As Congress debates its response to COVID-19, understanding the roots of its financial impact is important. This economic downturn is unlike ones in the past, meaning that the economic response needs to be different too. Skepticism of market intervention is always warranted, but this is a prime example of an economic event where Congress has a carefully defined role to play. The poorly-structured fiscal stimulus from the Great Recession shows that not all fiscal policies are created equal, but a complete and sudden drop-off in consumer spending warrants a fiscally-responsible economic response.
Economists describe the economy as being composed of several big pieces: consumption, investment, government spending, and net exports. It’s often represented as a formula:
GDP=Consumption + Investment + Government + (Exports - Imports)
Consumption is the largest part of the economy, representing approximately 70 percent. Investment, however, is the most volatile. Companies don’t invest in times of uncertainty, so they pull back or delay investments, causing large fluctuations in the amount of economy-wide investment. In fact, most economic downturns are related to decreases in investment.
But COVID-19 is causing a different phenomenon to occur. Here, consumption is dropping quickly. Individuals are staying home; they are avoiding public areas like gyms, restaurants, movie theaters, bowling alleys, and the like. From a public health perspective, this is the right call. We want and need Americans to minimize social interactions to control the disease’s spread and impact.
But that means that consumer spending is going to run straight into a brick wall, hurting many in the process. A great deal of consumption, the largest component of GDP, will functionally evaporate. In essence, a small recession may be inevitable to control the disease, but we need to be smart about ensuring it is a short recession.
Businesses, particularly in leisure industries, are seeing their revenues dry up overnight. Hotels and restaurants are reporting dramatic cuts in customers. Other industries, like dry cleaners and nonessentials retailers, are next. This economic shock to consumer demand means that these businesses are struggling suddenly, and due to no fault of their own. This isn’t the market determining who is successful with poorly-run businesses suffering as a result of bad decisions they’ve made; it is public reaction to a virus wreaking havoc on the economy. By comparison, during the Great Recession, the impact was felt first in industries that had made bad bets.
Acting quickly can reduce total cost to taxpayers.
Businesses will be forced to confront difficult, immense questions in the next several weeks. Do they lay off workers or cut hours? How do they make payroll or pay debt obligations? Can they even keep their doors open? Restaurants in Seattle are debating closing their doors.
Small businesses often operate on razor-thin margins. They are not equipped to survive on a small number of customers for weeks or months, and they will be left with existential decisions to make.
At the same time, their employees are hit too. Bartenders and restaurant servers will see a large decrease in their tipped wages. Gig economy workers will see little to no demand for car rides. Individuals who don’t have telework-accessible employment will be hurt as their hours dry up.
In Italy and Spain, all businesses except for pharmacies and groceries are closed. The economic impact of those decisions are staggering. Ideally, the United States will not need to make those drastic changes, but even closures well short of that will cause economic distress.
So what does this mean? This isn’t similar to the 2008 financial crisis and our response should reflect that. A fiscal policy response must inject liquidity quickly into the market. We need to ensure that businesses can make payroll, pay their debt obligations, and weather the next several bumpy weeks. We need to ensure that the affected individuals are helped too.
Expanding the Small Business Administration’s loan authority and capital access (along with proper oversight) makes sense, though underwriting can be time consuming. Ensuring banks provide the utmost flexibility on debt obligations is critical too. States should copy the federal efforts, providing flexibility on tax and fee payments.
At the same time, we shouldn’t burden companies with new mandates either. Some bills in Congress would force employers to provide paid medical leave, without assisting in the costs. For small businesses struggling with little revenue, an additional mandate would be their death knell.
There are, of course, many public health responses needed too. Testing should be expanded, telemedicine should be more widely available, state certificate of need laws should be eliminated, and medical licenses should be transferable across states and reactivated for retired medical professionals. If the Centers for Disease Control and Food and Drug Administration request more funding, leaders can provide it without breaking the bank. If states need support to provide services, federal funding is an obvious solution. Medicare and Medicaid should loosen their restrictions on states, allowing their health care systems to be nimble. The school lunch program should be given additional flexibilities to distribute food to vulnerable children, while allowing the schools to close.
To the extent that we need to boost federal spending to manage the crisis, it can and should be managed with fiscal responsibility. Suddenly-low interest rates mean that we can borrow for a short period of time with little borrowing costs. Treasuries have negative interest rates currently, when inflation is considered. And we should find offsets as soon as feasible to prevent the federal government from expanding permanently from a short-term crisis. NTU and NTUF have years of research identifying wasteful and low-priority spending that could be trimmed in favor of crisis response.
Additionally, acting quickly can reduce the total cost to taxpayers. By supporting businesses and individuals in the short run, we can contain the economic impacts, preventing wider economic failures.
The Federal Reserve is trying to do its part too, by cutting interest rates and providing additional liquidity to capital markets, ensuring banks are well capitalized, bond markets are stabilized, and investors are reassured.
As individuals, we play an important role too. Ordering delivery from your favorite restaurant would help. Take advantage of curbside pickup when possible, and perhaps buy a gift card from local retailers to use at a later date, providing them cash now. Keeping your gym membership going or prepurchasing classes can help locally-owned gyms stay in the black while keeping patrons safe. If you employ a nanny, a dog walker, a house cleaner, or individuals for other personal services, continue to pay them if you’re able. And, of course, check in on elderly and other high-risk individuals to ensure they have adequate food and supplies too.
We can’t treat this just as a public health crisis; a proactive public health response is going to necessitate financial disruption. But robust, targeted fiscal policy can prevent the financial disruption from becoming a long term financial crisis. And timely and targeted relief is needed immediately if we’re going to prevent a large, drawn out recession that will ultimately hurt taxpayers to a far greater degree.