How Congress Should Build A Stimulus Package To Counter The Coronavirus Crisis

The economic impact of the coronavirus pandemic will be the most severe shock to hit the US since the depths of the 2008-09 financial crash, and could rival that crisis in intensity. JP Morgan projects that growth in Q2 will fall by an annualized 14%, while Bank of America estimates a 12% hit. Both of those numbers would be the steepest quarterly decline in growth since 1947, and far worse than the 8.4% decline in Q2 of 2008. As a result, it is critical that economic policymakers in Congress and the Administration take immediate action to prevent likely 2-3 quarters of negative growth from turning into a deep, years-long malaise as we saw in 2007-2010.

Importantly, while the Trump administration has blown up the deficit in recent years largely through reckless tax cut policies, now is not the time to worry about debt-related issues. Long-term interest rates are at all-time lows, so the government has much greater ability to sustainably borrow without risk of hefty interest payments. Furthermore, a deep recession would actually likely increase deficits to a greater extent than a large fiscal stimulus now, given that long periods of weak growth tend to boost deficits because they harm revenues and increase automatic stabilizer spending, as we saw in the weak recovery after the financial crisis.

Therefore, Congress should aim for a massive fiscal stimulus right now, and should aim to achieve three broad goals with their proposal: shore up the healthcare system and pandemic-response, provide aid to workers and businesses directly harmed by the pandemic, and conduct a massive cash transfer program to boost the overall economy.

The first part of the fiscal stimulus proposal must deal with critical shortfalls in both the national coronavirus testing regime currently in place and in critical hospital equipment that will likely occur over the next week. First, on testing. The federal government must immediately ramp up testing by a factor of dozens (through an all-of-the-above approach that incorporates tests produced by the CDC, private labs, and WHO-approved firms), implement drive-through testing in all states, and begin a system of temperature checks in most high-traffic public areas (including all international airports). Each of these steps has been implemented by South Korea weeks ago and most of Western Europe now, and there is no reason why the US can’t do the same with adequate funding.

Second, it is likely that many US hospitals will run out of both ICU beds and ventilators in the next week, something that could cause a large spike in mortality as we’ve seen in both Lombardy and Hubei when medical equipment ran out. This is a problem that can be solved immediately with proper funding. New reports indicate that ventilator production can be increased by 500% if the federal government puts in the order, and the National Guard can quickly set up triage units and greatly expand the number of hospital beds with adequate resources. Third, access to testing and treatment must be widespread regardless of income, so all coronavirus testing and treatment care should be free of charge to patients (through government-provider burden sharing so that healthcare providers remain fiscally above water themselves). The quicker that the spread of new coronavirus cases diminishes, the smaller the economic impact of the crisis will be – if these steps are taken immediately, both the number of deaths and hit to the economy from this crisis will fall greatly.

The second piece of the stimulus must address workers and businesses that have been impacted by the pandemic. With the shutdown of a huge number of retail, entertainment, and restaurant businesses in the past few days, and likely much more to come across the country, businesses will find it extremely difficult to continue future operations without government support. This will severely jeopardize the economic recovery after lockdowns have ended, as businesses could lay off their workers en masse if they can’t survive during the lockdowns. As a result, the federal government should offer interest free loans to all small and large businesses impacted by the pandemic to ensure that they can continue paying their fixed costs during the crisis.

Workers have also been greatly impacted, and it is likely that mass layoffs and working hour cuts will start in the next few days as businesses see their revenue dry up. Indeed, jobless claims surged over 33% last week, and that was before the large wave of layoffs beginning on Monday took effect. To support workers and encourage them to take sick leave to avoid spreading the pandemic, the stimulus should include 1) Paid sick and family leave set at 75% of median income using a government funding mechanism (versus coming from already hard-hit businesses), 2) Enhanced unemployment insurance benefits set at 75% of median income and lasting indefinitely (until the crisis is over), and 3) Increased provision of more generous food stamps, housing support, Medicaid, and SSI payments. By supporting businesses and workers who have been hard hit by the pandemic, we can ensure that there is no large-scale collapse in consumption and business-investment once the lockdowns end, and that all workers are still able to purchase necessities right now even if they lose their job.

Finally, the federal government should unveil the most ambitious cash transfer program in American history to support the overall strength of the economy, by providing $1,000-2,000/month to all Americans. The exact monetary amount of the cash transfer, and any means testing of the payments (i.e. more to households making under $100,000/year), can be determined by the severity of the crisis as economic data comes in and by the simplicity in actually running the program, but the key point is that checks should begin arriving for the vast majority of Americans as soon as possible. A key factor behind the slow recovery in 2007-2010 was that the Obama administration’s $800 billion fiscal stimulus, opposed for being too large by some Democrats and almost all Republicans in Congress, was actually far too small considering the severity of the 2008-09 economic crisis. Economists today now generally agree that a stimulus twice that size would have led to a far more robust recovery in 2009 and 2010, and today policymakers must ensure that they don’t make that same mistake of going too small and thus handicapping income and jobs growth for years to come.

Direct cash transfers to every American have benefits that other, more targeted programs like a payroll tax cut don’t have. First, it necessarily applies to all low- and middle-income Americans, including those who are out of work, disabled, or elderly. A payroll tax cut wouldn’t provide relief to any of those groups, because you have to have a job to pay payroll tax in the first place. Second, providing these lump sums of $1,000/month would put hundreds of billions of dollars in the hands of the poor and middle class, whereas the rich pay more money in payroll tax (because they have higher incomes to begin with) and many poor households don’t pay much payroll tax (because they are out of work or make low incomes), so a payroll tax cut would end up being regressive and targeted towards the wealthy. And importantly, cash transfers appear to have wide bipartisan support in Congress today. Republican Sens. Tom Cotton and Mitt Romney have come out in favor alongside Democratic Sens. Sherrod Brown, Cory Booker, and Michael Bennet, and Chairman of Obama’s Council of Economic Advisors Jason Furman. As a result, it could likely get large support right now and pass quickly, which is a critical necessity.

Now how much would all of this cost? Giving a $1,000/month payment to all Americans would cost about $320 billion (1.5% of GDP) per month. The combined cost of more spending on healthcare/testing equipment and subsidies to hard-hit businesses and workers is harder to tell, but a bill proposed by Senate Minority Leader Chuck Schumer with many of those provisions has been estimated at $750 billion (3.5% of GDP). So an initial bill would cost about $1.1 trillion (5% of GDP), with an additional $320 billion per month until the economy is sufficiently recovered. A hefty price tag yes, but necessary to ensure that Americans who are suffering right now are taken care of, and that the economy sees a robust recovery once the pandemic begins to abate. In preparing for a recession in 2020, it is critical that we remember the lessons of 2008. In that crisis, Americans who owned mortgages worth more than their homes received little support and lost their life savings as a result, while unemployment remained far too high for too long due to a lack of fiscal and monetary stimulus. Today we should ensure that those most vulnerable to the crisis receive support immediately, and that significant stimulus is available once the lockdown ends to rejuvenate the economy rapidly.