Congress needs to act — like, yesterday — to stem the impact from a pandemic that will surpass 9/11 and 2008 in its economic impact. People who are losing jobs and income need money fast, as do small businesses and state and local governments. The alternative is they start defaulting on debt in mass numbers, turning coronavirus into a credit crisis that will make 2008 seem like a picnic. But the proposal President Trump announced this week is too broad and may waste scarce resources we will need later.
Washington has two main economic tools: the Federal Reserve’s power over private debt and stimulus. The Fed has already cut interest rates to zero, and though it probably isn’t harming anything at this point, it didn’t work. The reason is that this isn’t a crisis that can be solved by cheaper debt.
It’s a cash-flow crisis. Think about how you run your household budget. Money comes in, and money goes out. Do you have months of easy-to-access money stored up in case you suddenly find yourself out of work? Already, even with a supposedly booming economy, people rely on debt. Only 57.5 percent of Americans pay off their credit-card balances each month, down from 63 percent in 2010.
Small businesses work the same way. Restaurants, bars, retail stores: They have thin operating margins and can’t withstand being closed for a month or more. The airlines, huge businesses, have only seen flights curtailed for a few weeks and are already close to bankruptcy.
Municipalities, too, will run out of cash quickly as sales taxes and income taxes plummet. The state-run Metropolitan Transportation Authority has already announced a “material event” to its bondholders, meaning a potential apocalypse. It can’t withstand a full schedule — meaning full costs — with severely depleted fare, toll and tax revenue beyond the late spring. This isn’t a the-deficit-is-too-big issue; it’s a basic liquidity issue.
The state and city, too, will see historic tax declines. And remember, after 9/11 and 2008, they addressed that problem with higher taxes. What this economy will need to recover is lower taxes, particularly sales taxes and commercial-rent taxes.
So massive congressional action is in order.
But not a check to everyone — as Trump proposed Tuesday. At a cost of $500 billion, it’s way too broad and risks increasing inflation, when both demand and supply in the “real” economy have fallen precipitously. People who have kept their jobs, and kept most of their income, just don’t need a check from the government.
Who does need a check — and right now — are the likely tens of millions of people who will soon lose, or have already lost, their jobs or their freelance gigs.
The feds should massively supplement state unemployment insurance, which currently maxes out at $504 a week. People who are losing freelance work should be able to apply for a top-up, with the Internal Revenue Service comparing this year’s quarterly earnings to last year’s.
Small businesses, too, are going to need massive aid — and grants, not loans. As will state and local governments. Longer term, the feds should tie aid for cost reform, but for now, the task is just to keep the trains running.
Otherwise, the MTA will have to severely curtail service come summer for lack of cash, something it essentially warned of this week. That’s going to hamper the recovery.
Are these perfect ideas? No. For one thing, they will cost a lot of money, likely well over a trillion. Because of its recent profligacy, Congress doesn’t start out here from a great place; it’s already running a trillion-dollar deficit.
But households, businesses and municipal governments can’t survive a pandemic. As it happens, the Federal Reserve released the latest tally of outstanding debt last Thursday, the day the World Health Organization declared the pandemic. These three groups owe $35.3 trillion, more, after inflation, than they did in 2007.
What’s the alternative? Mass-scale debt defaults, as people stop paying their credit cards, auto loans and, perhaps, mortgages. Just the fear of such mass defaults could send markets into a worse spiral than they have been in for weeks. Then, Congress would end up bailing out banks, not people.
Would some people still default on debt? Sure. But most people are responsible citizens and just want to get back to work. After 2008, aid to actual people took too long and was too complex. We are still suffering the political fallout from Too Big to Fail.
The goal here isn’t stimulus; nothing is stimulated when people are locked down. It is just avoiding something worse.
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