America is going to need a bigger stimulus
The $2.2 trillion economic support package wending its way through Congress is simply massive. At 10 percent of GDP, it's nearly three times the size of the 2009 stimulus that helped the Great Recession stop well short of becoming a second Great Depression. But it's not enough.
Economic forecasts continue to deteriorate. There was much disbelief last week when JPMorgan slashed its second-quarter outlook to an annualized -14 percent, which would be the deepest three-month decline on record. Now, a week later, America's biggest bank is predicting a crushing 25 percent contraction. And it's not even the gloomiest forecast out there. St. Louis Fed President James Bullard sees as much as a 50 percent drop, annualized, in GDP, with the unemployment rate soaring to 30 percent.
Of course, this virtual sudden-stop in economic activity is integral to the public health response to COVID-19. That $2.2 trillion isn't meant to stimulate trips to the mall but rather to help individuals and businesses survive an economy that's now sheltering in place. For instance: The mega-bill includes nearly $400 billion in zero-interest loans for firms with fewer than 500 employees. It's basically cash, since those loans will be forgiven if the firms follow certain conditions, such as not firing their workers. At least that's the plan.
But $400 billion likely won't cut it. George Washington University economist Steven Hamilton calculates that the total annual payroll of small- and medium-sized firms is $2.7 trillion, an amount that doesn't cover other expenses like rent. So we're maybe talking a month or so of adequate aid. My AEI colleague Michael Strain figures that the needed support might be more like $1.2 trillion to $1.5 trillion. As small businesses continue to implode, unemployment will be higher than it has to be and the recovery weaker than expected.
There's also a problem with the support measures for big business. Much of the financial help there isn't grants but rather loans and loan guarantees allocated by the Treasury Department and the Federal Reserve. Even before the pandemic, however, the ratio of business debt-to-GDP and other measures of corporate leverage were at historically high levels. And that debt overhang is one reason why JPMorgan disagrees with former Fed Chair Ben Bernanke, who says the economic shock from the coronavirus "is really much closer to a major snowstorm or a natural disaster than it is to a classic 1930s-style depression." As the bank now sees it, the recovery will be more reminiscent of the miserably slow one that followed the 2007-2009 financial crisis.
So, yeah, we're going to need a second or even third financial support and stimulus package, and those might well include more aid to individuals as well as businesses and states. Some non-traditional ideas should be considered as well. Entrepreneur Balaji Srinivasan, a former general Partner at Andreessen Horowitz, suggests "universal basic mask" and innovation prizes for breakthrough tests, drugs, and vaccines.
We should hope things go more smoothly than they did for Obama's second stimulus. It never happened, a failure that — along with the first stimulus being too small — some economists now partially blame for the historically slow recovery. And even though the Senate just voted unanimously for the CARES Act, there's no guarantee such bipartisanship will continue. Don't underestimate the level of discomfort some on the right have with this tsunami of government spending. Economist Arthur Laffer and pundit Stephen Moore, economic lodestars on the right, recently wrote that cutting relief checks is likely to "prolong a slump, as the Obama strategy did." Others cling to the Darwin-esque note that recessions are good things since they kill weaker companies, allowing workers and capital to be redeployed to stronger firms.
Democrats might also have to get more comfortable with simply cutting checks to companies with few restrictions beyond avoiding layoffs. The main, even singular, goal of policy should be keeping the economy as intact as possible during the Great Pause so it can quickly rev up during the Great Restart. Otherwise we risk another Not-So-Great Recovery. The last one helped spawn a populist wave across advanced economies everywhere. We should shudder to think what a second might bring.
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