After the Federal Reserve fired nearly all of its bullets Sunday in a bid to rescue the teetering U.S. economy from the devastating effects of the coronavirus, investors promptly replied, “Next!”
Markets plunged again Monday after the Fed’s decision to cut its key interest rate to zero, among other historic moves, with the Dow Jones industrial average plummeting nearly 3,000 points, or 13%. And so hopes of at least minimizing a recession that almost certainly has already begun now rest with Congress.
The Fed can open the economy’s lending spigots wider but it can’t aid airlines, retailers or restaurants whose revenue has fallen off a cliff as customers fearful of the coronavirus hunker down at home. Nor can it shore up the employees of those businesses who have lost their jobs or are toiling sharply reduced hours.
Only Congress can hand cold hard cash to consumers and businesses to tide them over until the outbreak starts easing, perhaps in a couple of months.
“We need a very large package that provides cash to households and particularly, small businesses,” says Mark Zandi, chief economist of Moody’s Analyticss.
Wanted: $600B stimulus
Zandi says the virus will ultimately cost the economy $600 billion and shave 3 percentage points of gross domestic product, causing a contraction in output during the first half of the year. As a result, he says a stimulus of at least that size is needed to limit the damage and keep the economy afloat.
The House late Friday passed a bill that helps Americans affected by the pandemic, expanding paid sick leave and unemployment benefits and increasing the share of Medicaid funding that the federal government sends to states.
White House senior economic advisor Larry Kudlow said Monday those and other measures proposed by President Trump – such as deferring federal student loan interest – will cost $400 billion and said the administration is prepared to double that to $800 billion.
Yet some economists question whether the administration’s proposed measures will be most effective at jolting a slumbering economy. For example, Kudlow said the White House wants to temporally cut payroll taxes for working Americans.
“The payroll tax holiday is a serious proposal, a very serious proposal,” Kudlow told reporters, though Republicans and Democrats in Congress have reacted coolly to the idea..
Jay Shambaugh, director of the Brookings Institution’s Hamilton Project, says a payroll tax cut wouldn’t help the unemployed and would give more money to high-income households who need it less since it’s based on a percentage of income. It also would dribble out over time as workers get their paychecks.
Plus, Zandi says, “it’s peanuts, maybe 30, 40 or 50 dollars per paycheck.”
$1,000 check for every worker
Instead both Shambaugh and Zandi suggest the government should send $1,000 checks to all workers who pay payrroll taxes at a cost of $155 billion. Low-income employees, who spend more of their paychecks, would benefit most. And it would help Americans who are still working but at reduced hours.
To be sure, Americans are spending much less since they’re going out less or not at all. But Shambaugh says, “They’ll use it to make rent payments, buy food. It’s not going to make them go on a shopping spree.”
Says Zandi, “They’ll spend it, no doubt about it,” on things like medical supplies. “They’ll buy online.”
Kudlow also said the administrations is considering providing financial aid to battered airlines.
“We don’t see the airlines failing, but if they get into a cash crunch we’re going to try to help them. He said he didn’t like the term, “bailout,” referring to it as a short-term liquidity problem.
Cancel payroll taxes
The U.S. Chamber of Commerce Monday advocated canceling all payroll taxes employers pay from March to May at a cost of $300 billion.
“The funds would be used by employers to pay employees” so they don’t have to lay off workers, chamber Executive Vice President Neil Bradley said on a conference call with reporters
Zandi and Shambaugh, however, say airlines and other large companies have the cash and lines of credit to weather the current turmoil. A stimulus, they say, would be better directed to small businesses.
Zandi recommends a rebate to small firms that would reimburse them for the payroll tax payments they’ve made so far this year. Those ordered by state or local governments to temporarily shut down would receive twice what they’ve paid so far.
Small business also should be able to put off paying taxes until September.
Moody’s also recommends:
• Sending a $1,000 check to Social Security recipients as well as workers.
•Paying Americans for all diagnosis and care related to the virus.
• Allowing homeowners receiving unemployment insurance to also receive forbearance on their mortgage payments.
While Moody’s proposals would cost $600 billion, they would result in an $825 billion boost to the economy. That wouldn’t prevent a recession, Zandi says, but it would lead to a swift and strong recovery.