Category: Coronavirus Recession

The U.S. economy is in a tailspin—policymakers must do everything they can to protect workers and their families

Posted on by Maria Monroe

This is not a drill. The infections and deaths from the new coronavirus are climbing rapidly. Public events that bring us together are being cancelled or postponed every day to protect our public health—March Madness, NBA and NHL and MLB games, the St. Patrick’s Day Parade in Chicago, South by Southwest in Austin, and counting. Stock prices plunged again yesterday and were down more than 25 percent from their peak in February. More than $5.5 trillion in household wealth has been erased in only three weeks.

For everyone—especially those who had finally gotten a job—the end of the decade-long economic expansion is a financial tragedy. This month and in the months to come, the incomes of families across the country will fall, making it impossible for some to make ends meet. As a result, spending will fall, hitting the bottom line hard at restaurants, car dealerships, construction companies, and many more. State and local governments will see their revenues dry up, while demands on their social safety net programs surge. State balanced-budget requirements could force a choice between fighting the public health crisis or supporting people in financial crisis.

Bold action from federal policymakers is urgent. Policymakers had advance notice about the new coronavirus, and they did not act. Likewise, they had early warnings of the financial crisis in 2008. People saw the dark clouds gathering. They knew that the music was about to stop. Policymakers, if they had listened, had a chance to act before the Great Recession began. They knew mortgage debt was historically high relative to household income, even before house prices began to decline in 2006. They knew that people were quickly losing confidence in the U.S. economy. Policymakers did not act with urgency. They are repeating that grave mistake today. People will suffer again.

Policymakers have no excuse. We had the unfortunate experience of watching people suffer over a decade ago, first as the housing markets unraveled, then as the financial markets went into free fall, and then as the Great Recession took hold. Fiscal stimulus then was too late, too little, and cut off too soon. Bad policy hurt families then and cast a long shadow into the future.

The thin silver lining for the economic threats we face today is that we know how to fight a recession. We know what economic policies will work. Recession Ready: Fiscal Policies to Stabilize the American Economy, a book recently published by the Hamilton Project at The Brookings Institution and the Washington Center for Equitable Growth, is full of policies to fight a coronavirus recession that will work. The polices are backed by evidence, cutting-edge research, and lived experience.

U.S. policymakers need to act now, go big, and tell people that the federal government has their backs. The government must fight the new coronavirus, and it must fight for people. Above all, it must fight for the families who cannot fend for themselves. Things will get worse in the weeks ahead. Families will suffer, especially workers in low-wage industries, families without health insurance, the people doing gig work, and everyone else who remains marginalized across the U.S. economy.

Democrats in the U.S. Congress proposed legislation earlier this week that would fight back. It would support those directly affected by the new coronavirus and those most vulnerable to its many threats. This support is essential. Everyone—from those who cannot afford the medical tests to those who cannot afford to miss work—needs direct, comprehensive help. We must fund these efforts with hundreds of billions of dollars.

The Trump administration has discussed a large cut in payroll taxes for the rest of the year. The president is right to go big, but he needs to go better. A payroll tax cut won’t do it. It will be too slow and its effects too small—so small, most won’t even notice it. Those who don’t have or will lose their jobs won’t get it at all. Most importantly, workers with high incomes will receive the most money. They don’t need it. We need to help people who do. The payroll tax cut is bad policy. We know its shortcomings from the Great Recession. We must not repeat that mistake.

We can do so much better than the administration’s payroll tax cut. We absolutely must get a lot of money to families if the new coronavirus affects them directly. But that is not enough. We need to send money to everyone now. People do not know today if they are going get the coronavirus, miss a paycheck, or lose their job. All these outcomes were unthinkable a month ago. Now, they are real. People are scared. They need a financial cushion right now, and many do not have one. They need some extra money.

Policymakers can deliver, and they must. One effective way is to eliminate the first $500 of withholding for federal income taxes and Social Security payroll taxes for workers in April, May, and June. This policy would increase take-home pay by $500 per month. This novel approach would get money in people’s pockets within weeks. Congress and the Trump administration can do this, and it will work.

Money to all workers is only a front line not a battle plan for a coronavirus recession. We need much more aggressive and durable support for families without breadwinners in the workforce who suffer the most during recessions. That support will require far more than $500 a month in paychecks and more than our current safety net programs offer. We need additional comprehensive social supports. Protections for workers, individuals, and small businesses are grossly insufficient in the United States, and many families cannot handle any drop in income.

Both Democrats in Congress and the president want paid sick leave. Moreover, Democrats have proposed commonsense paid family leave, free medical testing, and other aid that recognizes just how little a buffer most families have to weather this recession. The investment by the federal government in people is worth it, both from a moral perspective and an economic perspective. Today, with the cost of borrowing at historic lows for the federal government, it is also an ideal time to do so.

Perhaps most importantly, we need to enact long-lasting policies that make the U.S. economy more resilient in the years to come. Luckily, we know what works. Economists have studied the previous recession and arrived at a set of policy recommendations in Recession Ready that will make our economy stronger and nimbler when the next crisis hits. Each one was used in the Great Recession and worked. Policymakers can improve upon these programs by making them start automatically when economic indicators say a recession is coming. And those programs will stay in place until people and businesses are back on their feet.

Fight the new coronavirus today. Get automatic stabilizers that always fight a recession in place for the future. Policymakers in the nation’s capital must go deep and wide. They must go now.

A coronavirus recession is a real threat that U.S. policymakers must address now to avoid it becoming reality

Posted on by David Evans

Four days ago, I wrote in The Hill about how the federal government could fight the rapidly spreading new coronavirus. So much has happened since then. Today, public health officials reported 1,000 people on U.S. soil with the coronavirus—a number certainly far lower than what’s happening on the ground due to pervasive lack of testing in the United States. Several U.S. universities have sent their students home for the rest of the school year. Chicago canceled the St. Patrick’s Day Parade. And more cancellations are on the way.

An immediate fiscal policy response is essential. Policymakers must fight the coronavirus head on and support the workers and families whose finances are threatened, too. Today, volatile equity prices are roiling businesses across the board against the backdrop of market indexes down nearly 20 percent from their historic peak a mere three weeks ago.

Speaking of historic, the yield on 10-year U.S. Treasuries remain below 1 percent. The cost to the federal government to borrow money is negative after factoring for inflation. Financial markets are begging the U.S. Treasury Department to sell more debt. Congress needs to tell it to do so now.

The proposed policies from the Trump administration, including a payroll tax cut and tax breaks for industries the president chooses to favor will fail to protect families from financial distress and everyone from a recession. Specifically, the payroll tax cut will, says Michael Strain at the right-of-center American Enterprise Institute be too little, badly targeted, and ineffective. My tracking of the effects of the payroll tax cut in 2011 and 2012 for households when I was at the Federal Reserve and my research on that program both lead to the same conclusion. Do not do a payroll tax cut. A refundable, lump sum tax credit actually will help families.

The U.S. Congress and the Trump administration must set aside politics. The coronavirus does not care who you will vote for in November. Policymakers need to care about everyone in the path of the coronavirus. Above all, they need to put their money where their thoughts and prayers are. NOW.

Below is an op-ed I wrote for The Hill, which originally published March 7.

Why government leaders must act now to address the next recession

The global spread of coronavirus has sparked new fears among the public and policymakers alike of when the next recession might strike. Despite such concern, unemployment sits at record lows and consumer spending is still solid. More than a decade into the longest expansion on record, we have a good opportunity now to prepare for the next inevitable recession.

States and localities faced unique challenges in the Great Recession. Tax revenues plummeted and, unlike the federal government, states and most localities had to balance budgets. The stark reduction in revenues forced states to slash spending on schools, higher education, and jobs training. But these cuts were just the tip of the iceberg, and the consequences ran deep. Millions of teachers lost their jobs, college tuitions rose, kids had a harder time learning in crowded classrooms, and young adults burdened with student debt were far less likely to buy homes and to start families.

To make matters worse, state and local spending lagged for years, and overall recovery was notably slower than any other recession after the Second World War. The extent of the last recession stokes deep fears of what will happen the next time the country is faced with one. Thankfully, government officials at the federal, state, and local levels have time to plan and prepare. Even better, a solid body of research exists based on the lessons from the Great Recession to better guide policy responses.

The main factor for states and Congress is speed. History and research show a rapid response is the best way to fight back and make a recession shorter and less severe. One way is simply to send people money once the national unemployment rate jumps. Congress should pass legislation now that would automatically send out money at the start of a recession. Having that mandate before a recession will allow us to move faster as soon as it hits. This amount should be meaningful, such as $1,600 for a family of four. If the recession becomes more severe, those checks would go out annually until the national unemployment rate moves back down.

By definition, a recession affects the entire country. Even so, some parts experience the pain more quickly or acutely. Before the Great Recession, the sharp declines in housing prices and home construction began early in Florida, Illinois, Nevada, and Minnesota. Unemployment in all four of those states rose notably in 2007, well before the national rate rose. The residents in those states would have benefited greatly from earlier relief.

An effective way for Congress to support states is to cover a larger share of the costs from Medicaid and the Children Health Insurance Program. This additional federal funding would free up money for other priorities, allowing states to avoid spending cuts and keep more jobs. Researchers from Harvard University, the Brookings Institution Hamilton Project, and the Peterson Institute for International Economics argue that Congress should vote to make this support automatic once a state unemployment rate jumps. By using the state instead of the national unemployment rate, that federal money would then arrive as soon as a state begins to suffer.

State lawmakers should also plan ahead and decide how they would fight the next recession before it hits. They could commit to use extra federal funding, for instance, to send money directly to people in their state or in their hardest hit counties. Such direct payments to people from the state government would be in addition to a national payment, and the timing would be much more properly aligned with local economic conditions.

Another option available to states is to strengthen existing programs to further support people in a recession, such as unemployment insurance and the Supplemental Nutrition Assistance Program. It is inevitable in a recession that many will lose their jobs. States need to make it easy for those people to get unemployment insurance benefits and food stamps. They could relax eligibility requirements or time limits before we enter a recession. States could also raise the dollar amount of food stamps and unemployment insurance checks. Without more support, jobless people and their families will need to sharply reduce their spending, only further depressing tax revenues and making it harder to balance state budgets.

We all know it is a matter of when, not if, the next recession strikes. To help ward off the deep and painful effects that could be felt across the country, policymakers at the federal, state, and local levels should take advantage of the still expanding economy and plan now for a downturn.

 

Retool U.S. supply chains to address weaknesses exposed by new coronavirus

Posted on by Maria Monroe

U.S. economic policymakers need to heed the fast-accumulating warning signs as the global coronavirus outbreak exposes weaknesses in supply chains crucial to American economic well-being. As these weaknesses come to light, U.S. policymakers and supply chain managers should take the opportunity to reduce the fragility of the global supply chains that provide the products and services that Americans rely on every day for their health, their jobs, and their overall economic prosperity.

When U.S. pharmaceutical companies are highly reliant on drug manufacturers in China, India, and elsewhere for their final products and the underlying ingredients, then a regional epidemic, or a government decision to stop exports, can deprive millions of Americans of the medicines they need to maintain their health. When U.S. automakers and auto-parts manufacturers cannot make their products without key parts from China, Mexico, and South Korea, a loss of supply from these locations leads to lost jobs and reduced productivity and economic growth. And when global shipping by air and by sea is crippled by inability to deliver goods to and from China, the negative effects can be felt by not just U.S. corporate giants such as Apple Inc., Intel Corp., and Pfizer Inc., but also by numerous small- and medium-sized U.S. firms alongside trucking and rail freight companies and their workers.

Most of these weaknesses were evident prior to the outbreak of COVID-19, the scientific name for the new coronavirus that emerged from an outdoor wet market in the big industrial city of Wuhan in central China. Before this crisis, supply chains were disrupted by crises such as the 2011 Fukushima Daiichi tsunami in Japan and the SARS epidemic in China and Hong Kong in 2002–2003. While long supply chains inevitably increase disruption risk, the typical models used to make global sourcing decisions do not sufficiently consider this risk to individual firms. Such models even more rarely consider the risk to society, including the potential for undercutting labor and environmental standards, when far-away suppliers win bids partially because they suppress wages and pollute the environment.

There’s another way to design supply chains so that all the players—shareholders, workers, and consumers worldwide—are less exposed to the risks and social costs inherent in today’s global supply chains. Specifically, in the United States, private- and public-sector leaders could build “high-road supply chains,” whose greater collaboration between management and workers along the length of the supply chain would promote sharing of skills and ideas, innovative processes, and, ultimately, better products that can deliver higher profits to firms and higher wages to workers.

This approach is decidedly different than today’s mostly “low-road” supply chains that encourage the offshoring of jobs to smog-choked industrial zones abroad packed with poorly paid workers operating with lax safety and environmental rules. Shipping and reshipping of components across the globe is a significant contributor to climate change.

To be sure, foreign ingenuity has contributed much to our prosperity. We are not advocating that U.S. supply chains become 100 percent domestic. But both public and private leaders need to fully take into account the risks of far-flung supply chains.

One small step to encourage decision-makers to design high-road versus low-road supply chains is to encourage a new approach of global sourcing decision-making: Total Value Contribution, a term the three authors of this column propose in a new working paper now under revision for peer-review publication. Our TVC method encourages managers to first consider how decisions affect value drivers, before considering costs. In addition to increasing attention to shareholder profit-maximizing revenue and risk (which are often neglected in traditional approaches), TVC explicitly encourages managers to price-in other things they purport to value—such as safe, reliable, and sustainable global supply chains.

This method helps firms move away from having purchasing agents, whose pay often depends on reducing the purchase price of a good, make sourcing decisions alone. TVC encourages firms to tap into the expertise of their personnel in marketing and engineering, who have information on what customers value and the potential hidden costs and risks of using suppliers whose prices appear low. At the same time, TVC empowers purchasing agents to contribute their expertise on the multidimensional capabilities of the supply base, rather than pushing them to prioritize cost cutting. It also helps firms make sourcing decisions for groups of products, rather than deciding on a case-by-case basis and, only too late, realizing excessive dependence on a single supplier or region.

We believe these changes work to the long-term benefit of the firm. But firms alone do not bear all the costs of these fragile, low-road supply chains. U.S. economic policymakers have a broad array of tools they could deploy to encourage high-road supply chains.

Take pharmaceuticals. U.S. policymakers must realize they have a duty to the American people to make sure that a critical mass of vital drugs and underlying ingredients are produced in the United States. The federal government needs to encourage pharmaceutical companies to base more of their production in the United States and encourage U.S. consumers to understand the value of doing so, even if it means higher prescription prices in the short term.

There are some easy ways to do this. First, require drug companies to indicate on all labeling where both the finished drug and the active pharmaceutical ingredients were made. This transparency will allow consumers to know where their drugs come from and possibly allow domestic drugs to fetch a price premium. Second, institute unannounced inspections of foreign drug facilities; the current practice is to preannounce foreign plant inspections, giving them a regulatory advantage over domestic plants, where inspections are unannounced. Third, pass on the increased costs of oversight and the societal impact of foreign production of drugs to the firms that produce them. The latter two steps will increase the costs of producing overseas. Taken together, these policies would increase the profitability of producing drugs for U.S. consumers in the United States.

The U.S. Congress and the Trump administration acted last week to ensure there are more medical safety products available domestically to protect healthcare workers from the threat of catching and passing on COVID-19. But that is not enough. There will be another pandemic—or several. Climate change increases the probability of other kinds of natural disasters that can disrupt supply chains. Even before these inevitable events occur, this new coronavirus revealed a dangerous national security issue with our pharmaceutical supply chains.

Consider, too, the importance of the U.S. auto industry to our nation’s innovation and manufacturing generally, to our efforts to reduce greenhouse gases, and to consumer mobility. It’s important that we take steps to reduce the vulnerability of these supply chains. One way that can happen is to locate more manufacturing facilities in the United States, so that more innovation occurs within our nation’s borders to develop ever more clean passenger and freight vehicles. There are numerous ways that policymakers can encourage this kind of innovative “reshoring,” including policies that:

  • Nurture supportive ecosystems of innovative small and large firms
  • Provide better access to trained workers, applied R&D, and finance
  • Convene supply chain players to develop a roadmap for products ripe for reshoring
  • Subsidies for innovation and production that help achieve national goals
  • Rewritten trade agreements that protect labor and environmental rights

Then, there are the U.S. shipping companies and their workers moving all of these products around the country and around the globe. The coronavirus pandemic is crippling global trade, with the Baltic Index (an index of global shipping) in the tank and with knock-on effects on U.S. domestic shipping and freight industries. In the past, one-time crises such as the terrorist attacks on New York City on September 11, 2001 or the collapse of the commercial and investment banking sector in 2007–2008 led the federal government to bail out a number of service industries affected by the crises. But in addition to reacting in the moment to these crises, the federal government should craft economic policies that mitigate that risk beforehand, including by making our supply chains more robust.

The current coronavirus outbreak is a clear reason for policymakers to act. High-road supply chains built from global sourcing decisions employing the Total Value Contribution approach—with nudges from policymakers that adjust the measurable costs and benefits of foreign production in favor of domestic—would smooth out product flows in global transportation so that future pandemics would put less risk on U.S. firms, workers, and consumers.

—Susan Helper is the Frank Tracy Carlton Professor of Economics at the Weatherhead School of Management at Case Western Reserve University. John Gray is a professor of operations at The Ohio State University’s Fisher College of Business. Beverly Osborn is a Ph.D. student in management sciences at The Ohio State University’s Fisher College of Business.

U.S. economic policymakers need to fight the coronavirus now

Posted on by Maria Monroe

The human tragedy of the coronavirus is now here in the United States. Nine deaths from the coronavirus have been reported in Washington state so far. Each day, more and more people are falling ill. Tragically, some will die; many others will recover but very well may spread the virus further. Quarantines are likely to be widespread.

The coronavirus is first and foremost a public health crisis. The front lines are the women and men who work at hospitals, community health centers, and pharmacies across the country. Each of us can contribute when we check on our elderly neighbors, make sure our children wash their hands (for 20 seconds with soap!), and take precautions to stay healthy and calm.

The coronavirus is a threat to our economy, too. We are starting to see it here, at the 26,000-feet (and falling) view of our volatile financial markets displayed in our living rooms, on our mobile phones, and on TVs in barbershops across the country. Last week, stocks plunged 11 percent in a single week—the most rapid correction ever. The yields on 10-year Treasuries, a benchmark interest rate for mortgages and other loans in the United States, are now less than 1 percent—the lowest level on record. (See Figure 1.)

Figure 1
Long-term interest rates in the United States fall to lowest level on record
Daily yields on 10-year Treasury bonds, percent change, 1960–2020

Source: Federal Reserve Economic Data, “10-Year Treasury Constant Maturity Rate” (March 3, 2020) available at https://fred.stlouisfed.org/series/DGs10.<br />Note: Shaded areas are recessions.

Low interest rates are good for many people, businesses, and local governments. If they need to borrow money, they will pay less in interest and can generally get a better deal from lenders. Here, the Fed is helping push interest rates lower. In fact, lowering rates is its primary way to provide support during tough times.

Indeed, at times like these—when uncertainty is high and misinformation rampant—lower interest rates are a sign of potential trouble. Unrest in financial markets is the primary reason why interest rates and stock prices are falling. When the Fed cuts rates, it is trying to support the economy and calm financial markets. The Fed does not control the market; it plays an important supporting role. So, why are interest rates hitting all-time lows? Investors around the world are buying up the safest assets available—U.S. Treasury bonds. Unless the government sells more Treasuries, their price—referred to as the yield—will continue to fall. The flight to safety today is a flight from the economic consequences of the coronavirus.

Yesterday, the Federal Reserve acted decisively. It cut the federal funds rate 0.5 percentage points. That may not sound like much, but it is a bold move from an institution known for its caution. As of last Friday, it said in a press release that it was “closely monitoring developments.” No word of a rate cut then. And it cut almost two weeks before its next regular meeting.

The Fed decided two weeks was too long to wait. Its decision to act outside of a meeting in Washington was not business as usual. Moreover, it acted a mere three hours after a phone call with central bank leaders and financial ministers across the globe. An hour later, Fed Chair Jerome Powell held a press conference to explain the decision

Can the Fed do it alone? No. Its policy tools, such as cutting interest rates, are too blunt to help the people who need it most. People in our country are getting sick, and the most vulnerable workers could lose their jobs if they are too ill to show up. Monetary policy cannot address this gaping public health problem. Yes, the Fed might calm financial markets some. Yes, the Fed might help businesses and borrowers who are taking on debt. The Fed is doing its part, doing what it can. But it needs help.

Chair Powell made that clear before the cameras, saying:

The virus outbreak is something that will require a multifaceted response. And that response will come in the first instance from healthcare professionals and health policy experts. It will also come from fiscal authorities, should they determine that a response is appropriate. It will come from many other public- and private-sector actors, businesses, schools, state and local governments. But there’s also a role for monetary policy.

And again, saying:

You saw this morning’s G-7 statement of finance ministers and governors. I think that statement does reflect coordination at a high level in a form of a commitment to use all available tools, including healthcare policy, fiscal policy, and monetary policy as appropriate. So, in terms of fiscal policy, again not our role, we have a full plate with monetary policy, not our role to give advice to the fiscal policymakers. But you saw the mention in the G-7 statement as appropriate as well.

It is not Chair Powell’s job to tell the president and Congress what to do. Even so, his words are as close as a Fed official gets to sending out the “Bat Signal” and begging for a fiscal response.

So, what can the federal government do? Here is my proposal, grounded in more than a decade of research and forecasting at the Fed.

  • Act fast. It is time for the federal government—all parts of it—to move swiftly against the spread of the coronavirus and any economic distress it may cause. If it acts now and joins the Fed in fighting back, the economic consequences will be less severe. We could spare the country from the worst possible outcomes. People and businesses would know that the government has their back and will do whatever it takes to end this crisis. The Great Recession taught us a painful lesson: Policymakers waited too long and were far too timid when they did act. Our country is still paying for those mistakes. It’s time to act. Go big or go home.
  • Provide financial support to people who are suffering. Any person who has the coronavirus, is quarantined, or stays home to care for a loved one needs financial support immediately. The federal government should send them money—a check for $1,000, all at once, not $70 a week. The U.S. Treasury and regulators can also push banks to give people grace on their mortgages, credit card debt, and student loan payments. If that does not work, then give people directly affected a zero-interest rate loan until they are back on their feet. With interest rates at historical lows and demand for safe assets, it will cost the federal government very little to issue more bonds to pay for this program. Do it now.
  • Plan for the worst. The U.S. economy is strong today—thankfully, it was strong before the coronavirus. The global economy was not. The U.S. unemployment rate is at a half-century low. That does not mean that our economy is immune to a pandemic. Congress and the Trump administration must follow the Fed’s lead and prepare for the worst. Everyone is monitoring the fast-moving events. They must be ready to go. Even better, get ahead of economic fallout and act now. To be most effective, policymakers need to coordinate their actions in public health and economic aid. The federal, state, and local governments need to talk and work together. Cooperation has yielded big benefits in the past. We need that today.
  • Have automatic support ready for a recession. A recession occurs when consumers and businesses across the country pull back on spending and when production falls widely. We are not in a recession today, and the financial distress may end up being concentrated in particular regions of the country and not push the entire U.S. economy down. But again, we need to be ready. As soon as the national and local labor markets weaken, support from the federal government needs to start. In any recession, send money directly to people, as soon as the unemployment rate jumps. Other excellent ideas are to send support to states, increase support to the unemployed, and make supplemental nutrition assistance more generous. Do not target it to people who still have jobs, as a payroll tax cut would do. Get the money out to as many people as possible and as fast as possible.

U.S. policymakers can beat the coronavirus, but it will take a rapid healthcare response and bold economic policies. We have no choice. Too many Americans are one paycheck away from financial catastrophe. Four in 10 U.S. adults tell us that if they had a $400 emergency expense, they would have to borrow, sell something, or would not be able to pay it. (See Figure 2.)

Figure 2

Only 1 in 10 adults say they could not pay the expense by any means. But that expectation does not account for the consequences of that adult, or a family member, or co-workers, coming down with the coronavirus. Someone out of work for a week due to the pandemic would very quickly come up $400 short. Borrowing, trying to sell something, or picking up odd jobs is not how we want people to deal with this public health crisis.

If the federal government does not give people financial support now, then we most certainly risk a worse public health crisis. Many people have so little savings that they regularly do not get the medical care that they need. In 2018, one-quarter of adults said that they or a family member went without some form of medical care because they could not pay for it. More than 1 in 10 skipped visiting a doctor in the past year when sick. (See Figure 3.)

Figure 3

The coronavirus is highly contagious. If people cannot afford to go to see a doctor, they could get very sick and they might also spread the coronavirus to others. The federal government needs to give people the financial support they need to get healthy, stay healthy, and keep their family and co-workers healthy. This is a public health crisis—all arms of the federal government need to take coordinated action now.