Fiscal Stimulus Should Be Ongoing

5/12/20

Forecasting GDP is fraught any time, but one thing is certain: GDP is going down sharply, and no one knows exactly how far down it will drop. The idea of any sort of a rebound that will get us back to the pre-virus levels anytime soon is nothing short of a pipedream. Things could rebound sharply once the public health issues are resolved, but that looks like something that could be still be years away.

Given the state of our economy, I can’t understand how or why an extension of the CARES Act is at all controversial. We need more. The form of the support, however, is critical. Congress appears to be fighting about making another infusion of funds, but they’re not thinking big enough. We need not only more money, but we need elevated stimulus spending on an ongoing basis, period by period, throughout the span of this current recession. I should be clear to everyone that if the CARES expenditures aren’t continued, a substantial portion of the jobs that had been temporarily saved will be lost.

Increasing federal spending in one period with a subsequent return to the original level of spending in the next means that spending is initially rising and then falling. In economic lingo, we’re imposing an expansionary policy in the first period and a contractionary policy the next. This is no time for a contractionary policy! We should be maintaining — or even expanding — federal spending all the while the GDP is in free fall. And we should only think about cutting back on these recurring expenditures after we can see the bottom with certainty.

We’re a long way from a recovery occurring organically. The best we can hope to do is to mitigate the pain until Covid-19 virus is controlled and a recovery becomes feasible. Prematurely terminating stimulus dollars will set us back to the point where we’ll just have to dig ourselves out of a bigger hole, making the subsequent recovery all the more difficult.