street over ordinary Americans.

If that failure is repeated now, then “we’ll get the anger of 2008, that it’s always the big guys that win,” he said. “If they contain the disease and protect the vulnerable, then I think that’s another story, and people will say: ‘Boy, are we glad we have government.’”

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