Carney: How to Respond to the Coronavirus Economic Emergency

The coronavirus is an economic emergency.

But it does not have to become an economic catastrophe.

It is very likely to push us into a recession, if it has not already. The signs of economic contraction are plain enough to see: major sports and cultural events have been canceled, airlines have curtailed their flights and been swamped with cancellations, Apple stores are closing, schools and museums are shuttered, movie productions are halted, the stock market has had its worst two weeks since the financial crisis, and you have very likely already canceled that trip you had planned for spring break.

Nothing else needs to happen for the economy to slip into recession. That’s why I say we may already be in one. To some, it will seem extraordinary that the economic impact could be so severe even though we only have a few thousand confirmed cases of coronavirus. But the social distancing we are undertaking to limit the toll of the virus on human lives entails a huge downturn in our economic activity. On a society-wide basis, we’re suddenly buying less and working less. Demand and supply are falling.

It has been thrilling to watch the people of our shining Republic rise up in a largely spontaneous and voluntary social movement to contain the virus. Businesses have voluntarily told workers to stay home, sports leagues have sacrificed profits for public health, landlords in New York are promising to forego foreclosures, colleges have taken instruction online, churches are taking measures to avoid becoming vectors of infection, and families have adopted infection-fighting hygiene regimes. All without orders from governmental authorities. America has always been a rugged nation of people determined to improve our lot.

And one thing that has been clear these past two weeks is this: we still got it.

An Avoidable Catastrophe

Right now we stand at the economic crossroads. It’s a time for choosing. Down one path, we allow the economic emergency to become an acute crisis. People who lose their jobs–and that’s inevitable given what has already happened–will stop spending on all but the necessities, struggle to live off all-too-meager savings and pragmatically skinflint jobless benefits meant to spur them back to work at the earliest opportunity. That will ripple through the economy, triggering more layoffs, more businesses closing, and even less economic activity. Think of this as stage one of the economic infection.

To take just one quick and obvious example: all the weddings planned for the next two months are being canceled. Couples are putting off one of the biggest days of their lives because of the virus. This has a potentially enormous impact on them and also on our economy. The florists, caterers, and people running event spaces are losing their incomes and jobs. Travel arrangements are canceled, so are hotel reservations, dinner reservations, honeymoon plans–and that will cost many hardworking Americans their jobs.

And just as the rational response to the virus means that behavioral changes go much broader than infection, the rational responses to the coronavirus economic emergency will be much broader than the frontline cost to the economy. People who are still working will pull back on spending to save their income for the bad times ahead, investment funds will flee risk assets for safe assets, and new business plans will be put on hold until we recover. Since every dollar spent into the U.S. economy is someone’s income, lower spending means lower incomes.  This path of rational fear threatens to push us into severe recession territory. Stage two of the economic infection gets very bad, very quickly. We panic save ourselves into poverty.

Remember when Disney shuts down its productions, the guys holding the boom mics lose their jobs and their incomes. When Broadway’s theaters close, the guys with hammers and nails who build sets are out of work. Contractors lose jobs because people drop home improvement plans. Waitresses can’t collect tips from empty diners. Factories get fewer orders for appliances, machinery, cars, and workers get hours cut. Some lose their jobs. College kids get job offers rescinded because companies need to rein in their spending when sales decline.

Though no fault of their own, and without much warning, American families get thrown into crisis. This is not something that is going to happen to strangers. It’s going to happen to your friends, your neighbors, your coworkers, and the people in your church’s pews. It’s going to happen to you if we choose to go down the path of coronavirus catastrophe.

The Way We Fix This

Fortunately, there’s another path. For all the surprise and shock that many of us are experiencing at the idea that our economy and society can be derailed by disease–it feels like we’ve been thrown back into the pre-modern Dark Ages–the coronavirus gives us economic policy advantages we rarely have: we know exactly what the problem is, we can see it happening right in front of us, and it is not due to excesses that need to be wrung out of the system through liquidations and rearrangements of the economy. This isn’t a dot com bubble, it’s not the mortgage bubble, it isn’t some inflationary spiral we need to stem.

In other words, we know what’s happening. Even better: we know what to do about it.

We need to put cash into the hands of the American people as quickly as possible.

I propose $1,000 of cash for every U.S. citizen. A family of four gets $4000 per month for the duration of the crisis. Bigger families get more. This boost of income will allow Americans to build emergency savings without having to drastically cut down on their spending.

This will not stop all the job losses but it will make them less painful. More importantly, it will make it far less likely that we go from stage one to stage two. It will make it more likely that the economic emergency can be contained to frontline effects.

We could accomplish much of this through a payroll tax cut but that becomes less likely to be effective every day because it only helps the working. A week ago, I told the Trump administration that this would be a crucial and effective measure. But now the cost of social distancing has become even clearer and I am convinced this would not be adequate. You can’t cut the payroll tax of someone who gets cut from the payroll. And, in any case, the House Democrats we need to pass any emergency measures have rejected the sort of payroll tax cut they fought for when Obama was president.

What we need to do now is just start cutting checks for everyone. We need to go deep and broad. The checks go out to hardworking American families who have jobs, workers who lose their jobs, stay at home moms and dads, young people, and old. And, yes, even some of the deadbeats who do not really deserve them. But that latter category is pretty damn small and paying off a few undeserving people is a small price to pay for stopping the economic ruin threatened by coronavirus.

There will be some who would prefer to see the government attempt to raise demand in the economy by engaging in big public works projects such as repairing our ailing infrastructure. We do not have time for that. Nothing is shovel ready. And it would fail to get the cash where it needs to be: in the hands of American households all over the country.

Others will worry about the precedent set by a huge program of government “handouts.” But the usual objections to such things do not apply here. There’s no moral hazard risk, no rewarding people for bad behavior, or socializing the costs of risks undertaken for private gain. This isn’t the launch of a big government spending program or a new welfare system. It’s just a temporary series of cash payments that the private sector will be free to use as it chooses. Instead of big government, American families will decide what to do with the cash. If it helps, think of this as a refund on the taxes we’ve paid all these years that have helped build our government into one of the few institutions in the world that can undertake this kind of spending in an economic emergency.

Within Our Means

Can we afford it? The financial markets have already delivered the answer and it is an emphatic “yes.” Interest rates are incredibly low. Long-term rates are the lowest they have been in the history of our country. We have plenty of “fiscal space” to borrow right now. There’s no reason to fear deficit spending now. Just as it makes sense to refinance your mortgage and withdraw some equity if cash is tight and rates are low, it makes sense to borrow now to support the economy. This is something like a cash-out refinancing of the American economy.

It’s rare that an economic emergency comes with so much warning and with such an obvious remedy. We know what needs to be done and we know it needs to be done now. History will look back on us as the generation that took a stand against the coronavirus or the generation that let it bring us down.

I say we take our stand.