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Trump and Other Leaders Grapple With Limited Economic Remedies for the Virus
With interest rates already at rock bottom and tax cuts too slow and unfocused, the U.S. president may find his best coronavirus response is a giant stimulus. But will he get one?
Rattled by Monday’s historic decline in the stock market, U.S. President Donald Trump is proposing a slate of measures to help contain the economic fallout of the coronavirus, which is sparking fears of recession from Japan to Europe and even in the United States. But the administration’s preferred remedies will face both an uphill fight in Congress and doubts over how effective they would be.
After markets closed up Tuesday on hopes of some kind of fiscal stimulus, the Trump administration presented a vague combination of proposals that might include another tax cut (this time of the payroll tax), combined with paid sick leave and other support for hourly workers. Reports indicated that Trump is pushing for a total elimination of the payroll tax through the end of the year, which would cost about $900 billion and would be larger than the Obama-era stimulus in the wake of the financial crash.
But a day after promising “very major” economic relief, the president had little to say following a midday meeting with Republican senators. “I was just with the Republican senators and they were just about all there, mostly all there and there’s a great feeling about doing a lot of the things,” he told reporters.
Other options could include loan support for cash-strapped businesses hit particularly hard by the virus; one idea gaining traction is a federal bailout for oil and gas producers struggling under the oil-price war unleashed by the virus, in addition to government aid for industries such as travel and hotels that have suffered a drop in business as the outbreak has grown.
And, true to form, Trump has also continued to pressure the Federal Reserve to further cut interest rates—the central bank already slashed the prime lending rate by half a percentage point in an emergency move last week—to kickstart an economy that by some indicators is looking wobbly.
In the end, whatever economic medicine Washington comes up with to battle the effects of the COVID-19 outbreak will be largely determined by Congress—especially the Democrats, who control the House.
Most Democrats prefer targeted measures like sick leave that will deal directly with those affected by the outbreak or the effects of school and business closures. They, like many Republicans, are not keen on the idea of payroll tax cuts, which would benefit only those with a regular job and which would trickle into consumers’ pockets in small amounts and slowly, lessening its impact as a tool to revitalize a lagging economy. Other critics of the payroll tax cut, including former economic advisors to past administrations, argue that, though such cuts were useful between 2011 and 2012 as the country struggled to recover from the financial crisis, they’re the wrong tool to deal with the fallout of the coronavirus.
A payroll tax cut “is better than doing nothing, but it doesn’t address the problem directly,” said Adam Posen, the president of the Peterson Institute for International Economics. “It seems an unnecessary expense with too little ambition.” He said he favored more targeted policies that would allow people to stay at home and mitigate the load on the health care system as the outbreak runs its course, rather than some form of broad macroeconomic stimulus.
And that’s because the broader conundrum facing the administration, like its counterparts in Asia and Europe, is that the economic harm done by the virus isn’t best treated with traditional forms of stimulus, like tax cuts and lower interest rates. That’s one big difference with the financial crisis a decade ago: Then, throwing money at the problem helped, whether through liquidity injections for banks, lower interest rates, or more government spending, because a lack of money was at the root of the problem.
Even then, massive government stimulus struggled to get companies to resume the kinds of investments they were making before the crisis. Here, getting a few extra bucks into people’s pockets won’t somehow make them fly or eat out more when flights are cancelled and lockdowns are in place.
“This is analogous to the response of corporate investment in the financial crisis: We’d be pushing on a string,” Posen said. “Basically, in the affected sectors, people are not going to be spending anyway.”
Trump’s other go-to option to spur the economy is interest rate cuts: He has repeatedly badgered Federal Reserve Chairman Jerome Powell to cut U.S. interest rates as low as those of other central banks, such as in Japan and Europe. On Tuesday, he attacked “our pathetic, slow-moving Federal Reserve” for not cutting rates faster, even though it did so just last week.
But interest rate cuts are helpful when the problem in the economy is a general lack of credit: If business loans and mortgages are made cheaper through lower rates, that should stimulate more business investment and boost the housing market, driving broader economic growth. Tight credit isn’t exactly a problem in the United States right now—the federal funds rate is now 1 percent to 1.25 percent, historically low (though higher than it was in the aftermath of the financial crisis).
And lower rates are hardly a panacea. Economists have found that when interest rates are already low for prolonged periods of time, additional rate cuts lose much of their oomph—doubly true when the rates are already close to zero.
“They’re both running out of ammunition, and the ammunition is less effective,” Posen said. “A supply shock, as opposed to a financial shock, is particularly ill-suited to monetary stimulus. Nobody should kid themselves, least of all the president, that monetary policy is the answer.”
All of which, as countries around the world seek to offset the impacts of the virus, makes old-fashioned fiscal stimulus—more government spending on things like expanded unemployment insurance, or emergency lines of credit, or paid sick leave—seem like the more practical option. Countries including Japan, South Korea, Australia, Germany, Ireland, and Italy have all pledged multibillion-dollar stimulus packages, and European Union leaders will meet this week to discuss a coordinated economic response to the crisis.
On Wednesday, the U.K. unveiled an expansive new budget that includes 30 billion pounds in stimulus to counter the effects of the virus. That came just hours after the Bank of England cut its interest rate by half a point to 0.25 percent as part of a double-barreled effort to keep the sluggish British economy from retracting.
The question is whether those big economies will have enough maneuvering room to deploy the kinds of large-scale fiscal stimulus that might be necessary to counteract any prolonged slowdown, and especially to make a difference to global growth. The big G-7 economies, notes Fitch Ratings agency, are among the weakest countries in terms of public finances; the countries that are in the best shape, budget-wise, are also the smallest and can make the least contribution to a global turnaround.
“Countries where fiscal stimulus could provide a fillip to global growth have less fiscal space available for doing so,” Fitch said in a report.
Mar. 10: This story has been updated with further details of economic relief from the White House.
Mar. 11: This story has been updated with details from the U.K.