Pessimistic Fed Forecasts Depression
Guaranteeing 100% of worker income is critical, as James Bullard, President of the Federal Reserve Bank of St. Louis, notes in his remarks on the short term future of the economy. He anticipates a severe recession — let’s call it a depression — with 30 percent unemployment and a 50 percent drop in GDP. He urged Congress to provide “epidemic unemployment insurance.”
Nothing currently proposed in Congress by Republicans or Democrats comes close to providing 100 percent of worker income for the duration of the crisis. The Republicans, focused on bailing out corporations, offered workers a completely inadequate one time payment, which the Democrats have rejected. The Republican plan also ignores the desperate needs of the health care sector. Representative Maxine Waters, with others, has outlined a fairly comprehensive plan, that follows the proposals made by Sanders in the Senate, but it still falls short of replacing 100 percent of a worker’s income. Senate Democrats have offered a similar, although less comprehensive, plan. It’s unclear what the leadership of the House Democrats will support.
Means testing and one time payments are a ridiculous waste of time and money, and they miss a crucial aspect of providing cash to ordinary people. The first aspect of a cash program is to provide direct assistance to Americans. The second aspect of the program is to stimulate the economy. Means testing introduces additional bureaucracy and delays, neither of which will help Americans or the economy. Reducing the number of people eligible to receive cash reduces the stimulus effect of the program.
One time payments are ludicrously inadequate to the scale of the financial crisis ordinary people face, even with expanded unemployment benefits. In terms of boosting the economy, one time payments will provide only a small, temporary stimulus that is unlikely to dent a 50 percent drop in GDP.
The solution is to provide at least $2,000 to every adult, and $1,000 to each child, every month until the crisis is over. Names and addresses can be extracted from income tax returns, and the Treasury Department can issue the checks. No means testing, and the end date depends on the duration of the epidemic. Knowing they will have extra income for three or four months may encourage consumers to spend, although some of the cash may be deposited in savings accounts as a hedge against the next economic shock.
Most of Bullard’s focus, as is usual with the Fed, was on bailing out corporations, banks, and Wall Street. He vowed a “do whatever it takes” response to prevent the loss of major industries, such as airlines or cruise ships. However, he said the Fed cannot help small businesses, because it didn’t have the administrative tools to do so. He recommended the SBA expand its writ to account for the extraordinary losses small businesses will suffer. The Fed also cannot help workers.
No mention of the fact that many community hospitals, especially in rural areas, require help. Even before the pandemic, 1 in 4 rural hospitals were failing, and few are equipped to handle large numbers of COVID-19 patients. The epidemic may put many hospitals out of business (talk about an industry we can’t afford to lose!), with long term negative impacts on rural health care. Any bail out plan worthy of the name will have to include them, but I haven’t heard that discussed by the Feds or the Republicans . The Democrats at least recognize the problem, but none of their policy proposals are comprehensive solutions.
I do think Bullard is overly-optimistic that a recovery will begin in the third or fourth quarter. Estimates of the duration of the pandemic run well into 2021. Prematurely attempting to boost economic activity by ending shelter at home requirements could lead to a spike in new infections and extend the crisis for a longer time period. Unfortunately, that is what the Trump administration intends to do.
Pessimism aside, there may be local activities that can help preserve local businesses and wages. Cooperative buying clubs (for services and products) that source locally, a “get delivery from a non-chain restaurant day” once or twice a week, and “citizen’s banks” that provide pooled cash to individuals (and perhaps small businesses) in distress. These alternative “institutions” could create the foundation and habits that might transform power relationships in the economy once the crisis has passed.
