Congress is clearly going to pass some kind of emergency fiscal package in response to the spread of COVID-19. One thing to consider is that this moment we are currently experiencing is nothing like anything that we’ve experienced since government began to actively use its budget-making powers in attempts to ensure full employment.
During traditional recessions we witness a reluctance or inability of people to spend money because they are unemployed, or because they fear the future and so hoard their money. No such clear “demand-side” shock is what we have now, although this kind of demand-side problem will likely arise as a follow-on consequence. Instead, what we have now is a situation in which people who still have jobs, cash, and a desire to spend nevertheless don’t spend because they are avoiding physical contact with others. Americans don’t want to get sick, and they don’t want to get other people sick. At the same time, we have federal, state, and local governments trying to restrict to limit the spread of the virus by restricting consumption and asking, among other things, restaurants to reduce their services and banning reunion larger than 50 people.
This source of reluctance to spend and government requirements to stop consuming are not what John Maynard Keynes, Milton Friedman, F. A. Hayek, or other economists theorized about when they searched for better ways for governments to respond to recessions.
Appreciation of this fundamental difference that separates today’s unique macroeconomic challenge from past, more conventional ones should inform whatever policies are adopted by Congress and the administration. This appreciation reveals, at the very least, that it is lazy to dredge up standard textbook solutions that are inapplicable to a completely different problem. At least for now. And it is downright irresponsible to use this crisis to push for measures that have nothing to do with addressing the crisis at hand, no matter what Rahm Emmanuel claims.
Because today’s situation is, at least for now, so different from past economy-wide problems — problems such as the Great Recession and other historical downturns — intellectual humility is more important than ever.
Under the circumstances, it seems that putting more money into people’s pockets (no matter how government does it) in the name of “stimulate the economy” won’t work if consumers and business are reluctant to spend this extra cash out of fear of physical contact with other people. It also seems that if we grant that government spending and built-in incentives to increase aggregate spending can stimulate the economy during recessions, such spending should be targeted, timely, and temporary. But if the government starts fiscal stimulus today in the hope of keeping the economy afloat when people still have jobs and money in their pockets, such an effort will not only fail, it will also counter-productively dampen government’s ability to intervene with stimulus in the future, when and if a more traditional recession hits our country.
The bottom line is that no matter how tempting spending lots of money seems to politicians who want to act, they must proceed with caution.
That said, to advise that government refrain now from stimulus spending is not to advise against increased spending for other emergency purposes. Sending cash on a temporary and targeted basis to lower-income workers who might not be able to go to work and who have no other immediate sources of income seems like the right thing to do. But it’s a safety net measure, not a stimulus measure. The difference is important.
Then there is all the spending that could help on the public-health side of things. Health-care professionals know best what is needed there. I don’t.
Helping businesses to keep their employees during this crisis could help too (though I have no idea what that looks like). Spending to try to prevent a worse downturn than the one we are sure to get may be productive too. But I guess things will be clearer in a few weeks. All this to say that there is a lot we don’t know because, for now, this is quite different than past economic crises.
There could be things to be done on the monetary side, and on other fronts of this issue, but I will leave that to experts in those fields.
Going forward I hope bureaucrats and politicians will learn from the many ways the U.S. botched the coronavirus testing.