The coronavirus crisis, which combines elements of all the gravest setbacks in modern American history, poses an unprecedented economic challenge to the federal government.
The shutdown of so much economic activity likely makes averting recession impossible. But by responding aggressively, Washington can steer away from a far worse economic calamity. And signs emerged this week that President Donald Trump, Congress and the Federal Reserve may be getting it right.
Medical researchers, racing to develop a coronavirus vaccine, represent the ultimate backstop to the crisis. But placing the financial might of the US government behind average Americans and battered businesses — as lawmakers in both parties aim to do with a massive $1 trillion stimulus by next week — may mean the difference between recession and depression until that happens.
“I am cautiously optimistic,” said Yale economist Andrew Metrick, a leading expert on economic crises. “The main thing they need to do is cough up an enormous amount of money. I think they’ll get there.”
After helping the Obama White House counter the 2008 Wall Street collapse, Metrick has spent years developing a playbook for government responses to financial calamity. Coronavirus shut down the global economy before his team of 15 researchers could finish it. Without a completed product, they’ve begun posting evidence from past policy interventions online.
Metrick now foresees a contraction worse than any since the Great Depression in the 1930s, potentially tripling the current jobless rate of 3.5%. There will be no lightning rebound when it’s over.
“We’re going to have a very significant recession,” he said. “This is going to be lasting at least a year. I think unemployment goes north of 10%.”
Yet given the dimensions of economic destruction now underway, that may represent success for the government’s economic response, not failure.
As in the Great Depression and Great Recession, the economy needs government stimulus to jump-start demand for goods and services. But health fears mean demand for many goods and services has vanished altogether. Average Americans need government help to minimize human suffering. That means ameliorating hunger, homelessness and sickness on an unprecedented scale.
“This is more like a hurricane — you’re handing out food and medicine,” Metrick explained. “We’ve not had this kind of natural catastrophe on a global scale ever.”
Will the $1 trillion the Trump administration has requested be enough? “If it lasts a year,” Metrick said, “it’s going to be several trillion they have to spend to keep people from starving.”
The terrorist attacks on September 11, 2001, inflicted a shorter-term economic shock. The economy had been in recession for six months on 9/11, and emerged from it two months later.
But the nature of the attacks threatened to devastate the airline industry, just as coronavirus does now. Then, Congress reduced the damage with $15 billion in aid and loan guarantees.
To offset the much larger potential blow now, the new Senate Republican stimulus bill seeks $58 billion for airlines, $150 billion for other distressed industries, and $299 billion for endangered small businesses. Keeping them alive to re-start operations once the health threat recedes would reduce long-term economic damage.
In the 2008 Wall Street collapse, the Federal Reserve repeatedly took unprecedented steps to keep the economy’s financial plumbing in operation. That experience left the Fed with off-the-shelf tools it’s now using to maintain access to short-term borrowing for businesses and money-market funds.
As fearsome as the economic impact of coronavirus has become, the financial system faces it in much healthier condition than in 2008. That’s largely due to post-crisis regulatory changes requiring banks to maintain larger capital cushions.
The danger is that the pandemic chokes off economic activity for long enough to turn solvent institutions insolvent, overwhelmed by loans gone bad. The populist backlash against Wall Street “bailouts” in 2008-’09 makes chances for a repeat highly uncertain.
“The banks are going to burn through their capital,” Metrick cautioned. “What I don’t know is whether our politics is capable of fixing that.”
The Trump administration’s laggard coronavirus response raises doubt about how quickly the pandemic itself can be contained. But prospects for development of a vaccine — which top infectious disease doctor Anthony Fauci projects in 12 to 18 months — at least suggest a natural end point for the worst of the crisis.
Meantime, political stars appear aligned for an enormous dose of fiscal medicine. The history of economic crisis response, Metrick says, shows that going too small poses the greatest risk.
In 2009, Republicans fought President Barack Obama’s call for stimulus in the name of fiscal responsibility. Even among conservative Democrats, anxiety about deficits kept the size of the stimulus below the $1 trillion or more Obama’s economists wanted.
Conservative Senate Republicans have rallied around plans for the government to send $1,200 checks to most Americans. Democratic leaders, promoting overlapping but different ideas, are seeking prompt negotiations.
And the White House incumbent — an ideologically unmoored Republican seeking re-election — is cheering both of them on.
“There are some very good ways of getting the money out and getting it out quickly,” Trump said this week. “We want to go big.”