Can Rich Governments Spend Their Way Out of Coronavirus Recession?

Should the U.S. government send every working American a $1,000 check? That’s just one of the proposals on the table to address the economic damage from the actions taken to limit the spread of the coronavirus. Some have recommended cutting or even eliminating the 6.2% payroll tax paid by workers, or perhaps eliminating the tax paid by both workers and employers.

One thing’s for sure, the recent monetary policy moves by the Federal Reserve and other central banks haven’t made much of a difference which has left people focusing on fiscal policy.

IMF Managing Director Kristalina Georgieva said pressure was growing by the hour for strong, coordinated fiscal stimulus to limit the damage from the fast-spreading outbreak.

Harry Broadman, managing director of Berkeley Research Group and a former senior U.S. trade official, said “a real abyss” loomed if the executive and legislative branches did not soon do “something economically meaningful on the fiscal side.”

White House economic advisor Larry Kudlow said that if the United States passed a payroll tax holiday that lasts until the end of the year, it would put $800 billion into the hands of consumers and businesses.  That’s something the President has favored for weeks. Of course the money would come right out of federal coffers, putting bigger holes in Social Security and Medicare.

The U.S. Chamber of Commerce on Monday urged Trump and top leaders in the U.S. Congress to cancel all payroll taxes paid by employers for the months of March, April and May; pass new legislation to expand and streamline loan programs for small businesses; and provide loans and loan guarantees to employers with more than 500 employees experiencing significant revenue loss as a result of the outbreak.

The three largest airlines, Delta, United, and American, are talking to the federal government about a bailout program that could reach $50 billion, but don’t call it that.  President Trump said at his virus update press conference that the U.S. will back the airline industry 100%.

Kudlow, Treasury Secretary Steven Mnuchin and other White House officials have made the industry a priority; last week Mnuchin told Americans they should keep flying domestically, even as officials recommended limiting nonessential travel.

Kudlow said:

“Flying is such an integral part of our economy.  This is not a question of systemic failure or bankruptcies. This is really a cash flow liquidity question.”

“We don’t see any of the airlines failing. But if they get into a cash crunch we’re going to try to help them. We’re consulting with the House and Senate to see what works. And of course the Treasury Department and the Fed have enormous powers on this.”

He added he sees the aid as “a liquidity fix, not a bailout.”

Senate Minority Leader Chuck Schumer (D-NY) wants a $750 billion stimulus spending package, which he might introduce as early as Tuesday.

No matter what steps the U.S. or other governments take, they still face the same problem.  By asking, and in some cases demanding, that people not travel, congregate, or even go outside, they are limiting the ways in which people can spend money.  Any stimulus or similar package won’t stop a recession, but it might supercharge the economy in the months after the virus finally subsides.

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