Alan Blinder of Princeton University and a former vice chair of the Federal Reserve Board, now visiting at Brookings, and Jay Shambaugh, director of the Hamilton Project in Brookings’ Economic Studies program, held a briefing on possible macroeconomic responses to the coronavirus (COVID-19), moderated by David Wessel, director of the Hutchins Center at Brookings. The conversation took place on March 6. Here’s an edited transcript.

WESSEL: The world has changed a lot in the last few weeks. The coronavirus is primarily a public health issue, but it also has economic implications. My colleague, Warwick McKibbin, who has a big macro model of the world economy, has recently published a paper on the Brookings website modeling different scenarios. Today we’re going to focus mostly on the U.S. macro response. I’m going to ask Alan Blinder to start first and talk about what monetary policy, more specifically, other Fed regulatory policies, can do in a situation like this, and what are the limits of that. Then I’ll turn to Jay to talk about fiscal policies. Then we’ll turn to questions.

BLINDER: Good afternoon. As everybody on this call and everybody in the financial world knows, the Fed reacted very swiftly, by Fed standards, by cutting interest rates this week. The markets were happy for about 15 minutes, and then they gave it a Bronx cheer. I think that illustrates a couple of things: It illustrates that feeding the beast when the beast is hungry is almost impossible. Or, you can feed him, but you’re never going to satiate him.

There’s a lesson there for the Fed, which it could read as either saying, “This is futile. Why do we bother doing this?” Or “We better feed the beast more than the beast is expecting, that is, surprise them on the upside.” My guess is that they will try to feed the beast again–surprising either on timing or amount or something else. The main point is that there’s not very much that monetary policy can do in a situation like this. As many people have noticed, there are two aspects to this crisis: An aggregate demand shock and an aggregate supply shock.

Let me start with the aggregate supply shock because that’s simpler. The Fed can do nothing about the aggregate supply shock because, unlike oil shocks and things that we’ve become accustomed to, the Fed has no weapons it can aim at restoring global supply chains. And those supply chains are either broken or getting broken, and are badly damaged by this in a way that wouldn’t have been true if we were talking about China 30 years ago and wouldn’t have been true if the world hadn’t gone so far to lean manufacturing–one of whose principles is you don’t leave millions of components stacked up in warehouses because you’re expecting to get quick delivery. So this is a very big problem. It’s happening now, it will get worse, and there’s nothing the Fed can do about it. Making credit more easily available or at cheaper rates is not going to have anything but a completely trivial impact on that.

The other problem, which is a little bit later in coming but may prove to be the bigger one, is on the aggregate demand side. This is obviously a shock to consumer confidence, and those have a way of getting people to put their wallets and purses away. Bigger than that will be the impact when consumers decide it’s dangerous to go to the movies, to a restaurant, to the shopping mall, and so on. We don’t know to what extent that’s going happen, and it will be different in different regions. I wouldn’t be surprised if it’s happening in Seattle already. It’ll roll out across the country in an unpredictable way, but it seems we’re getting there.

And I’m reminded, though, of two very different historical instances where consumer spending just fell off the table suddenly. One was after Lehman collapsed, which shocked everybody; the consumption data just plummeted. And the other was the week that Jimmy Carter told everybody in 1980 to put away their credit cards because that’s the way we were going to fight inflation. I don’t know if you ever looked at the consumption data that followed that plea. It was incredible in magnitude, it was incredible people listened to Carter.

It may be the biggest drop in consumption in the whole post-war period. But those are just illustrations of what can happen if something gets consumers really spooked.

So on the demand side, there’s something the Federal Reserve can do, that’s the Fed’s usual bailiwick: It tries to stimulate demand by cutting interest rates and, in other ways, make credit more available. The clinker in this case is that the parts of the economy that are likely to be most severely affected by this pandemic scare are not at all interest-sensitive.

It’s the stuff that people buy in shopping malls, the movies, the restaurants, etc. It’s not so much houses and cars, which is where the Fed has some real purchase by cutting rates. This is the stuff that the Fed, when it moves the interest rate levers, has relatively little control over.

WESSEL: Do you think cutting rates is the right thing to do?

BLINDER: I’m like a 55-45 guy on that. If I was sitting in Jay Powell’s seat, I think I would have been about 55-45 for doing it–mainly just to show you’re doing something without deluding yourself that it’s going to do a lot of good. I’m not saying that’s the way he thought. I haven’t talked to him. But I think that’s the way I probably would have thought about it in that context.

WESSEL: During the crisis, a lot of central banks did these various funding for targeted lending schemes. I understand, from what we know, that the Fed actually discussed this during the crisis and decided not to do it for a couple of reasons. One was that, at the time, the banks were saying, “We have plenty of capacity to lend. We just don’t have much demand.” But doing something through the discount window where you would make available money to banks at favorable interest rates to lend to businesses that may be disrupted by the coronavirus crisis. Do you think that’s something worth thinking about?

BLINDER: I think it’s worth thinking about. I don’t think you’ll get much leverage from it because this is not now, and I don’t think it’s likely to evolve into anything that looks like a credit crunch. Many businesses are going to take a very big whack. Many of these are not capital-intensive, and I don’t think that getting more credit will do them much good. Now, where the Fed may do good is in staving off some illiquidity events that could turn into bankruptcies. The Fed has some tools to help provide liquidity, not much on bankruptcy. That requires more than just the Fed.

WESSEL: The Fed could, as it does in natural disasters, urge banks not to rush to foreclosure on people who miss mortgage payments because they are out of work, and to show the same forbearance towards business borrowers.

BLINDER: Yeah, that’s the kind of thing that might be helpful.

In contrast to what I just said about monetary policy, certain fiscal policies – fiscal spending aimed at health, test kits, safety precautions, etcetera – have the potential to have enormous multipliers. I’m not talking about a little Keynesian multiplier of one-and-a-half or so. These things may have enormous multipliers if they can get people back to the shopping malls, back to the restaurants, etc.

SHAMBAUGH: I’ll pick up right where Alan left off. I think monetary policy makes sense but clearly, many people at the Fed have said this, they probably need help from the fiscal side here. So the first area that makes a lot of sense, as Alan just said, is you spend whatever you need to spend for the public health crisis and not let budgets be a real barrier. It’s great that they passed $8 billion relatively quickly. They may need to pass more than that. You don’t want the public health response to be in any way constrained because, as you said, if you can really contain it and convince people it’s contained, that becomes the most important economic policy lever you probably have.

I would say the next bucket down, as I move from the things that are most targeted at public health to the things that are pure aggregate demand, would be FMAP or the federal share of Medicaid spending. Right now, the states know they’re going to face a bigger burden in Medicaid because they pay a lot of the bills for what’s going on with health, and the rest of their health systems are being stressed, whether it’s Medicaid or not. So state budgets are going to be strained.

One way to deal with that is by having the federal government pick up a larger share of Medicaid spending. Here, it makes even more sense because the exact spot they’re going to get pressure is through their health care systems. Say the federal government bumps its FMAP share up 10 percentage points. That would be around $60 billion going out to the states. That would be a meaningful way to make sure that the states are not cutting their budgets at the wrong time, either on health or redirecting money from the rest of their spending towards health and making cutbacks in other places such as education or public safety.

I’d say the next thing that would really worry me beyond the states would be the safety net. The safety net has holes in it, as far as situations like this. In particular, if you’re unemployed but you’re in a quarantine zone, or if you’re self-quarantining, you’re not ready to take a job. You literally don’t qualify for UI under the rules right now. They could pass a rule just today changing that rule and saying, if you’re in a zone that’s been declared health emergency, the requirement to search is out the window, and you can claim anyway. Similarly, lots of places have SNAP work requirements or food stamps work requirements where you have to work 80 hours a month if you’re between 18 and 49.

So, you don’t want people who are sick and debating if they should go to work or not, feeling like, if I don’t go in and get enough hours, I lose my SNAP payments because you also lose them for a considerable amount of time when you do. It makes total sense to waive the work requirements. Evidence shows they’re not effective in any way at all and so you should just waive them as a public health measure.

There are a couple of other things where, in the Recovery Act for example, they did an emergency TANF spending, figuring that the most vulnerable would probably feel pain whenever there’s a crisis. You could do a similar thing of an additional amount of money going to the states through the block grant process. The last one here, is lots of kids get their meals at school for free. If schools are closed, they won’t be getting their meals and their parents don’t have the money to feed them if they’re on free lunch or free breakfast, or both. We have a process to do additional money through SNAP for families that have kids, during the summers. And they should immediately do this for anywhere that has a quarantine or where schools are getting shut down. The families that are involved get a plus up to their SNAP payments, so that families know they’re going to be able to feed their kids. These are just the kind of things where the safety net needs a little bit of repair.

I would say the other big thing fiscally that you could do for mostly the crisis itself and not pure demand, is sick days. Half of people in the bottom quartile have zero sick days. Gig economy or self-employed people don’t have sick days. And even up the income distribution, lots of people don’t have any sick days at all. And so, people are making the debate, “Should I self-quarantine for 14 days? I’m a little worried about how I’m feeling.” You don’t want that person to say, “But I can’t get by without getting paid for two weeks.” And so, a federal system of picking up the first 10 sick days, is something that would both be a public health response in some ways, but in a very targeted way to make sure people who are affected by this aren’t feeling the financial burden and again, injecting a little more money into the economy that way. Similarly, we could implement loan facilities for firms that are in trouble. You could do it through the Fed, you could also do it through small business or treasury.

Lastly, though, I would say the aggregate demand piece is the piece that’s the most uncertain. This is because the most recent data we just got says the economy is doing great because we just got a big jobs number that’s for the middle of February. We won’t know until the first week of April how we were doing in the middle of March. It still seems unlikely that next week we would be feeling a big drag in this way, and so we’re not going to see if this is hitting for a while. So the question is, how much do you throw at the economy right away versus how much do you wait? If you’re worried you can’t do the things like sick days and fix the safety net, that alone suggests that just doing an immediate response that gets cash into people’s hands would be a very sensible thing to do. Jason Furman, in today’s Wall Street Journal, talks about a $1000 check per person. Personally, I think sending out cash now is a very sensible way to approach this.

You could, especially if you wanted to do additional things whether it’s SNAP, UI, more infrastructure, more FMAP money, etc., you could tie the onset of spending to triggers if you’re worried about overloading the economy right now. You could say, for example, if the unemployment rate goes up half a point, then all these other things come into play and again. Going back to the confidence effects, that might be a very helpful thing that people know. We’re not going to have to keep going back to Congress every week and try to fight through a political process if we just say, here’s what’s going to happen if the economy does start to deteriorate, that might be a really effective way to help there.

The last thing I would just say is, especially when it comes to the sending checks now, the question you get is, “Well, is this a waste of money?” I think what we should remember here is that the markets are literally begging the federal government to borrow money. The yield on 10-year Treasury bonds is under one percentage point. The inflation rate will not be under one percentage point over the next 10 years, which means real rates are negative for 10 years for the federal government.

So, if the government borrows money, and just hands it to people and has to collect that money back from people over time, they’re doing so on the terms you’d rather see. That should push you a little bit more towards getting in front of this rather than being in any way worried about the fiscal cost.

WESSEL: Alan, what do you think of his fiscal argument?

BLINDER: We’re quite likely to need it, but we don’t really know that we’ll need it. That particular number, $1000 per person, comes to about $330 billion in the United States.

SHAMBAUGH: I think it’s $500 for kids. It probably comes in a little under.

BLINDER: That’s a lot, and it’s conceivable that you live to regret it. I agree with Jay, however, that the cost-benefit calculus is lopsided. If you live to regret it, you’ll say, “Gee, we shouldn’t have done that,” but nothing terrible will have happened. The one amendment I’d make to the Shambaugh-Furman plan is to target it better on people who need it. I don’t need $1000; lots of people don’t need the $1000; it’s not going to affect them. But as you try to target it better, every targeting filter slows down the wheels a bit, and that’s of course the reason that Jay and Jason are saying what they do. But I think a little bit of thought about targeting it better could be worth, say, a three days delay. Don’t hold it for seven months.

SHAMBAUGH: When I wrote the piece three days ago, I still had the “Send checks” part under the “With a trigger” because we didn’t know we needed it yet. We’re seeing now that there might be an argument that you really do want it. I think frankly, you could also honestly just split it, you send $500 today, and if the unemployment rate goes up half a point, we send you another check. There’s an argument that they want to be ready and in front of this such that you don’t want them debating this in early May, when they get jobs numbers that say, “Actually, yeah, payroll employment and the unemployment rate was a disaster.”

WESSEL: On Twitter, in the response to Jason’s post, there’s this skepticism. Which is, “If I can’t go out and go shopping, what’s the money going to do? What’s the point?”

SHAMBAUGH: I think there are a few reasons you’d say this. So first of all, there are people who are going to need it just to pay their bills, to pay their rent, to pay their mortgage.

If you’re not earning money because either you’re furloughed, or because we’re in this situation where restaurants are shutting down, or factories that can’t get parts have cut from three shifts to two shifts are all these types of things. People’s incomes could be going down, and so this would just make sure people have enough money that they can pay their core bills. Also, if you are driving for Uber or Lyft on the side, and either you’re sick or you’re worried about people sick being in your car, this gives you the money to not have to do those sorts of things. If you don’t think you can do administratively the sick days and things like this, then this becomes even more important, because it gives people the option to not work when they shouldn’t be working.

I would say, on top of that though, there is this piece where we are hopeful, at least, that whatever happens on the health side, is relatively short-lived. People keep talking about, “Well, would it be a V-shaped recession or an L-shaped?” The goal of this would be that people would have the cash, such that when they did start to feel more confident about, “Can I go shopping? Can I go out?” We’re not then trying to wait for them to earn some money before they start things back up, but have it jump back up rapidly. The other thing people have talked about is a payroll tax cut. And so, I would just like to firmly plant myself on the side of cutting actual checks, not payroll tax, because people who aren’t working for the whole set of reasons we’ve talked about won’t get the payroll tax cut, first of all. It also is highly skewed towards high income people. If you make $10,000 a year with a 2% payroll tax cut, it’s going to get you $200. It’s going to give many of us on this call $2,000. And that’s backwards from how you’d want to target it.

BLINDER: Two little counters on that.

Reasonably prosperous people would benefit from cutting the payroll tax, but not really comfortable people. And I still think you can probably get some oomph from the payroll tax faster than from cutting checks. Congress could cut the payroll tax this evening.

The withholding can change basically immediately. The check cutting will take some time.

SHAMBAUGH: It’s not a major disagreement.

WESSEL: I’m going to turn to questions now, but I want to just point out two things that I find interesting and helpful. One is on the sick leave question. The Bureau of Labor Statistics release headline is Employee Benefits in the U.S., September 19th, 2019, has very good data on sick leave and who has it and who doesn’t. The people in the lowest quartile of the wage distribution, only half have paid sick leave. And that’s even among people who work for state and local governments, that is only 60%. And secondly, there’s a blog from the IMF out today by the Fiscal Affairs Department, Vitor Gaspar and Paolo Mauro, but they have some interesting examples of what other countries have done. France, Japan, and Korea are providing subsidies to firms and individuals who’ve taken leave to stay home to care for children. France is offering sick leave to people directly who are affected, who have to self-quarantine. And then, there’s some stuff about China and stuff about Iran. I’m not sure we want to model ourselves on the Iranian tax system, but that’s also mentioned, so it’s interesting.

GREG IP, Wall Street Journal: Jay, what are the logistical barriers and challenges of some of these targeted measures? So for example, you mentioned SNAP, free and reduced meals, and sick benefits. How hard is it to actually implement that, and what are the lags? And is it one of the challenges getting the people who are supposed to benefit from it to actually know that the benefit is there, and therefore to exploit it?

SHAMBAUGH: So on the SNAP question, my understanding is that it’s a little easier because they have debit cards, so you can just put more money on them, and you know their zip code. So you know if the school is closed, you know the zip code, and you know if they have kids. All that is in the system, and so without them even knowing, you can just put more money on the SNAP card. You could waive work requirements today, and that might be helpful.

IP: But you’re trying a get a behavioral response, right?

SHAMBAUGH: Yes.

IP: So those people need to know what you just did.

SHAMBAUGH: Yes, yes.

IP: How do you do that?

SHAMBAUGH: So I think there, you’re announcing the school closing. When you announce the school closing, you literally just announced also that SNAP benefits will be going up. So any families that have kids in the school district on SNAP, you should know your SNAP cards now have more money on them. I think some of these we can do, because we already have the administrative piece of it. The sick days one, I completely acknowledge, it’s hard. After I wrote the piece I’ve spoken to some people on the Hill, they’re like, “How would you do that?”

I think there are already actually bills on the Hill floating around about national paid sick leave. You could try to operationalize one of these things. You could also do it through tax credits for firms where you just say, “Everybody, your first 10 sick days are paid by the federal government.” And so everybody gets it, and firms would just apply for tax credits off anything they had to pay for sick leave. You’d have to have a little bit more on the tax side to work through that one. And that’s why I said, “I’m less confident, you could do that really, really fast.” The safety net stuff, they should be able to do fast.

It’s a question of whether you do it (the FMAP stuff). The behavioral responses at the state level are much easier. If you tell the states, “We’re spreading $50 billion out across all of you based on what you’re getting in FMAP already,” that takes the pressure off them right now saying, “How am I going to spend this?” The governor of Maryland announced that he wants to pull money from the rainy-day fund to spend on this. Rather than them having to make calls like that, it seems like you would want them to stack more money in their health systems.

BLINDER: For the FMAP you need an act of Congress, right?

SHAMBAUGH: Absolutely, yes.

BLINDER: But that’s a big difference–between what you can do administratively and what requires an act of Congress.

WESSEL: Okay. Does anybody have a question?

JEANNA SMIALEK, New York Times: Hey, this is Jeanna Smialek.

SMIALEK: Alan Blinder, you said earlier that you don’t think this would turn into a credit event, but there’s been a lot of speculation though, about whether this would show some cracks in the financial system worldwide, especially in the corporate debt market. And I was curious what your thoughts are on that.

BLINDER: Well, I think this is going to cause bankruptcies in a variety of places and ways. My best guess now would be that this is going to be a problem for smaller businesses rather than larger businesses. And there’s an irony here, right? Business cycles usually hit small retail establishments, and restaurants, and things relatively lightly compared to heavy industries. This one I think is going to be the reverse. And those companies are mostly small ones. I’m not talking about Walmart. They’ll take quite a hit, but they can bear the hit. But a lot of retail firms are quite small businesses, mom-and-pop shops, barber shops, restaurants, retail stores that haven’t already been wiped out by the big boxes. They need credit to operate, and they generally don’t have a big buffer to rely on. The thing is if you add all of them up, you probably don’t get that much macroeconomically. You get some terrible situations for individuals and specific businesses, but in the big macro picture, which is the way the Fed thinks of things, it may not add up to that much.

SMIALEK: Isn’t there also a possibility that you’ve had a fairly abrupt and sizeable decline in stock prices? Although the yield on treasuries has gone down, the spread between treasuries and corporate borrowing’s going up. Those are the kind of circumstances where you sometimes discover that there are parts of the players in the financial system that were not equipped for such an abrupt swing.

BLINDER: When people have talked about financial instability lately, the one thing that everybody talks about is leveraged loans. Those are exactly the kinds of business loans, corporate loans that are the weakest and the least able to withstand the rise of interest rates. And that’s what you do get in a crisis. We saw this in the financial crisis: some interest rates went down, the safe ones, but other interest rates went up. And we’re seeing it now.

WESSEL: Great. Anybody else have a question?

IP: Alan, Larry Summers wrote a piece earlier this week criticizing the Fed’s interest rate cuts saying that it wouldn’t do much good. And that they shouldn’t have done it. Given how low rates are already, they should conserve that for something where they can do some good. What are your thoughts on that?

BLINDER: Well, that was my 45%. I was sort of 55/45 on whether it was wise or not. I think the reason I’m at 55, not 45, on that is that the bad outcome that Larry seems to be worried about is that you don’t have enough ammunition later–that you spent it now. But there are lags. So it’s not like the effects on the economy of what the Fed did this week are going to already have petered two months from now. It’s quite the opposite. So the worst that could happen is the ill timing, and that maybe it would have had more psychological impact if they did 100 basis points in May. But that’s not such a big negative.

IP: Is the fact that we have a very large federal deficit now, in part because of discretionary actions, tax cuts mostly that took place while we were actually at a very strong partner cycle…does that diminish the fiscal room we have today?

SHAMBAUGH: I would argue strongly no. And the reason I would say is the things that I just talked about could all be meaningful in a quarter or year, in terms of the spending, but they’re all temporary. They don’t lift the debt-to-GDP ratio path in any great way. They maybe move it up a point or two, but even as we sent the checks that’s real money. It’s sending out more than ~1% of GDP. And if you add an FMAP and other stuff, you could maybe get to 2% of GDP if you were really, really, really aggressive. But if we think of our long run fiscal problems, a level shift up of the trend by two points, isn’t what worries us. What worries us is if you shift the trend. And that’s what the actions over the last two years did by permanently shifting down tax receipts and things like that.

This is something that is a targeted event. One way you see this is the markets certainly don’t seem worried about lending to the Federal Government right now. They’d like the Federal Government to be borrowing more. So I would just say that the only place that worries me about our fiscal space is our political fiscal space, and that people will say, “We can’t run deficits when the deficit is this big.” And I think, from an economics perspective, that’s not right.

BLINDER: I just want to add one thought to that, which is that the only item on Jay’s entire list that is big bucks is the $1000 check. All the rest are small beer. Given what the Trump administration and others have done to the deficit, you can’t even notice these things. It’s not a lot of money.

WESSEL: Right. Yeah. Most of these are, I would say, are more targeted at the health event and trying to make it so people can stay home and pushing the blow to affected communities and individuals. The aggregate demand ones would be to build up our automatic stabilizers to trigger some more spending. But even that would all trigger off, at which point it doesn’t change the trend of your debt-to-GDP ratio.

Thanks for joining us. And thank you Alan and Jay.