Prioritizing Coronavirus Aid

5/21/20

Here’s one thing we can be thankful for: an independent Federal Reserve Chairman who speaks the truth.

In the spirit of full disclosure, I’m a former Fed employee. I’ve always respected the institution, and I’m proud to have the experience of working there; but I’ve never been as appreciative of its independence as I am now, when so much of our economic policy decision making has been crippled by political infighting.

Chairman Powell summarized the orientation of monetary policy concisely in his recent testimony before the Senate, “We have 20-some million people out of work; we want to do everything we can to create a world where they can go back to their jobs or find new jobs.” Who could argue with that?

Well… apparently Scott Walker, former governor of Wisconsin, who, in a NY Times Op-Ed, argues that the federal government should turn its back on the increasingly perilous financial conditions facing state governments, all of which are contending with sharply reduced tax revenues. (See https://www.nytimes.com/2020/05/20/opinion/scott-walker-coronavirus-bailout.html?searchResultPosition=1)

The Federal Reserve appropriately recognizes that having ready access to credit is a necessary — essential — prerequisite for any recovery to take hold. Think about the myriad companies stressed by the coronavirus, coping with a dramatic reduction of working capital. Funding for many of these companies is their respirator. Without funding, they die.

Still, in this environment, when the economic uncertainty has elevated credit risk throughout the economy, lending has become increasingly perilous. The Fed has taken actions to mitigate these credit risk concerns while still requiring lending institutions to do their due diligence to bear at least a portion of the credit risk inherent in the loans they hold or originate. It’s a tough needle to thread, but the Fed appears to be structuring its policy with appropriate sensibilities, even allowing itself to become the lender of last resort in an expanding number of situations.

Returning to Scott Walker and the laudable goal of implementing policies that “create a world where they (people) can go back to their jobs and find new jobs.” The infrastructure afforded by state and local governments is essential to this end. I prioritize this sector at the top. Even with direct federal support for private businesses, many won’t come out of this pandemic alive. Restaurants, sporting arenas, concert halls and theaters, even colleges and universities are likely to take years to come close to operating with revenues that approach their pre-pandemic levels; and along the way many will fail. Those failures will be painful for those directly affected, but as an economy, we’ll accommodate to that.

States and localities are in a different category. They provide, police, fire departments, sanitation services, courts, parks and recreation, education, libraries, detention facilities, and water and other utilities. These services are truly essential. Moreover, they serve as the foundation for private enterprise to be able to function. Scott Walker thinks we can’t afford these services, as if they were, somehow, dispensable. Instead we can’t afford not to support these services. If we starve this beast, we’ll suffer mightily.