Stabilization Policy Priorities in the COVID-19 Pandemic

The most crucial government priority in the COVIRUS-19 pandemic is aggressively fostering the development of effective vaccines and therapeutic treatments. While stabilization policy-making does not directly contribute to the key objective, well-designed action on the macroeconomic front is critical to containing the welfare costs of the variegated social efforts which suppress the spread of the novel coronavirus. The GEM Project has identified three stabilization-policy priorities in the pandemic.

Macroeconomic Policy Priorities

The interrelated stabilization objectives most critical in the extraordinary circumstances of the pandemic are:

• The U.S. Treasury should replace wage income lost to the Pandemic.
• Deep-pocket public subsidies should further be used to prevent business bankruptcies in response to the pandemic.
• Stabilization authorities – the Federal Reserve, the Congress and the Executive Branch – should adhere to the principal lessons learned in 2008-09. Go big and go fast.

GEM modeling indicates that those objectives, if successfully pursued, would effectively manage pandemic stabilization risks. Consider each in turn.

First, replacement of wage income is a no-brainer. It is both ethical and provides a good deal of the support for aggregate spending sufficient to stabilize the economy.

Second, mass liquidity bankruptcies would grievously damage lifetime financial paths of millions of people as well as  disastrously forcing recovery dynamics to accommodate the painfully slow, painfully arrogant justice system’s liquidation processes. In circumstances of extreme instability, debt dominos do double duty. The immediate effect is to substantially aggravate the collapse of total nominal spending. Subsequently, the resumption of growth is badly hindered, similar to the drag experienced in the aftermath of the Great Recession, by the extent to which bankruptcies and associated debt problems are slow to be resolved.

How well we achieve the bankruptcy-prevention objective will greatly influence the course of the post-vaccine economy. At the onset of the pandemic, fiscal and monetary policymakers assigned high priority to income replacement and bankruptcy prevention. They must not lose that focus in the remainder of the pre-vaccine period.

Third, the U.S. central bank can create money. In the circumstances of extreme instability threatening depression, that is a super power. The GEM Project has identified the Fed’s crucial responsibility to prevent a breakdown of the financial system’s capacity to support aggregate demand in circumstances of nonstationary contractions of total spending.

Biggest Likely Policymaker Failure

Based on personal experience, especially during the 2008-09 extreme instability that also significantly threatened depression, I believe that today’s greatest risk to the policy priorities listed above is the failure of fiscal policymakers to do their part. History indicates that Congress quickly loses its focus even when confronting big problems, reverting to a more comfortable state of political in-fighting that typically derails concerted action. Congress’s lack of focus on what was important during the Great Recession was dangerous and embarrassing, forcing the nation to rely almost wholly on the Federal Reserve to avoid depression.

It is an ominous sign that Washington politicians appear to be shifting back to most worrying about political advantage. That shift was evident before today’s news about rebounding employment in May. Given that jobs jump is largely an artifact of the distribution conditions governing the trillions of dollars in COVID-19 relief, the best bet is the successful pursuit of near-term stability will be significantly helped by at least one more large tranche of income replacement. It will certainly not be helpful for Congress to prematurely return to its familiar self-interested, destructive behavior. It is already clear that the President has lost interest in any policy action, however promising, not targeted on rapidly improving capacity utilization prior to the November election.

Blog Type: Policy/Topical Saint Joseph, Michigan