Much More Economic Support Is Needed To Prevent A Lost Decade

Over the past few weeks, we've begun to receive data on the state of the economy during the coronavirus crisis, and the numbers are even worse than expected. First quarter GDP fell by 4.8% on an annualized basis, the second worse quarterly decline since 1982 (only Q4 2008 was worse at -8.4%), and economists now project that Q2 GDP will decline by over 25%, by far the largest quarterly decline since the Second World War (the current worst decline is -10% in Q1 1958). Furthermore, over 30 million people have filed jobless claims over the past month and a half, and economists forecast that this Friday's employment report for April will show the unemployment rate hitting 15%. 

But perhaps the most worrying economic data is the CBO's newly released projection of unemployment - they forecast the jobless rate to average 10.1% in 2021, meaning that a v-shaped recovery doesn't occur and people continue to remain unemployed for an extended period of time, similar to the slow recovery seen in 2009-2011. This type of lost decade, with elevated unemployment and weak wage growth for years, is not inevitable however, and Congress and the Administration should do everything in their power to boost growth right now. In particular, there are four areas where a surge in new spending could make a real difference in boosting the recovery - significantly increasing funds for the PPP small business fund and making those funds more widely available; boosting spending on direct relief programs including food stamps, housing assistance, Medicaid, and TANF; sending out another round of $1,200 cash payments and making those payments monthly; and developing a massive loan program for state and local governments so that they don't cut budgets and lay off workers. The point is to boost spending in the economy as much as possible and, given historically low interest rates, the federal government shouldn't worry about taking on large deficits to do it.

Unfortunately, and reminiscent of their blanket opposition to the 2009 stimulus as well, Congressional Republicans have recently come out in opposition to this type of urgently-needed economic support package. Last month, McConnell infamously came out against aid to state and local governments as "blue state bailouts", even though this would help all states and clearly the dire straits of these states is a result of coronavirus, not profligate spending by certain states. Furthermore, Republicans opposed hundreds of billions of dollars in new funding for hospitals and testing, state and local governments, and relief programs such as food stamps in the latest relief package negotiations with Democrats, and only backed down in return for no money for state and local governments. This should not be a partisan issue - every additional dollar spent now will mean fewer unemployed Americans in a year's time, and it is our hope that Congress will come together to pass this type of legislation in coming weeks.