After a few days of shameful positioning for special interests, Congress in late March finally passed legislation to head off the worst recessionary effects of the present medical emergency or rather from the quarantines and shutdowns associated with it. There was a risk that Washington’s policy response might miss the unique nature of the economy’s predicament and adopt policy measures out of the standard anti-recessionary playbook. To the credit of both the government and the Federal Reserve (Fed), that has not happened. Some policies are of the standard sort, but most do focus on the special needs of this situation.
In judging the array of fiscal and monetary measures, it is critical to understand how different today’s economic pressures are from a typical recession. Just about all recessions reflect a shortfall in demand. Some sector of the economy becomes unbalanced, and the resulting cutbacks multiply throughout the economy. Standard policy remedies reasonably aim to substitute for that shortage of spending, either through direct government outlays or by inducing businesses and individuals to spend more. Today’s problems, in contrast, stem from supply shortages. People cannot get to productive work, while interruptions in trade have left even operations that otherwise might function short of parts and supplies. Retail facilities have simply shut down under government orders.
The object today, beyond giving the medical establishment needed funding, is not to substitute for lost demand, as policy typically does, but rather to keep the present interruptions from morphing into a classic recessionary demand shortfall. That would involve supporting businesses, large and small, so that they can sustain payrolls and avoid bankruptcies while the shutdowns and quarantines curtail or entirely interrupt revenue flows. That would also mean channeling financial help to individuals otherwise put out of work temporarily by today’s emergency measures so that they do not have to alter their lifestyles inordinately, much less permanently. Though not all the measures coming out of the Fed and the government focus on these essentials, most do.
To be sure, some of what the Fed has done is pretty standard stuff. Interest rate cuts are a prime example. They might otherwise induce spending, but the uncertainties of the current situation raise questions about who would borrow for expansion now even at zero cost. Also fitting into the standard playbook are the billions earmarked for purchases of Treasury bonds and mortgage-backed bonds in the open market – what the Fed typically refers to as quantitative easing. These add liquidity to financial markets, an important step in a classic recession, but these specific purchases are not especially useful in helping pressured businesses and individuals through their immediate predicament.
Other actions, however, show a welcome focus on this matter’s particulars. The Fed’s decision to reconstitute the Term Asset-Backed Securities Lending Facility (TALF) from the 2008-2009 financial crisis, for instance, would put funds into credit card and consumer loans that might help sustain lifestyles for individuals suffering from immediate income interruptions. Also helping in this way are the moneys the Fed is making available for four-year bridge financing for companies under immediate pressure. These might enable them to keep more employees on payroll for longer than otherwise. Arresting the slide from emergency to recession in a similar way are plans to support commercial paper markets where many corporations go for immediate financing needs and plans to extend credit to lower quality borrowers, including small businesses through the so-called Main Street Business Lending Program.
Most of what recently came out of Congress also qualifies as focused on the specific needs of this unusual situation. There are, of course, provisions to make $150 billion available to the health care system and a like amount to state and local governments strained in by the containment measures taken against the spread of COVID-19. For individuals already deprived of income by the emergency, the legislation expands those who qualify for unemployment insurance, raises its maximum payout, and extends the term it pays beyond the typical 26 weeks. The bill would also give lower income Americans a check for $1,200 and $500 for each child. Though this might addresses immediate economic needs, it will offer little if the troubles linger.
To help businesses, the bill provides $350 billion for the Small Business Administration (SBA) to lend in order to sustain payrolls and stave off bankruptcy during the period of the emergency. The legislation also provides $500 billion as a backstop for credit losses to Fed lending. These funds will allow the central bank to lend directly to troubled industries and corporations, even those with questionable credit ratings than the Fed typically does. Here, too, the object is to help these employers sustain payrolls for longer than they otherwise could and avoid bankruptcy.
Even with these well-targeted measures, the economy will suffer. Reports on March already see significant negatives. These will reappear in most, if not all economic measures. So will following months see an ugly picture, if the quarantines and lockdowns remain in place. Even after the emergency lifts, the economy should suffer some lingering stains. But the monetary and fiscal measures coming out of Washington should significantly shorten any lingering recessionary effects and make any downturn shallower than it otherwise would have been.