Economic Policy and Coronavirus
Warning. This post is a little wonkier than my usual, as I sit and ruminate over arcane matters of politics and economic policy.
Markets seem to be stabilizing and recovering a little today. In fact, if there is a bright side to the recent shellacking in the stock market, it is that markets have functioned well. There has been little chaos or financial system instability, which is in part a testament to the stronger foundation which has been laid by financial institutions and their regulators over the past dozen or so years since the financial crisis.
Looking back to that time, what stands out in retrospect was that our leaders in Washington, in both the White House, the Congress, the Federal Reserve and the Treasury department – took bold and decisive action in the face of a potential financial and economic crisis. That set us apart from Europe, where leaders hamstrung by a complex bureaucracy settled for half measures. As a result, Europe’s financial institutions and economy never fully recovered from the crisis, even as America raced forward into a decade long recovery with record breaking job growth and the longest bull market in stocks the country ever experienced.
What more testament is there to the value of bold and decisive action in the face of a crisis?
We need more of the same today – but so far it is not coming. There can be little doubt but that the coronavirus will cause a dramatic slowing of economic activity. I can already see it on my commute to work – traffic is down substantially. As we fight this virus, people will work more from home. They won’t be going to the deli for lunch. Already we see travel plans cancelled, conventions postponed, even weddings plans on hold - all with significant fallout to businesses both large and small. Yes, this will be a temporary situation - but the economic toll may be severe even if short lived.
The effects of this sudden cessation of economic activity could be serious. Many businesses - both small ones and large ones - are unprepared to survive a sudden drop in sales, even if it is only temporary. They have to make debt and mortgage payments, they have bills to pay. Our ability as a nation and economy to recover may depend on policy actions we take now to limit the economic fallout from what is likely an inevitable short but intense slowdown in economic activity. If as a country we don't provide support as needed to businesses so they can survive this event, our ability to recover as we come out the other side will be greatly diminished.
So far what I am seeing is not encouraging. That is not a partisan complaint because I don't see the kind of vision we need coming from anywhere in Washington. The Federal Reserve cut interest rates last week, which was just the waste of ammunition. People and companies aren’t going to rush out and borrow more money because interest rates went down a little bit. In fact, it will be virtually impossible to entice people to go out and spend money when they are afraid for their health. Now the White House is chattering about cutting payroll taxes. Again, the wrong target. People will welcome more money in their pocket – but they will only save it if they are afraid to go out of their homes. That won't help the businesses who are on the front lines of this crisis.
What is needed, more likely, similar to what was done in 2008, is targeted economic assistance directed to companies and industries who face existential threat due to loss of revenues during this crisis. Inevitably (as in 2008) there will be political pushback about moral hazards (let the weak fail!) and corporate welfare (giving help to greedy corporations while the poor suffer) and the like. That is why we need visionary policies combined with political courage – something that seems to be in short supply these days. Markets would sure appreciate knowing that policy makers stand ready to act with thoughtful policies, rather than simplistic and ineffective (but popular and expedient) half measures.
We entered this crisis on sound economic footing, and were thus well positioned to survive it and recover – but a little help from our leaders on both sides of the aisle in Washington would help reassure me (and more importantly the markets) that we will survive this crisis and come out as strong as we were when we went in.