It was recently reported that the nation’s GDP dropped by 4.7 percent in the first quarter of 2020, and even with unemployment at 15 percent, we’re technically not in a recession since a recession is defined by two consecutive quarters decline in GDP, which economist project will happen in the second quarter.
While the decline in output is understandably disappointing, we can take comfort from the fact that policy makers in the House of Representatives and the Fed, are pursuing policies that are currently appropriate in terms of timing and magnitude. But, Fed chairman Jerome Powell has made it quite clear that the Fed has gone about as far it can in helping the economy avoid the coming recession. Fed policies are designed to expand demand through emergency lending programs, and through decreases in interest rates which are the result of increases in the money supply. But low interest rates have little impact in an economy with no investment demand.
For this reason Chairman Powell said that it is time for Congress to accelerate the use expansionary fiscal policies to protect incomes. Acknowledgment that Chairman Powell is right can be seen in Nancy Pelois’s proposal for an additional $3 trillion stimulus package, and Bernie Sander’s proposal for a Paycheck Security Act. Both proposals are designed to pump significant amounts of money into American families now and in the future so that while unemployment may rise to Depression era levels, economic distress at the household can be held to a minimum.
The recession we are entering will be unique in the sense that it is being triggered by an intentional closedown of large segments of the economy unlike the typical recession which is caused by a singular event the consequences of which must be overcome. By contrast, the problem we’re facing now is how to implement a “phased reopening” of an economy when the cause of the shutdown, the COVID-19 virus, is still prevalent. Allowing business firms to open is one thing, getting customers to return is another.
It’s possible that this recession could have a recovery phase that is long with persistent levels of high unemployment. For this reason liberal economists contend that we need to continue to expand the safety net for impacted families. The scope of unemployment insurance needs to be broadened and the current coverage extended, we need to create a new mortgage and rent relief programs. In addition we need to support state and local governments because once they experience a decline in tax collections, their mandate to have a balanced state budget will force them to layoff workers and cut social welfare spending which will deepen the coming recession.
Nancy Pelosi’s $3 trillion bill, while expensive, is exactly what economists’ say is needed. The bill has eight main provisions: $200 billion for “hazard pay” to essential employees such as front-line health care workers, and $75 billion for testing and contact tracing. A second round of economic impact payments of $1,200 per family member up to $6,000 per household (to include undocumented individuals), and $10 billion for emergency grants to small businesses. Subsidies to workers who have lost their health insurance because they’ve been laid off. It also creates a special enrollment period in the Affordable Care Act exchanges for the uninsured, an extension of weekly $600 federal unemployment payments through January, and finally, $175 billion to help renters and homeowners with housing-related costs.
Another proposal, by Senator Bernie Sanders, is the Paycheck Security Act. It would cover salaries and wages up to $90,000 for each furloughed or laid-off employee, including benefits. It would also cover a portion of fixed operating cost. In order to qualify for the program, businesses would have to show a drop in revenue of at least 20 percent. Unlike the Paycheck Protection Program, employers and nonprofit firms of all sizes would be eligible unless they hold more than 18 months of average payroll in cash or cash equivalents. Companies receiving these grants must commit to not cut the pay and benefits of rank-and-file workers along with rehiring workers who’ve been furloughed since February.
The problems we’ll face implementing these programs will not be economic but political with Republicans and the President claiming they have a better plan, and that the nation can’t afford the price tag of the two proposals. The truth is Republicans have no better plan, and the affordability is issue is a “red herring.” The government has an unlimited ability to create and spend money, and when money creation has reached it limits due to inflationary pressures, the government can use its taxing ability to raise revenue, and fund the programs, in a way that does not dampen demand nor the economic recovery.