Is $2 Trillion Too Little, Too Late?

Despite market rebound, economists say only a major suspension of mortgage and debt contracts and reimbursement of pay may stave off a coronavirus depression.

Senate Majority Leader Mitch McConnell
Senate Majority Leader Mitch McConnell returns to his office as negotiations continue on a $2 trillion economic stimulus in response to the coronavirus pandemic in Washington on March 24. Chip Somodevilla/Getty Images

Despite a record rebound in the financial markets on news that the U.S. Congress’s nearly $2 trillion rescue plan is imminent, some economists say the legislation may not be enough to blunt the sudden shutdown of so much economic activity from the coronavirus pandemic. 

What is needed is not a “stimulus,” as the rescue package announced early Wednesday was called, or one-time payments to businesses and workers, but rather an across-the-board suspension of private debt payments and a nationwide program under which the government directly reimburses pay to laid-off employees, as other countries have done, some critics say. Only such an unprecedented government intervention can prevent permanent economic devastation from the virus-induced work stoppage, even if U.S. President Donald Trump manages to reopen parts of the economy in the next several weeks in defiance of his health experts, as he said Tuesday he was eager to do. 

As news spread that the bill was close to completion, the Dow Jones on Tuesday posted its largest percentage and point gain since Franklin Delano Roosevelt launched the New Deal in 1933, leaping by 2,113 points to finish at nearly 20,705. But that recovery came only after financial markets fell more in March than in any month since September 1931, suggesting the depression-sized stakes of the U.S. rescue package, the largest ever conceived by Congress. 

The most pressing issue is that with economic activity across the country ceasing even more quickly than it did during the Great Depression—with businesses shuttering and workers laid off at a pace unprecedented in U.S. history—defaults are expected to be imminent on everything from corporate debt to mortgage payments. 

As a result, some economists say, the more appropriate response should be a broad-based “holiday,” to use a Depression-era term, suspending foreclosures, evictions, bankruptcies, and other contractual obligations that would cause long-term damage to the economy. The federal government should step in, possibly invoking implicit force majeure clauses in private contracts, to guarantee such suspensions of debt payment and also to ensure that the millions of workers laid off or furloughed are paid.

“The very term ‘stimulus’ is indicative that people don’t understand the nature of this downturn,” said the Nobel Prize-winning economist Joseph Stiglitz of Columbia University.  “There’s no awareness of this on Capitol Hill at all. In 2008 we were worried about the potential consequences of a credit freeze. Then it was top-down: a freeze of the banking system. But this is bottom-up and has not been adequately talked about: If workers don’t have wages, they can’t pay their bills. They’ll be buying food [with stimulus money], but their balance sheet is still going to be ruined.

“The answer is we need no evictions, no foreclosures on all properties, and the government should guarantee pay,” Stiglitz told Foreign Policy. Credit card companies should also be pressed to issue “a stay on interest on all debt.” 

The Trump administration has declined to apply pressure directly to commercial lenders, announcing last week that mortgages guaranteed through the Federal Housing Administration and Fannie Mae and Freddie Mac would not result in foreclosures or evictions for at least 60 days. The giant rescue plan that was completed shortly after midnight Wednesday would funnel out enormous amounts of cash to individuals and businesses, but with no assurances about what happens in the medium to long term to their jobs or debt obligations. It would grant about $500 billion in direct payments to people, in two phases of checks of up to $1,200 per individual making up to $75,000 a year. Additional payments for families with children could total $3,000 for a family of four. Another $500 billion, the most intensively negotiated portion, would go to corporations for unspecified purposes, to be overseen by an inspector general and congressional panel. The package would also reportedly grant immediate tax rebates of up to $1,200 per taxpayer; offer $350 billion subsidized loans to small businesses that maintain their payrolls and direct loans to the hardest-hit industries; relax income tax rules and deadlines; and give financial aid to students, schools, and colleges. 

Unemployment insurance benefits in the bill would give recipients 100 percent of their salary for an extended period, but Stiglitz and other economists worry that such indirect methods requiring workers to apply online could crash the system. “I worry if we have the capacity to deliver checks to everybody in two weeks, or two months. I also worry whether the unemployment insurance system is capable of expanding tenfold in two weeks,” Stiglitz said.

Some economists say the Danish approach of directly guaranteeing the better part of salaries through companies, also recently adopted to differing degrees by the German and British governments, is a better remedy. Last Friday, Britain’s chancellor of the exchequer, Rishi Sunak, announced an unprecedented intervention in the British economy that would cover 80 percent of worker salaries for at least the next three months up to $2,900 a month, a figure pegged at more than the average income. Earlier, the Danish government said that companies that would otherwise be forced to cut staff by 30 percent or lose more than 50 people will be covered for 75 percent of their wage bills for three months. The German government, meanwhile, is planning to expand a program to guarantee wages and prohibit eviction due to not paying rent between April 1 and Sept. 30.

“Keeping workers on the payroll, with the cost covered by the Federal government, is very important,” said the Harvard University economist Dani Rodrik, president-elect of the International Economic Association. “It is essential to instill confidence and reduce the insecurity of job loss that will otherwise result, even with generous unemployment compensation. So yes, the Danish (and German, and UK) way is the right way to go. There should be a separate facility to help small and medium sized businesses to help with their liabilities.”

The G-7 nations on Tuesday issued a common call from finance ministers and central banks pledging “coordination on our dynamic domestic and international policy efforts” against the health and economic impact of the virus. And G-20 leaders are expected to deliver an “action plan” later this week. But in practice, the United States has gone its own way. Trump, in particular, has been notably reluctant to inject the federal government too much into economic activity or health responses, declining to mandate anything from industry despite signing the Defense Production Act last week. On Tuesday, Federal Emergency Management Agency chief Peter Gaynor said the government for the first time would use the new act to order about 60,000 test kits.

Stiglitz said the government could work with private companies through the tax system, since they have to fill out a quarterly return anyway, supplying them with a new tax form so that reimbursement to the companies for laid-off workers is simply subtracted from what they owe. “Denmark has done it most clearly,” he said. “They told employers to send workers you don’t want home, lay them off, but pay them, and we’ll pay you.” 

Other economists agree that an unprecedentedly swift shutdown of economic activity calls for an unprecedented response by the government. “We are in worse times than in anybody’s memory,” said Lawrence White of New York University, who noted that the devastation of the Great Depression took four years to ruin the economy while the current stoppage is happening in weeks. Both lenders and borrowers in the debt equation need to be encouraged or ordered to stand off from using the typical means of bankruptcy and restructuring. “I can imagine a faster process,” he said, to “encourage shops to reopen and provide liquidity and loans, whatever is needed to get entrepreneurial processes going again.” 

Such efforts are needed now because even in the best case, said White, “I  can’t imagine a sharp ‘V’ [shaped recovery] where we declare the coronavirus threat over. It ain’t gonna be full employment on June 1.”

March 25: This story was updated with news of the rescue package.

Michael Hirsh is a senior correspondent and deputy news editor at Foreign Policy. Twitter: @michaelphirsh

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