Coronavirus Shutdown is Not a Recession but an Investment in Survival

As the coronavirus sequesters millions of Americans and shuts down the US economy, it should be thought of as an investment in public health that lays the groundwork for a rapid rebound.

That is the view of St. Louis Federal Reserve President James Bullard, who argues that a potential $2.5-T hit coming to the economy is both necessary and manageable if officials move fast and keep it simple.

It is an unconventional view in this time of global anxiety, but the shutdown measures being rolled out by The Trump Administration are essential to shortening the course of the coronavirus pandemic.

They must also be coupled with massive federal government support to sustain the population through its coming isolation and prime the economy to pick up where it left off.

That means this: Match any lost wages. Match any lost business. No questions asked. No arguments about bailouts or “moral hazard.”

Plus, do not call it a recession.

Recessions are the ordinary contractions in activity that mark the end of normal business cycles, this crisis is anything but a recession.

Mr. Bullard says, “Frame this as a massive investment in US public health.”

Mr. Bullard’s comments came as US lawmakers debate emergency economic measures worth $1-T+, a figure he says may underestimate what’s needed.

The spread of the coronavirus has touched off discussions about the Ys 2007-2008 financial crisis worldwide, but with an urgency that is shredding old hesitancies.

Friday, United Kingdom PM Boris Johnson’s government announced it would pick up 80% of the national wage bill for the next 3 months.

Many Fed officials have called for a stronger US fiscal response in recent days, but Mr. Bullard went a step further with an explicit call for the US government to match what is being lost dollar for dollar.

For now, he said, economists and policymakers should turn their view of data on its head because little will make sense otherwise.

The recent spike in unemployment claims is a win, a sign that so-called government stabilizers are being used. The hope should be that such programs get “crazy heavy use” in coming weeks, he said.

If economic output falls by 50% in Q-2, that is a win and not a record-setting defeat. It means businesses have heeded orders to close and customers to stay home.

We are not trying to move production and income up in the second quarter. We are trying to keep it out of the 2nd quarter,” Mr. Bullard said.

You want capital to just sit in place. Switch off the factory … Then switch it back on.

Mr. Bullard was among the large group at the Fed who at 1st felt the coronavirus risk would pass with little economic damage, as have other similar health scares such as SARS/MERS and Ebola.

Now they are catching up, with emergency rate cuts, extensive new programs to keep markets working, and other steps to aid an economy slowing to a halt.

He said he was ready to do more, including putting more of the Fed’s direct lending powers to work if needed, his colleagues agree.

It is early days and we are willing to do more. I am willing to do more,” he said.

He is blunt about the dilemma posed, saying the economics profession was “reeling” as it tries to understand what is happening.

For now what is usually good: jobs and production are bad, and the headline numbers are going to be staggering.

Mr. Bullard’s estimate is that unemployment could hit 30%, higher than in the Great Depression and 3X that of the Ys 2007-2009 recession. Output in Q-2 could be 50% the norm, a hit of about $2.5-T.

That is unavoidable if the coronavirus is to be contained through “social distancing” or government orders to stay at home.

All this need not wreck the economy. Legislation working its way through Congress has begun to roll out some support.

Mr. Bullard said the “core aim” can be kept simple: “keep everyone, households and businesses whole through the 2nd quarter.” Do it with a quick expansion of unemployment insurance to cover lost wages, and through grants and loans to business to cover losses from “unemployed” capital.

From a macroeconomic standpoint, he argues, that it is an easy to deal with problem.

He said perhaps $500-B of lost output will be accounted for by necessarily lost consumption from all the movie tickets and clothes no one buys and trips people will not take.

As to the other $2-T, Mr. Bullard said the federal government should borrow and distribute it to people and business.

That is completely feasible,” in service of limiting economic damage, he said. “This is a planned, organized partial shutdown of the US economy. We are throttling back output on purpose to meet public health guidelines… Transfer income to affected households.”

Call it pandemic relief,” he said. “Get transfers to businesses that are affected heavily, and come out on the other side. Identical economy. Produce the same goods as before.”

Have a healthy day, stay home!

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