Washington Wednesday - Inoculating the economy

MEGAN BASHAM, HOST: It’s Wednesday, the 25th of March, 2020. Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Megan Basham.

NICK EICHER, HOST: And I’m Nick Eicher. It’s Washington Wednesday.  

The new coronavirus threatens not only people, but the economies they depend upon. As soon as it became clear COVID-19 would bring much of the country to a standstill, investors panicked, markets tanked, and Congress started talking about economic stimulus.

BASHAM: Republicans and Democrats differed on the details of where the government money should go, and what pet projects to stuff in. But they didn’t fundamentally disagree on the scope. It had to be big. Really big. As in trillions-of-dollars big.

EICHER: Joining us now to put that into perspective it is Stan Veuger. He’s a resident scholar at the American Enterprise Institute, where he studies politics and economics. Good morning!

STAN VEUGER, GUEST: Thank you, Nick. How are you doing? Thanks for having me on. 

EICHER: I’d like to start by putting this stimulus package into a historic context.  As a share of GDP, how does this compare to other times when the government made some drastic moves in response to shocks to the economy?

VEUGER: Well, it’s very large. I think the most direct comparison would be to the 2008 policy response which came much later, well after the financial crisis had already unfolded. And was really only about half the size of the package we’re talking about already. So it’s really quite large. Congress is now talking about a package that’s around $2 trillion big, maybe a little less than that, and that would be close to 10 percent of GDP. 

EICHER: Have we had something as big as 10 percent? 

VEUGER: Well, of course during World War II, we had very, very large deficits and so that would be the only situation where we’ve undertaken more dramatic fiscal policy. The goal there was to defeat the Nazis and not so much to keep people employed and maintained. So, I think it’s really without comparison in that way. 

EICHER: Stan, in broad strokes, what are the pros and cons?

VEUGER: Well, I think the pros is that Congress has really understood that it needs to take dramatic action quickly because we’ll see, I think, within a week or so that millions of people have lost their jobs. Millions of businesses are struggling, especially in the sectors that are entirely shut down. And so the fact that Congress realizes that it has to take aggressive action as soon as possible, I think, is a big pro. The composition of the package, then, is the other issue. And I think there that Congress is doing an OK job. I think there’s a realization that both individuals and businesses and state and localities need support. I would say that one weakness so far has been that there doesn’t seem to be enough urgency in combating the direct public health threat, right? So, we haven’t seen that much of a focus on building up healthcare resources, making, manufacturing protective equipment and facial masks and ventilators and respirators much more attractive to businesses. And so that, I would say, is the weakness. What you can think of as the pure economic response, I think they’re doing OK. I worry that some of the programs are smaller than needed and we’ll be back in the same boat we’re in a week from now. 

EICHER: One of the sticking points in negotiations over this package involved Democrats’ rhetoric on corporate “bailouts.” I have a view on that, because the “bailout” tag tends to apply when the discussion is around bailing out a company’s poor decision-making—and not typically due to a black-swan event like this. But I’d like to hear your view on the appropriateness—or not—of this package.

VEUGER: I think support for businesses is appropriate here. As you said, I think usually the reason why we don’t like bailouts is because they encourage moral hazard and they reward people for taking risks they should not have taken. Of course that is not the case here for all the bars and restaurants and barber shops and dry cleaners and taxi drivers that are just incapable of operating. I think for those businesses—many of which are relatively small—it’s impossible to plan for or to insure against this kind of shock. And so I think it is appropriate for the government to step in and help them make it through these difficult times. Especially because in many places the government has forced those businesses to shut down. On the larger corporate side of the ledger, I think the government can reduce its activity a little bit. I think many of the larger corporations have better access to creditors. In many cases, they’ll be able to go through the bankruptcy process in more of an organized way. People’s personal savings and businesses aren’t at stake as much. And so there you can use a regular process a little more. So I think what Democrats were right to be concerned about in a previous version of the Senate bill was that there was a lot of money appropriated for non-transparent goals. That’s been reduced a little bit now in the more recent versions of the agreement. So, we originally had a $500 billion fund where the legislative language was vague enough where it seemed like the treasury could do whatever it wanted. 

EICHER: And part of what I was getting at was all of those little bits of Green New Deal—

VEUGER: Yeah, so on the House side, for sure, there was a lot of also—to put it politely—tangentially relevant legislative language, yes. 

EICHER: You recently wrote about the need for the stimulus plan to target the needs of small businesses. If you have a job at a small business or you run one, that idea makes a lot of sense. But can you explain what that’s an overall good for the national economy?

VEUGER: The way it looks like the plan is going to be implemented is there will be a facility of about $350 billion of basically forgivable loans for businesses that have fewer than 500 employees. And so those loans would cover payroll and a number of other inevitable expenses like utilities and rent and mortgages. And those loans would become forgivable at the end of a period—probably around late June—if you keep your payroll intact. Then there’s a separate facility that runs through the Federal Reserve—and this is where now much of that $500 billion I mentioned earlier is going—where the Federal Reserve will buy up corporate debt both in the secondary markets and potentially also some primary and they will also set up a small business lending facility that would go through the regular financial system. But those loans would be loans, right? They would not be forgivable. So it’s sort of a two-pronged approach. The total sum of money is very significant. So that would be, I think, the way it’s going to end up. 

EICHER: Basically what we’re discussing here is the idea of liquidity so that businesses have money, actually, to operate. 

VEUGER: Yes, so that’s—on the loan side it’s obviously about pure liquidity. On the forgivable loan side, it’s also about solvency, right? So, those loans would be forgiven if you keep your payroll intact and that would effectively make them a grant. So it’s a mix of pure loans to bridge liquidity issues and direct cash infusions to make it so that businesses that are completely shut down—right, like if you’re a restaurant, borrowing more money to keep your employees for the next two months is not going to make it feasible for you to survive through this period of crisis. Whereas if a lot of that borrowing ends up being forgiven, the picture becomes very different. So it’s a mix of liquidity and solvency that’s being addressed. 

EICHER: One other part of this plan involves a stipend for individuals—we’re talking direct checks from the government to families. Completely understandable for people who have lost their jobs or seen a reduction in pay or hours. But, again, talk about the broader economic perspective. How does that help the overall economy to recover?

VEUGER: Well, so there, I mean, the problem we have right now is not exactly one of a shortfall of demand, right? In many cases we actually don’t want people to go out and do stuff and purchase goods and services. And so what these payments are meant to do is to help people just meet their rent, their mortgage payments, buy food for their families, those kinds of expenditures. And the idea behind just a broad based program of sending checks is one you’ll reach everyone—even the people you don’t reach through, for example, the small business program. And then secondly, obviously, a lot of people are just in a very different financial situation than they were two weeks ago. And so to keep the parts of the economy afloat that are not shut down, that can continue to function, I think there is some room there to make sure that demand doesn’t completely fall off a cliff. 

EICHER: Stan Veuger is with the American Enterprise Institute. Thanks for joining us today.

VEUGER: Of course, Nick. My pleasure.

(AP Photo/Patrick Semansky) The U.S. Capitol is seen from the Russell Senate Office Building on Capitol Hill in Washington, Thursday, March 12, 2020. 

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