Congress to the Rescue?

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

A previous version of this article appeared on March 19, 2020.

The Federal Reserve has been acting quickly and forcefully to ensure financial markets stay liquid and to help even more borrowers access credit. Of course, these moves, while important and necessary, cannot fix the whole economy. Nor should we expect that from the Federal Reserve. Luckily, despite some disagreements, Congress is likely to take bold steps to stem the current economic crisis caused by the coronavirus pandemic. Indeed, this is a unique crisis for which fiscal policies can provide needed relief to ordinary people, and some approaches could deliver dual benefits of improving both the economy and public health.

Is the Government Managing the Current Economic Crisis?
The federal government’s response to the pandemic so far has looked chaotic.

One issue is that the president and his team have broadcast differing and contradictory messages and struggled to get tests and medical equipment out to hospitals and doctors. One might be forgiven for doubting Washington’s ability to address the economic part of the crisis. There are also reasonable concerns that, given our current structural annual deficits of around $1 trillion and outstanding publicly held debt of $18 trillion, the federal government might lack the resources to mount a response.

And yet, on the political side, there appears to be wide agreement among members of Congress that a massive fiscal action is needed. There are some key disagreements on how, but there is agreement that the government needs to spend money (or give it to other entities, levels of government, or ordinary citizens) to help them get through a period of forced reduction in economic activity.

In terms of resources to fund this fiscal intervention, it is true that we cannot maintain our current structural deficits indefinitely. But for the purposes of the current economic crisis, the federal government has the ability to borrow at very low rates that might even be lower than the long-term rate of inflation.

In short, Congress appears to have the political will and the Treasury certainly has the means to pursue a robust response. If the stimulus Congress lands on is reasonably well-calibrated and sufficiently large, it will visibly help the economy and ordinary workers and help stabilize asset values.

Where the Fiscal Stimulus Is At and Why It Matters
In fact, Congress already passed a $105 billion package last week that will:

• deliver sick pay to some workers who are not covered,
• provide for more COVID-19 testing, and
• send additional money to states through the Medicaid program.

That’s just the opening act. For the headliner, members of Congress continue to work on a much larger package that may top $1.8 trillion, even if they do not yet agree on how to deliver that fiscal relief.

The details will not be that significant as long as the broad policy strokes are right. Many approaches will work as long as they get money into the hands of Americans who have lost income and all the small businesses that have lost customers.

Unlike other recent recessions, which started with a financial crisis that then affected the real economy, this downturn has a simple cause: People cannot and should not go out and spend money. Still, the question is not if we will ever again be able to go to a movie theater, fly to a wedding, or dine in a restaurant again in many parts of the country, but when.

Sooner or later, this will pass. Getting temporary assistance to people will prevent this real-world crisis from spiraling into a financial crisis, alleviate suffering, and allow us to recover quickly when public health officials give the all-clear to lift restrictions.

Furthermore, a fiscal stimulus could go a long way toward helping people comply with guidance to stay home by relieving them of the need to conduct or get to nonessential work, thus slowing the spread of the virus.

What Can Boost the Effectiveness of a Fiscal Stimulus?
The challenge with designing a fiscal stimulus is always the tension between ensuring it is targeted enough, and also gets money out to people, governments, or institutions that need it.

For example, there is a debate right now about whether aid should go to people who have lost their jobs, people whose income is below a certain level, or to everyone. There are also discussions about the degree to which the Treasury should have constraints in determining which industries or businesses get bailed out.

The easiest thing to do would be to send everyone a check, and because this approach is administratively simple, the government can deliver this stimulus more quickly than the other options. The more restrictions or targeting we introduce, the more difficult it will be to get the program working quickly. Similarly, federal stimulus aid to businesses or states can be open-ended or preconditioned on addressing specific national goals.

In terms of how to approach the fiscal stimulus, we believe:

• Policymakers should err more toward the side of speed but avoid a fiscal stimulus that completely misses the target. In that regard, one idea that has been recently floated that will simply not work is a payroll tax holiday. Such a tax break can be delivered quickly, but it skews toward benefiting higher-income people while providing no benefit to those who have lost their jobs. Similarly, aid to businesses needs to have some oversight and guardrails to ensure it does the most good.
• Aid to states should ideally take the form of general block grants for health programs, as states typically must balance their budgets. As their revenue dries up from lost sales and income taxes, they’ll exhaust their rainy-day funds and therefore may need to cut back later in the year, which will cause more economic stress as we try to recover. Open-ended funds to states to deal with the health crisis they are managing will almost certainly be put to good use and reduce painful cutbacks elsewhere in state budgets.

In sum, given current borrowing rates and the current political will to pursue a wide variety of approaches to help alleviate the economic impact of the coronavirus, a congressionally passed fiscal stimulus could really ride to the rescue.