Congress puts aside its habitual dysfunction and responds to covid-19
The fiscal stimulus is impressive, but America may need another one before too long
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EVEN
TO THE housebound and socially distant, the signs of a contraction are
apparent. The 18th Street corridor of Adams Morgan, a typically bustling
stretch of restaurants and shops in Washington, DC, is filled with
shuttered businesses—closed as part of the nationwide effort to contain
the epidemic of covid-19 that had, as of March 24th, infected 53,740
Americans and killed 706, according to official counts. One fledgling
business—a new bar calling itself Death Punch—never managed to open its
doors. Down the road, an established whiskey bar called Jack Rose has
been selling off its gargantuan collection at discount to support its
staff. The queue for it snaked several blocks—a long dotted line of
aficionados standing a careful six feet apart.
These
are just the premonitions of the pain to come. Unemployment will rocket
as much of the economy is put into a sort of medically induced coma. So
many unemployment claims are being filed in Ohio that the state website
has crashed. The national weekly unemployment numbers that will be
released on March 26th are widely expected to be the worst in history.
Goldman Sachs has predicted that there could be 2.25m new claims over
the week—triple the previous record. And just as the covid-19 epidemic
has not yet reached its apex, neither has the economic crisis. Morgan
Stanley predicts that GDP will fall 30% year-on-year in the second
quarter and unemployment will rise to 12.8%, compared with just 3.5% in
February.
To head off the damage,
Congress is preparing the largest fiscal stimulus in modern history. Its
provisions—including bail-outs for firms both big and small, expanded
unemployment-insurance benefits and a straight cash transfer to many
Americans—are expected to cost close to $2trn, roughly one-tenth of GDP.
This is the third substantial piece of legislation to deal with
covid-19. Depending on the harm to come, even that may not be enough.
Whole
industries rely on congregating people. So too, unfortunately, does the
virus. As of March 24th, 12 states had ordered all non-essential
businesses closed. Seventeen states, covering half the country’s
population, had urged residents to stay home. Many white-collar tasks
can just about be performed remotely. But cruelly, those likeliest to
lose income or their jobs are in more precarious, less well-paid
industries—restaurant staff (of which there are 9.6m), retailers (8.8m)
or hotel workers (2m). If they lose their jobs, the effects will ripple
through the economy.
One corrective for
this problem is unemployment insurance. Yet this is not as robust as in
other parts of the rich world. The American version replaces a smaller
share of previous income than the average in the OECD, a club of mostly
rich countries, and declines faster with time. Individual states, which
administer the programme jointly with the federal government, differ in
their generosity: Mississippi caps its maximum benefits at a paltry $235
a week.
At
the insistence of Democrats, Congress would make this part of the
safety-net decidedly more European, at least temporarily. The federal
government would pay to top up unemployment-benefit levels by $600 a
week—an enormous increase, given that the current weekly average is
$385. The set of people eligible for benefits would also be expanded to
include independent contractors, such as gig-economy workers. Those who
have been laid off but not fired could receive compensation for lost
hours. And the length of the benefit period would be extended from the
usual 26 weeks to 39 weeks. The cost of all of this is thought to be
$260bn: a serious expansion of a targeted programme.
A
similarly gargantuan wad of cash—$250bn—will be spent on a less
targeted scheme, sending cheques to Americans direct from Uncle Sam.
Below some generous income thresholds ($75,000 a year for a single
person and $150,000 for a married couple) every family can expect $1,200
per adult and $500 per child. This is the best version of a cash
transfer that was proposed. Previously the White House had pushed the
idea of a payroll-tax holiday; an early version of the stimulus bill
ignored people who did not file taxes. Both would have excluded those
with the lowest incomes from an ostensibly universal programme. Reaching
everyone eligible now will require ingenuity, such as using
administrative data from states, says Sam Hammond of the Niskanen
Centre, a think-tank. But even if sent quickly, the cheques could be
both too small for those who need them and too big for those who do not.
The
government is also expected to set aside $500bn to stabilise firms and
states. The capital could faciliate lending several times larger than
that. Democrats in Congress and the White House got stuck on a
(relatively) small portion of the programme, the $75bn set aside to bail
out big embattled firms like airlines and those deemed critical to
national security—because of the latitude the treasury secretary would
have to set and disclose the terms of loans. A compromise struck in the
dead of night bulked up independent oversight.
A
more intriguing scheme is the $350bn set aside to save small and
medium-size firms (those with fewer than 500 employees). The programme
would give loans of up to $10m without interest or fees to pay for
employees, rental costs and sundry other expenses. These would then be
forgiven in proportion to the share of staff spared the sack: a firm
that kept all employees would owe nothing; one that dispensed with half
would owe half, and so on.
This
is a more complicated idea than those devised by European finance
ministers facing down the pandemic. Rishi Sunak, the British chancellor,
pledged to pay up to 80% of wages for furloughed workers; the Danish
government could pay up to 90% of the costs. The added hurdle in America
may mean that the most sophisticated operations get the grant-loans (or
“groans” in bureaucratic argot), while mom-and-pop operations languish.
It may also mean that even more money will be needed. Research from
Glenn Hubbard, an economist at Columbia Business School, and Michael
Strain of the American Enterprise Institute, a think-tank, estimates
that total needs could amount to $1.2trn—roughly triple the sum
allocated. With the ink not yet dry on the phase-three bill, bigger
bail-outs may be broached in a future phase-four bill.
The
extraordinary legislation is not intended to avoid the recession that
already seems to have arrived, but to spur the fastest possible rebound.
This of course requires that the cause—the covid-19 pandemic—is
effectively dealt with first.
But after
a brief period of taking the virus seriously, President Donald Trump
seems eager to lift restrictions as soon as possible. He has taken to
saying that “the cure cannot be worse than the problem itself”, and that
he wants the country “opened up and just raring to go by Easter”, which
epidemiological projections suggest is unwise. The collapse of the
stockmarket, which used to be Mr Trump’s barometer of success, may be
spooking the president. Markets rose in anticipation of the coming
stimulus package. But pre-emptively relaxing the restrictions would
result in deep harm both to public health and the economy.
Because
health authority is devolved to the states, it is unlikely that Mr
Trump would pre-empt local declarations of emergency. But some states
could follow suit, and the president’s supporters might not adhere to
the recommended course of social distancing. Already, the
lieutenant-governor of Texas has suggested that the elderly might risk
death for the sake of the economy. Liberty University, an evangelical
Christian institution led by a devotee of the president’s, is proudly
inviting thousands of students back to campus in defiance of
public-health advice.
Mr
Trump appears to be defaulting into an old playbook—vacillating wildly
in the hope of winning concessions. What may work with Democrats or
North Korean dictators has no chance against a virus, however. And as
things worsen, as seems likely, such irresolution may look like
political malpractice. Already, New York appears to be a new disease
epicentre. “The apex is higher than we thought and the apex is sooner
than we thought,” said Andrew Cuomo, the governor of New York, in his
address to citizens. He is warning that the city’s health system could
be overwhelmed by lack of ventilators and protective equipment for
staff. The medicine—a controlled, national shutdown of the economy—may
be strong stuff. But a premature reopening, leading to rampant
transmission of the virus, could produce something far worse.
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