Congress Goes Big, States Play a Vital Part in Recovery, and a Dollar Crunch Takes Hold


  • Policy Tries To Keep Pace With The Pandemic
  • The State of Local Responses to COVID-19
  • Emerging Markets Suffer Dollar Deprivation


This is my third week of working exclusively from home. To put it mildly, it has been challenging. I spend all day, every day with my wife and our youngest, who was sent home from her university campus to complete the semester virtually. That amounts to a lot of togetherness, which isn’t always a good thing. We are competing with one another for hot water, treadmill time and broadband access. Intervals where our wireless connectivity is interrupted are filled with sheer panic.

Some of the conversations I’ve shared recently about the economy are also laced with sheer panic. Markets have been volatile, and the data are setting the wrong kinds of records. I’ve tried to counsel patience and perspective, but the only cure is a strong policy response. That response is finally starting to match the problem.

Viral outbreaks usually follow a predictable pattern. Cases initially grow exponentially, before slowing down as patients recover and serve as barriers to further contagion. (This is referred to as “herd immunity.”) The pace and duration of contagion are dependent on many things, one of which is the frequency with which we come into contact with one another. Public health officials around the world have consequently implemented social distancing measures of varying severity.

Weekly Economic Commentary - 03/27/20 - Chart 1

Sheltering in place minimizes the risk of infection, but is nonetheless damaging to commerce. Businesses that feed us, entertain us, transport us and provide a range of other services have been severely impaired. Some have been forced to close, leading to an increasing volume of layoffs. Initial claims for unemployment insurance in the United States hit a record level this week, which was four times the previous mark.

Incoming global indicators over the next few weeks will paint a similarly dire picture. Many countries, including the United States, are entering a recession.

There is certainly hope that the viral outbreak will be contained and that normalcy will eventually be restored. But health officials, the private sector and consumers may remain hesitant for some time. This means that while a good portion of lost activity may be regained quickly, some sectors will lag, leaving a considerable number of businesses and workers at risk even after the virus transmission has subsided.

“Developed countries are busting their budgets to fight recession.”

To help, governments are stepping forward. This week, the Group of Twenty (G20) nations pledged to collectively spend $5 trillion to hasten economic recovery. Of that total, $2 trillion will come from the U.S. Coronavirus Aid, Relief and Economic Security (CARES) Act, which moved through Congress this week. The bill includes a number of interesting features:

  • Checks will be sent to households in the hope of carrying them through this difficult period and stimulating consumption. The disbursements will be means-tested. Unemployment benefits will be increased and extended to independent contractors who are not on traditional payrolls.
  • Large companies that have been directly and deeply damaged by the effects of the coronavirus will receive direct aid. The help will come with the condition that they retain their workforces. Decisions on which sectors will receive aid will certainly be difficult ones.
  • Small companies will be eligible for loans to bridge them through difficult times. Loans can turn into grants if firms retain workers. This should help limit business failures.
  • Aid is also available to states, whose finances are cyclical and who are bearing the brunt of treating the sick. (See following article.) Aid to states was an important part of the American Recovery and Reinvestment Act of 2009 (ARRA), helping to avoid layoffs in local government and the associated drop in public services.

All of these elements should provide a short-term financial and psychological boost that is urgently needed. We’ll be discussing the packages in detail in the weeks ahead.

Weekly Economic Commentary - 03/27/20 - Chart 2

In the medium term, the U.S. government has now joined other countries in putting Modern Monetary Theory into operation. The lines between fiscal and monetary policy have been blurred: the Department of the Treasury is providing $450 billion in seed capital for the Federal Reserve to use as leverage to buy loans and investments. These purchases will be designed to help the economy and the financial markets recover.

Reciprocally, the Fed will undertake open-ended quantitative easing, which will absorb a good fraction of the Treasury bonds that will be issued to pay for the congressional stimulus program. This will help interest rates remain in reasonable ranges.

“Modern Monetary Theory has been made operational.”

Purists will certainly feel uneasy about this apparent compromise of central bank independence. But with interest rates at zero in most major markets, traditional levers of monetary policy have been exhausted. Financing fiscal efforts is the best way for central bankers to continue to pursue their mandates. And it is worth noting that central banks have historically played key roles in lending during periods of crisis.

It will certainly take some time to open these new financing channels and get capital to the companies and markets that need it most. Bureaucracies move slowly, and will move even more slowly while operating under public health restrictions. As a result, the economic recovery may not take deep root before late summer.

Some components of the government stimulus programs will not work as well as others. But the efforts are scaled to match the substantial challenges we face.

Similarly, I have tried to scale my responses to my family’s current challenges. I tried ordering a bigger water tank, another treadmill and a faster router. Unfortunately, everything is on back order. The misery index in my house is rising rapidly.