The staggering $2 trillion bill passed by congress and signed by Trump is unique in several respects, including its size that may not be sufficient to get this economy through the COVID-19 pandemic. Its bi-partisan support was surprising, especially given that Democrats had to fight to ensure that the bill included some support for working people in addition to help for large corporations.
In contrast to your “plain vanilla” type recession, this is a self-imposed economic suspension intended to slow the spread of the killer virus while attempting to get it under control. As economic fallout will be greater than a typical recession, a more comprehensive response is required.
A typical recession, or slowdown in economic activity, is the result of deficient aggregate demand composed of total spending by consumers, business, government and receipts from net exports. The standard remedy is a combination of expansionary monetary and fiscal policies. Customary expansionary monetary policy centers on reduced interest rates and expansion of the money supply to make business and consumer borrowing and spending easier. Expansionary fiscal policy consists of a combination of reducing taxes and increased government spending. Federal deficits are automatically incurred through reduced tax receipts, and further increased by government expenditures to compensate for deficient private spending. As the economy expands, deficits are reduced relative to size of the growing economy.
The Great Recession of 2008-09, the most severe economic downturn since the Great Depression of the 1930s, was atypical, more complex than a typical recession, due to its cause. Financial regulations and reforms instituted during the 1930s designed to prevent such a recurrence were thrown out the window during the prosperous 1990s. Politicians bought into the dogma that unfettered capitalism is “self-regulating.” Regulation of financial institutions would inhibit freedom to “innovate,” and would prevent adapting to changing conditions, they alleged.
The disastrous result of irresponsible risk taking, including unsound mortgage lending, and “innovative” credit instruments designed by Wall Street’s most prestigious firms, led to collapse or near-failure of major financial institutions, including Lehman Brothers and American International Group. This house of cards threatened collapse of the entire world economy.
The policy response during the Great Recession went far beyond, the usual “plain vanilla” solutions. Yes, the Fed lowered interest rates to record levels, only gradually raising them through the next decade. And fiscal policy was expanded through small tax cuts and spending increases, though more timid than many critics recommended.
But due to the fragility of the banking system, extraordinary measures included the Emergency Economic Stabilization Act of 2008, Public Law 110-343, often called the “bank bailout of 2008.” The law created the $700 billion Troubled Asset Relief Program (TARP) to purchase toxic assets from banks. Including interest, TARP eventually recovered $426.4 billion from the 441.7 billion invested. Thanks to timely action by the President, the Congress, and the Fed, the economy was on the road to recovery that continued through the remaining Obama years and the first three years of the Trump administration.
While the U.S and world economies were saved from collapse, the 2008 legislation was unpopular, seen as bailing out the banking system and big business, while neglecting citizens, many of whom suffered economically. The lingering anger and resentment of the bailout legislation of 2008 has perhaps taught politicians and policymakers some lessons, which brings us to the current public health and economic crisis.
Fed Chair Jerome Powell observes that “We may now be in recession.” Whether we are formally into a declared recession is irrelevant. With overnight unemployment applications totaling over three million, and near total shutdown of the service sectors of the American economy, we are kidding ourselves if we believe we are not in for a horrendous recession, or worse.
Apart from its magnitude, the major difference between a plain vanilla type of recession and this episode is that rather than caused simply by deficient aggregate demand that can happen for a variety of reasons, this case is a necessarily self-imposed shutdown of a portion of the economy, required to achieve the public health objective of getting on top of the killer virus.
Because this is a self-imposed slowdown of economic activity, the funds intended for business and individuals are not so much for “stimulus,” as they are for economic survival of businesses and unemployed workers, to get them and this economy through this pandemic. In that sense, this is an “economic relief” bill much as a “stimulus” bill. No matter the nomenclature, the objective of government assistance is to keep businesses, individuals, and this economy insofar as possible, “whole.”
Some critics insist that shutting down the economy to this extent is “overkill.” Maybe so, but this is an intractable dilemma giving policymakers a Hobson’s choice. Is it better to “overreact” with negative economic consequences or, to “underreact,” leaving the virus spreading further out of control? COVID -19 simply must be brought under control before the economy can get back to anything approaching “normal.”
In addition to lessons learned during the 2008 bailout, some lessons should have been learned from the Trump 2017 tax bill. Instead of corporate tax savings being used for business investment and increased compensation to employees, as was sold to the public, they were used to increase executive salaries, and for stock buybacks that increase stock values that further enhance executive salaries.
Federal grants and loans to large corporations should not be used to raise CEO and executive salaries, or for stock buybacks. This original legislation proposed by Republicans included a half trillion dollar slush fund to be allocated by Treasury Secretary Mnuchin, at his discretion, with no transparency. It was amended to include transparency and oversight by an inspector general and the congress.
During signing ceremony of the bill, Trump dismissed the need for such oversight. If this huge bill is to attain its objective of keeping businesses solvent and assisting the unemployed through tough times, it is imperative that Congress exercise oversight and responsible use of these moneys.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
