The economic and financial dislocations of 2020 are bigger in scale and scope than 2008. The loss of income and profits will ultimately be determined by the duration of this slump, but Washington needs to act with speed and target the support to where it is needed the most.
There is high probability authorities are going to misdiagnose the problem and incorrectly direct the fiscal support. Cash payments to citizens are just politically expedient. If the coronavirus are causing people to remain idle, this “helicopter” money will not flow into the economy. The bulk of financial support must be directed to business not consumers, because without them there will be no economy.
Washington needs to go “big”, enacting a fiscal plan two or three times the $700 billion bank bailout package of 2008.
The Scale of the Problem
The scale of this economic and financial crisis is incomparable to anything experienced in the post war period. Washington along with a number of state governments has asked people and businesses to refrain from typical activities, causing a record number of businesses to either cut hours or close entirely. Some businesses have asked their employees to work from home, take voluntary pay, or unpaid leave.
The US economy is a well-integrated machine, where people and commerce are constantly in motion. But when the wheels of commerce stop, company revenue, profits and employee income collapses.
The largest decline in operating profits for a single quarter was 26% (not annualized) in Q4 2008 and wage and salary income saw a 4.5% decline in Q1 2009. These record declines could be exceeded in the current environment.
Washington needs to give companies financial assistance even though they do not have the capabilities, or the time, to assess the good and bad ones. If they don’t act quickly and offer substantial aid to businesses, especially small-sized companies, which employ nearly half of the private sector workforce, a large number of companies will fail or go bankrupt. This would harm public confidence in government, and further economic and job loss in the process.
The Federal Reserve responded with a fire hose of liquidity trying to open the credit markets and improve entire financial markets. Their actions do not put $1 directly into business revenue or worker’s pay.
It’s up to Washington to act. Sending a $1000 check (helicopter money) to all Americans may be a politically popular response, but this approach will have limited success. Many businesses are closed and people are standing still given the health crisis.
Small companies are the most vulnerable aspect of the economy. Many of these businesses could be closed for weeks or months, especially if the healthcare experts in Washington are correct that the coronavirus will not peak until July or August. Smaller firms don’t have the liquidity or cash of large firms, so one or two weeks without any revenue threatens their survival.
In 2008, Congress approved a $700 billion bailout for banks and also gave billions to auto companies to eliminate ultimate failure. Why can’t there be a rescue package for small businesses? A financial assistance package for small business might end up costing two or three times the size of the bank bailout bill.
Politicians might be looking for a “shock and awe” package, offering something substantial to help stabilize public confidence. The scale of the package is important, but the plans specifics are more so. Only a well-targeted package will mitigate the contraction in the economy and ensure post recession there is a business structure to generate jobs and overall growth.