A dangerous myth is taking hold in the United States that the country must decide between saving the economy at the expense of risking many additional Covid-19 deaths and a depression leading to double-digit unemployment.

Trump says that the cure for the virus can’t be more costly than the virus itself. Others, like former Treasury Secretary Larry Summers, caution that the US must stick with stringent public health measures, but simply can’t fix the economy “until we contain the virus.”

But this is a false choice. The virus’s hit to the economy is real. But beyond the direct hit from the pandemic, the US is experiencing an economy-wide collapse in demand, as job losses lead to income losses, which lead to reduced spending and further job losses. There is a climate of concern, and people who haven’t lost jobs and incomes worry that they may do so soon and restrain their spending. There is a pinch on state and local budgets that is causing cutbacks on front-line labor as there’s more, not less, work to do.

And despite frantic moves from the Federal Reserve last week and a big stimulus bill from Congress, the steps taken thus far are too small and too timid — like a series of mattresses to cushion the fall when the US needs a trampoline to bounce everyone back to full employment. That’s not a job that can afford to wait until after the epidemiological crisis is solved any more than the Allies waited until after defeating Hitler to cure the Great Depression. The US needs to beat the virus in part through a massive, deliberate mobilization that puts people back to work.

America needs a strategy for recovery, not just rescue

Businesses across the country have been forced to either shut down or dramatically curtail their activities because of the virus.

That inevitably leads to job losses and a declining stock market. But if you broaden your set of economic indicators — including currencies (where the dollar is getting stronger), commodities (where everything from oil to corn to metal has gotten cheaper), bonds (where government interest rates have fallen), and inflation (where expectations are of slower price increases) — you see a second story, a crisis of falling demand.

And though the measures taken by Congress and the Fed last week led to a clear improvement in the indicators, they weren’t nearly enough to address the crisis.

The US needs to take the analogy of wartime mobilization that’s been used by many leaders much more seriously and deliver trillions more in tax cuts and spending increases to stimulate demand. Much of that spending should be aimed at mobilizing workers and industry to provide the goods and services the US needs to continue coping with a virus that, even if successfully contained, is not going to vanish soon.

To cope with the twin crises of economics and public health, the US will need substantial investment in the production of personal protective equipment for health care workers, but may also need production of masks and gloves for the public. It will need a huge infusion of funds to state and local governments so they can continue to provide — even expand — needed services. It will need medical research in spades, and we’ll need income support for households and businesses as they struggle to adapt to a new world of doing things in less efficient, more socially distant ways. And to support it all, the US needs a creative and flexible Federal Reserve willing to adopt a wartime mentality to finance.

Economic policy can’t fix everything, but it can fix a lot

A few years ago, Christina Romer, who served as the chair of the White House Council of Economic Advisers under President Obama, and her husband David co-wrote my favorite paper about macroeconomics.

It’s called “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter.” In the paper, the Romers review three tragic episodes in American economic history — the early phases of the Great Depression, the Great Inflation of the 1970s, and the extended Great Recession that began in 2008 and left America with labor market weakness that lingered up until the moment the coronavirus hit.

They show that in each of these episodes, policymakers convinced themselves that because of special unique attributes of the situation, there was nothing more that they could do on the demand side of the economy.

In 1930, for example, as the Great Depression gathered, George Norris of the Philadelphia Federal Reserve spoke against the idea of extra stimulus. In his view, the real problem was the extraordinary stock market bubble of the 1920s. “The consequences of such an economic debauch,” he argued to other Fed officials, “are inevitable. We are now suffering them. Can they be corrected or removed by cheap money? We do not believe that they can.”

In the 1970s, the problem was inflation rather than mass unemployment. And William Miller, then chair of the Federal Reserve, insisted that it wasn’t his problem to solve, telling Congress that “an effective program to reduce the rate of inflation had to extend beyond monetary policy” and instead focus on deregulatory and anti-union policy “designed to enhance competition and to correct structural problems.”

And in the wake of the Great Recession, distinguished economists started coming up with fanciful explanations for why labor force growth was persistently slow, even at one point deciding that advances in video game quality rather than a weak job market were to blame.

But in the first two instances, once policymakers — President Franklin Roosevelt in the case of the Great Depression, Fed Chair Paul Volcker in the case of inflation — actually accepted responsibility for solving the problem, they took action by abandoning the gold standard in the former case and with painful but relatively brief spikes in interest rates in the latter.

The Great Recession never had such a decisive turning point, but exactly as the Romers predicted, over time growing demand just kept pushing the job numbers up steadily throughout both the Obama and Trump presidencies.

So I was alarmed to see something Christina Romer told my colleague Ezra Klein:

“I feel like we need a new term for the kind of unemployment we’re going to have,” says Christina Romer, the Berkeley economist who led President Obama’s Council of Economic Advisers during the financial crisis. “It’s not cyclical unemployment. It’s quarantine unemployment. Businesses aren’t allowed to operate. People aren’t allowed to be out of their home. The idea that if you just give people money it’ll somehow prevent the unemployment rate from skyrocketing makes no sense. No amount of demand stimulus will get people to go to restaurants if they’re closed.”

What Romer is saying is that the US needs humanitarian relief to help people who can’t work, rather than expecting stimulus to create jobs.

But that’s a huge overstatement. She teaches at UC Berkeley in California, which is under some of the strictest lockdown orders in the country. Yet restaurants in Berkeley are not closed — many of them are offering food for pickup or delivery.

The novelists Ayelet Waldman and Michael Chabon announced on Twitter a plan to buy 25 meals a week from local restaurants to give to nearby hospital workers — a nice gesture for the community. And one thing that makes it a nice gesture, of course, is that lots of people are constrained in the number of restaurant meals they can consume by their income.

Do you run an East Bay restaurant? Once a week for as long as this lasts @michaelchabon and I will buy 25 meals from you and deliver them to the Highland Hospital ER staff. Cash for you, food for them! Win win! Email me at ayeletw@gmail.com. Spread the word. — Ayelet Waldman (@ayeletw) March 21, 2020

It’s also true that there are plenty of affluent people who eat out frequently who are going to be cutting back for non-financial reasons during this crisis. But it’s a big mistake to think that everyone is in that boat, or that the US has to simply give up on the idea of keeping people engaged in meaningful work.

Signs of demand shortfall are everywhere

Even in the midst of the current crisis, some companies are hiring. Instacart says it’s looking to add 300,000 staff as demand for grocery delivery picks up. Amazon says it’s going to hire 100,000 new people, and Domino’s Pizza expects to add 10,000 more workers.

A crisis for some is an opportunity for others. And in an appropriately stimulated economy, workers laid off from some sectors would gain new jobs in others. But something I’ve noticed in my Washington, DC, neighborhood is that even though supermarkets and hardware stores are still open, they are curtailing hours rather than expanding them.

Prudent people are trying to shop at the least crowded possible times in order to minimize human contact — typically at odd hours. The Whole Foods in my neighborhood is normally open from 7 am to 10 pm. The store has established special hours for people ages 60 and older, from 6 am to 7 am, and it is closing early at 9 pm. In a healthier economic environment, the store would be opening early and closing late — adding shifts to cover those times and adding workers to do extra cleaning and disinfecting.

This might lead to price increases for some retail goods, partially offsetting retailers’ reduced costs for commodities and the fuel to get things shipped. Nobody likes to see high prices. But that’s what you’d expect to see from an appropriately stimulated economy — overall stable or slightly rising inflation as total spending levels stay steady even though the virus is disrupting exactly what people spend money on.

Instead, aggregate spending is collapsing. Recode’s Peter Kafka reports that even as news consumption is soaring, the advertising market is shrinking. BuzzFeed News announced across-the-board salary cuts. This isn’t the virus forcing media companies to shut down or making it impossible to buy laptops. It’s the secondary and tertiary demand impacts that are creating a generalized economic crisis.

How to fix the problem: Spend, mobilize, recalibrate

Congress has declared victory and gone home, but it’s important for leaders in both parties to stay engaged. They need to keep monitoring the situation and continue passing new stimulative measures until there are clear indications that things have gone far enough on the demand side.

That’s going to mean primarily pushing a lot more money out the door.

Secondarily, the federal government needs to mobilize the country to address the virus — working with private industry, but also plenty of pushing cash out to state and local governments to do things.

Last but by no means least, the Federal Reserve— the American government’s premier demand-management agency — needs to commit to allowing a small spurt of inflation if that’s what it takes to ride out this crisis, and to extending maximum support to whatever the nation’s elected officials decide to spend money on.

Fed Chair Jay Powell’s announcements last week pointed in that direction, but everyone would benefit from a clear and consistent statement from the central bank that it supports fully and swiftly returning to full employment, even if it means a temporarily elevated pace of price increases. If people look back on the year 2020 and see that the big problem was 4 percent inflation, rather than mass unemployment or the widespread collapse of hospital systems, that’s a victory.

Push out more money

At the very beginning of the crisis, President Trump was said to be interested in a major payroll tax cut.

Eventually he got talked out of that by Democrats who argued that generous unemployment insurance benefits and flat cash transfers to households should be higher priorities. That was the right judgment, but with demand still not fully stabilized, it would make sense to go back and look at the payroll tax issue.

The kind of companies that are still enjoying healthy sales — from giants like Target to the little hardware store across the street from my house — would be more likely to expand staff and rehire some newly unemployed workers if employer-side payroll taxes fell. Employers whose businesses have been hurt by the crisis but who aren’t forced into closure by it will, similarly, have an easier time avoiding layoffs if they get a tax break.

Meanwhile, the millions of Americans who haven’t lost their jobs but are dealing with unusually difficult working conditions, complicated child care situations, and other problems could use a boost from a worker-side payroll tax cut.

Depending on the market reaction to that, it could also make sense to do more rounds of cutting universal checks. Even while maintaining fairly severe social distancing, reasonable people might want to splurge on home exercise equipment, new toys and activities for kids, better equipment for your home office, or remote consultations with medical doctors or psychotherapists.

Deliver the goods and services people need

The political controversy du jour is Trump’s reluctance to invoke the Defense Production Act (DPA) and secure critically needed ventilators and personal protective equipment for front-line health care workers. He should do all that. But the government at all levels should also acknowledge that our wartime production needs are broader than the most critical supplies. The acute shortage of N95 respirators facing medical personnel treating Covid-19 patients obviously needs to be fixed first. But instead of managing the shortage by telling the public surgical masks aren’t useful, the US ought to make more masks and widen the circle of people who get them.

The gap between our current situation — where front-line health personnel can’t get the basic equipment they need — and a realm where everyone is amply provisioned with masks and gloves for routine use is huge. Filling that gap will be hard. But it’s the opposite of the problem of having too many workers with nothing left for them to do. The US needs to be looking at all appropriate tools to get newly unemployed people into manufacturing masks and gloves. That probably means some mix of DPA edicts, direct subsidies for production, and guarantees that the government will purchase any “excess” supplies if the crisis ends up ending sooner than expected.

But beyond medical equipment, we are looking at a reasonably extended period of time in which people should be consuming more soap, hand sanitizer, disinfecting sprays and wipes, and lotion. Especially once the US is able to move beyond the most severe lockdown measures, we’re going to need lots of household cleaning supplies. And that means we’ll need more personnel and industrial capacity to make them.

Congress should also directly infuse state and local governments with the money they need to run things properly. Mass transit agencies are being crushed by falling ridership and have started curtailing service. Distancing best practice, however, is that transit agencies should run ample service even as commuter loads fall so that trains and buses can stay as uncrowded as possible, even while vehicles are disinfected frequently. This isn’t financially viable for local governments, but the federal government can make it viable, and in doing so support public health and employment at the same time.

More broadly, the one saving grace of the coronavirus pandemic is that the pathogen is fairly easy to kill with soap and other normal cleaning supplies. While surface spread is not thought to be the main vector of the coronavirus, high-touch surfaces in playgrounds, parks, and other public spaces could and perhaps should be routinely disinfected as part of a transitional strategy to getting things partially opened up again. The barrier to doing that is simply cost.

But that’s just another way of saying the virus hasn’t eliminated our need for labor. There is plenty for workers to do instead of being unemployed, as long as people refuse to accept mass unemployment as inevitable. Rather than it being necessary to completely fix the health situation before the US can heal the economy, mobilizing idled workers should be part of how to get the health situation under control.

Wartime central banking

But to undergird it all, Americans need a cooperative central bank.

The question of Federal Reserve action is intimately linked to the inevitable question of whether the country can really afford to engage in stimulus on this level. And the answer is yes.

Since the 1951 Fed/Treasury Accord, the Fed has operated independently of the rest of the American government. But as Jessica Romero of the Federal Reserve Bank of Richmond recounts in his history of the accord, “during World War II and its aftermath the Federal Reserve did not enjoy such independence.” Instead, “at the request of the Department of the Treasury, the Federal Reserve formally committed to maintaining a low interest-rate peg of 3/8 percent on short-term Treasury bills. The Fed also implicitly capped the rate on long-term Treasury bonds at 2.5 percent.”

The point of this was to make sure it was affordable for the government to borrow the money it would need to fight and win the war. Current interest rates are less than half of where they were set as an emergency wartime finance measure, and the Fed has announced that it’s willing to engage in unlimited purchases of government bonds “to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”

What’s further needed from the Fed is a clearer statement of the goals of its activity. In the past generation, the central bank’s overwhelming focus has been on ensuring that inflation stays near but below a target of 2 percent.

To support an adequate recovery, the Fed should state clearly that its goal is to help fiscal authorities fully eliminate any shortfall in demand. That means as long as the virus is with us, we should be willing to see inflation rise above 2 percent levels, as you would expect to see in an economy suffering from a supply-side problem.

A lot of commercial transactions, even when they restart, will have to be conducted in slightly cumbersome ways with more emphasis on delivery, uncrowded spaces, and lots of disinfecting. That will mean a higher cost structure, higher prices, and lower economic output — real economic problems that stimulative policy can’t fix and that will ameliorate only as testing, treatment, and vaccination will improve. But it won’t have to mean mass unemployment or a chilling choice between overwhelmed hospitals and a depression.

A depression is a choice

The corners of the economic policy world I follow are spending a lot of time playing armchair epidemiologist and debating various theories about how deadly Covid-19 really is and how useful lockdown-type policies really are in combating it.

Current estimates of the coronavirus fatality rate may be too high by orders of magnitude, write Profs. Eran Bendavid and Jay Bhattacharya from @StanfordMed https://t.co/5zIfFWK1Ko via @WSJ — David Andolfatto (@dandolfa) March 25, 2020

I reproduced by average-growth-in-last-week graph, but this time for COVID deaths instead of cases.



Can you spot which places had lockdowns? Because tbh I cannot. pic.twitter.com/hnW5AKVbnD — Lyman Expand the House Stone, AKA 石來民 (@lymanstoneky) March 25, 2020

These are important questions, and in these uncertain times, I am also interested in them. Trump has become personally enthusiastic about the prospects of using hydroxychloroquine, perhaps in combination with azithromycin, as a pharmaceutical treatment for Covid-19. (The research so far on the effectiveness of such treatment is preliminary and mixed.)

I hope some of that pans out, too, and it’s not unreasonable to try to maintain some optimism on the epidemiological side.

But this also has an air of grasping at straws about it. Both the human mind and the political system rebel at the idea that the current bleak economic picture Americans are seeing is our only alternative to a world with increasing sickness from a new virus.

We need to be clear-eyed, however: That false choice only exists because we aren’t thinking big enough about economic policy. Both the virus itself and the public health countermeasures that have been put into place to combat it are costly to the national economy. But the financial market indicators we can see are a clear indication that these costs are being exacerbated by a second wave of problems — demand-side problems — that are actually larger in scale than the problems on the supply side.

And unlike on the epidemiological side, the solutions to a demand crisis are actually very clear.

We are already poised to begin significant fiscal stimulus, and that has helped. But to get to where we need to be, we need to do even more — put more cash into state and local government coffers, cut taxes on individuals and businesses, put money directly into the hands of the American people, and finance increased production of medical and household cleaning supplies.

A program like that won’t eliminate the economic costs of coronavirus. Huge amounts of labor will be “wasted” on cleaning and re-cleaning surfaces, and manufacturing supplies that are swiftly used up and thrown away rather than building wealth. But it will avoid mass unemployment, cascading waves of bankruptcies, and the other miseries associated with a depression. And since the economic problems will be genuinely virus-related, they will go away whenever the medical situation improves — whether that’s because of improved testing, improved treatments, new findings that it’s not as deadly as we feared, or whatever else.

The problem with the demand shock is that it is currently bigger in economic terms than the supply-side impacts of the virus itself. And — because it’s caused by policy failure rather than RNA strands replicating in our cells — there’s no guarantee it goes away, even if there is a totally effective vaccine a year from now.

It’s time for economic policymakers to let the doctors, epidemiologists, and other public health officials do their jobs, and to start taking responsibility for doing their own work instead. The virus is a fact we have to deal with. The ongoing collapse in aggregate demand is a policy choice we can avoid.

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