We Need a Coronavirus Fiscal Stimulus That’s Bigger Than $2 Trillion. And We Need it Now.

The risk of going too small on stimulus is large, while the risk of going too big is almost nonexistent.

Josh Bivens March 23, 2020

The fiscal response should continue until we reach full employment. (Photo By Bill Clark/CQ-Roll Call, Inc via Getty Images)

Con­gress is tak­ing up a fis­cal sta­bi­liza­tion pack­age this week to cush­ion the eco­nom­ic shock of the coro­n­avirus. A nat­ur­al ques­tion aris­ing in this debate will be how big should it be?” The expe­ri­ence of the Great Reces­sion argues clear­ly that the answer to this has to be as big as is need­ed.” This is unsat­is­fy­ing but is the most impor­tant answer to this ques­tion so we don’t repeat the fis­cal pol­i­cy blun­ders of the past.

A Trump administration slush fund will not spur the needed growth.

For those who absolute­ly need a num­ber to focus on, the like­ly cost of a fis­cal boost suf­fi­cient to restore eco­nom­ic health by the end of 2020 starts at $2.1 tril­lion — but it could be more, and fis­cal pol­i­cy should be set to deliv­er more if con­di­tions war­rant. And con­di­tions con­tin­ue to wors­en. The expect­ed hit to the econ­o­my would mean a job loss of almost 14 mil­lion work­ers by summer.

The impor­tance of mak­ing fis­cal aid con­di­tions-based is illus­trat­ed by our response to the Great Reces­sion in 2008 and 2009. In 2009, the Amer­i­can Recov­ery and Rein­vest­ment Act (ARRA) allo­cat­ed rough­ly $800 bil­lion over two years for fis­cal stim­u­lus. It turned out to be sub­stan­tial­ly under­pow­ered rel­a­tive to the pri­vate-sec­tor shock to demand.

Most notably, ARRA ran out far before pri­vate-sec­tor demand was healthy enough to gen­er­ate accept­able lev­els of unem­ploy­ment. We should not make the same mis­take this time — fis­cal aid needs to be ongo­ing so long as the econ­o­my remains weak. This is espe­cial­ly true giv­en the rad­i­cal uncer­tain­ty sur­round­ing the cur­rent cri­sis, where a return to eco­nom­ic nor­mal­cy will begin only when pub­lic health mea­sures allow it.

We can, how­ev­er, put a low­er-bound esti­mate on the size of aid need­ed to restore eco­nom­ic health by the end of 2020 (an ambi­tious but total­ly real­is­tic goal). Today, Gold­man Sachs’ fore­cast­ing group released pro­jec­tions of growth in U.S. gross domes­tic prod­uct (GDP) for the rest of the year. Their fore­casts were pes­simistic in the short run — a 6% GDP con­trac­tion in the first quar­ter and a 24% con­trac­tion in the sec­ond quar­ter. But even as of a few days ago a num­ber of invest­ment banks were fore­cast­ing sec­ond-quar­ter con­trac­tions of greater than 10%, and the pat­tern has been that these esti­mates grow every day. In short, we should take these types of fore­casts very seriously.

In the third and fourth quar­ters, Gold­man Sachs projects growth of 12% and 10%, respec­tive­ly, as the econ­o­my bounces back from the coro­n­avirus shock. Giv­en that the economy’s trend growth before the cri­sis was around 1.9%, GDP at the end of 2020 will still be 4.9% small­er than it would have been absent the coro­n­avirus shock. Fill­ing this demand gap with fis­cal stim­u­lus implies we would need rough­ly $1.1 trillion.

The enor­mous con­trac­tion in the first half of the year pro­ject­ed by most fore­cast­ers is con­sis­tent with job loss of almost 14 mil­lion work­ers by June. While much of this job loss would be recouped if the rapid pro­ject­ed growth in the third and fourth quar­ters comes to pass, we should not be com­pla­cent about this.

The rapid return to growth pro­ject­ed in Q3 and Q4 is itself dri­ven by assump­tions that fis­cal stim­u­lus pass­es. For exam­ple, Gold­man Sachs (and oth­er banks like JPMor­gan Chase) assume a $1 tril­lion pack­age will pass this com­ing week or the next. So, the $1.1 tril­lion stim­u­lus must hap­pen on top of this under­ly­ing assump­tion in order to deliv­er a healthy econ­o­my by the end of the year. There­fore, a fis­cal res­cue pack­age that makes the econ­o­my whole by the end of 2020 would require $2.1 tril­lion. But, again, the real num­ber need­ed could be more, and fis­cal pol­i­cy should be con­di­tions-based and deliv­er more if tar­gets aren’t met.

Is it pos­si­ble that the econ­o­my could remain weak even with that much stim­u­lus? Absolute­ly. For one, this num­ber assumes the fis­cal stim­u­lus is well-tar­get­ed and not squan­dered on uncon­di­tion­al give­aways to busi­ness. But the major­i­ty of the Trump admin­is­tra­tion plan for $1 tril­lion includes such uncon­di­tion­al give­aways. A Trump admin­is­tra­tion slush fund will not spur the need­ed growth.

But even well-tar­get­ed stim­u­lus could end up being under­pow­ered. The opti­mistic sce­nario for com­ing months is that a fast, large, and well-tar­get­ed fis­cal response com­bines with progress on pub­lic health inter­ven­tions (test­ing, test­ing, test­ing) to allow the econ­o­my to start grow­ing rapid­ly start­ing in July. If many work­ers laid off in the pre­vi­ous three months have received fed­er­al sup­port and busi­ness­es have been giv­en loans and oth­er aid to get through this quar­ter, then many labor mar­ket match­es that exist­ed at the begin­ning of March can be reestab­lished. Shut­tered restau­rants, for instance, can open back up and be large­ly staffed with the same peo­ple who were staffing them in February.

But the longer work­ers and busi­ness­es have to go with­out aid and search des­per­ate­ly for oth­er eco­nom­ic cop­ing strate­gies, the hard­er it will be to reestab­lish these match­es, and the longer recov­ery will sput­ter. Fis­cal aid should con­tin­ue until the job of reach­ing full employ­ment is done.

Final­ly, we should note that the risks of doing too much ver­sus doing too lit­tle are extreme­ly asym­met­ric. Tra­di­tion­al­ly, the risks of over­shoot­ing on stim­u­lus is that pol­i­cy­mak­ers might spark infla­tion or spike inter­est rates. But both infla­tion and inter­est rates were extra­or­di­nar­i­ly low even before the coro­n­avirus shock when unem­ploy­ment rates were his­tor­i­cal­ly low. The risks of spik­ing this seems very remote, and the down­sides to tem­porar­i­ly caus­ing them to rise faster than expect­ed are extreme­ly mild. The risk of doing too lit­tle fis­cal stim­u­lus are huge — poten­tial­ly years of ele­vat­ed job­less­ness and eco­nom­ic suffering.

As Con­gress and the admin­is­tra­tion debate the fis­cal sta­bi­liza­tion pack­age in com­ing days, $2.1 tril­lion by the end of 2020 is the scale they should be think­ing on, unless sub­se­quent eco­nom­ic fore­casts dete­ri­o­rate even more. Fur­ther, aid must be set to auto­mat­i­cal­ly con­tin­ue if the econ­o­my remains weak as 2021 starts. We need to start learn­ing from our mis­takes from the past.

This post first appeared at the Eco­nom­ic Pol­i­cy Insti­tute.

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