Momentum is building for a bigger federal response to the economic damage and uncertainty that the novel coronavirus (COVID-19) crisis has wrought. Calls are emerging from both the left and right to prop up a suddenly sputtering economy. Some of their ideas are better than others.
Uncertainty about the coronavirus has lowered aggregate demand for goods and services. Disruptions in supply chains due to factory closings in China and elsewhere reduced the worldwide supply of goods and services. These factors have some fearing a recession and have some policy makers taking action.
Following a stock market decline of more than 10 percent during the previous week, on March 3 the Federal Reserve’s Open Market Committee voted unanimously to reduce interest rates by 0.5 percent. The stock market rallied in response, and President Trump called for further interest rate reductions.
Later, Jason Furman, head of the Council of Economic Advisors under President Obama, argued that Congress should approve an economic stimulus bill to send $1,000 to every adult citizen and $500 for each child. And as market volatility continued, the Trump administration proposed another economic stimulus in the form of a payroll tax cut.
Although it makes sense for the Fed to lower interest rates, we do not need fiscal stimuli like what Furman or Trump have proposed.
The interest rate cut can be understood as a response to recent changes in market interest rates, which reflect the impact the coronavirus has had on the world economy. Long-term interest rates, over which the Federal Reserve has little control, have plummeted.
To align its own policy with market forces and to lower borrowing costs and stimulate the economy, the Fed reduced short-term interest rates.
In reality, the only interest rate the FOMC controls directly is on bank reserves. But because that rate is so closely linked to the rates banks charge on loans and to rates on Treasury bills, it is essentially ironclad. Sure enough, those rates have fallen in response to the Fed’s decision.
The Fed Funds futures market is predicting that the FOMC will reduce interest rates by 75 basis points (0.75 percent) at its March 18th meeting.
Good arguments can be made for and against the March 3 interest rate cut and the proposed reduction on March 18. But sending a check to every American or to taxpayers is irresponsible.
Proposed payroll tax cuts or payments to citizens are an attempt to offset the reduction in demand and prevent a recession. The argument for stimulus spending also reflects concern that lower interest rates will not do enough as people miss work, earn less, or produce fewer products and services because of the virus.
It’s true that with all of the uncertainty about the future, lower interest rates may not be enough to keep households and businesses from reducing their spending.
The problem with economic stimulus spending, however, is that the federal government is already spending much more than it collects in tax revenue. This makes the federal debt more and more unsustainable, especially if we consider the enormous unfunded liabilities of Social Security and Medicare.
If Americans did get a check from the government, most may spend very little of it, and it would do little to help businesses who may have to shut down or lay off workers.
There are better and more direct ways to deal with the coronavirus than cutting taxes or sending a check to every American. Most of us could use a little more money to spend — but more important right now, we need to mitigate risks. Economically, the risks include changes to our regular routines of work, education and leisure activities.
Congress and the president should focus on helping those who actually experience harm due to the economic and health effects of the virus. Deferring tax payments for individuals and businesses negatively affected is a good idea; so are the president’s efforts to encourage health insurers to waive co-payments for coronavirus treatment and extend insurance coverage.
The most important actions the government can take involve public health — particularly promoting accurate information and testing to diagnose the virus and slowing its spread.