Congress Needs To Fill Three Big "Holes" To Start & Sustain An Economic Recovery
The coronavirus crisis is unique in that it involves public health, finance, and economics. An all-out policy package has to address all three areas, as there are obvious interactions and synergies among the three.
No sustained economic recovery can occur without fixing the public health crisis. But it’s also true failure to address the financial and economic issues comprehensively can slow or even derail the economic recovery curve.
For example, the small business fallout in the 2020 coronavirus crisis is to the economy what the housing debacle was in the Great Financial Recession. Back then fiscal efforts were centered on policies to stabilize the housing market and stem the rising tide of foreclosures. Today, fiscal efforts are focused on providing necessary funding to small businesses to stem a rising tide of failures and bankruptcies.
Congress passed a Payroll Protection Program that provides forgivable loans to small businesses if they retain their existing workers. The initial funding of $349 billion has already been allocated, with less than 1.5 million loans granted, a small fraction of the 30 million small businesses.
There is no way to finesse support to the small business community; either there is a dramatic increase in federal funding aid soon or many small firms will not be around when states try to re-open.
Another shortfall in the initial policy package is insufficient support to help stabilize overall aggregate demand. The $2.2 trillion in fiscal stimulus provided $150 billion in aid to state and local governments, but the funding can only be used for coronavirus related expenses.
State and local governments get over half of their revenue from sales and property taxes and another quarter from individual income taxes. The abrupt and sharp drop in retail sales---evident by the record 8.7% decline in March retail sales---and record surge in jobless claims---22 million filed in the last month-- has created a gaping hole in the revenue stream for state and local governments.
One of the lessons from the Great Depression and the Great Financial Recession is that the federal government needs to quickly fill the “holes” in the system to enable the economy to recover.
In the 1930s, the federal government initially failed to provide financial support to states. Substantial spending cuts by the states, which at the time was three times the size of federal outlays, countered stimulus policies at the federal level worsening the economic decline.
In 2009, Congress provided unprecedented fiscal relief to states, appropriating nearly $150 billion to help fill budget gaps. That funding did not stop cutbacks in their entirety but it did prevent an across the board collapse in spending at the state and local level enabling the rebound in the private sector to power a modest recovery.
In 2019, nominal state and local spending in the GDP accounts totaled $2.3 trillion, that's more than double what people spend annually on airline travel, hotels, and restaurants, three industries hit hard by a sudden stop in the economy. Removing restrictions on travel. lodging and restaurants is an important step to reopen the economy, but so too is supporting the spending levels at the state and local governments.
The National Association of Governors has formally requested from Congress $500 billion in direct aid to help fill record budget deficits. Absent any additional federal financial support substantial spending cutbacks by states and municipalities will undoubtedly occur.
In the March 22 article, “How Big of a Fiscal Stimulus Package is Needed? Try $3 Trillion”, https://www.thecarsonreport.com/post/how-big-of-a-fiscal-package-is-needed-try-3-trillion, I made the arguments that Congress needs to act “big” providing “substantial fiscal aid” to fill the “holes” in the economy.
One month later, Congress finds that its initial $2.2 trillion package has been insufficient to fill the “holes” in public health and testing, and aid to small businesses and state and local governments.
Medical experts say no large scale reopening of the economy can start without more funding for public health and testing. But from an economic perspective no sustainable recovery can occur without increased financial support for small businesses and states and local government.