Tags: Coronavirus | Financial Markets | economic | slump | 2 year | virus

Get Ready for 2-Year Economic Slump Due to Virus

Get Ready for 2-Year Economic Slump Due to Virus
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By Thursday, 09 April 2020 09:34 AM Current | Bio | Archive

America’s leaders face a difficult question in deciding the scale of intervention needed to prop up the economy: How long will severe restrictions be required in the battle against the coronavirus?

Judging from events so far, I’d say they should base their relief efforts on the expectation that the economic slump will last through 2020 and much of 2021.

COVID-19 places a heavy burden on the health-care system because it tends to put a lot of people into the hospital (especially, but not only, among the elderly). Even if only a small fraction of the population is infected, their need for treatment overruns the available resources. To keep hospitals functioning, governments must drastically reduce the spread with some combination of two tactics. One is social distancing. The other is mass testing, tracing, and quarantining. Note that testing is not enough on its own — authorities must also track down infected people’s contacts and quarantine them, to stop the further spread of the virus.

It seems highly unlikely to me that the U.S. will ever have a mass testing, tracing and quarantine program in place at the national level given the polarization and lack of direction in the federal government. In the absence of such a targeted response, state and local authorities will have to rely on blunter tools such as lockdowns and social distancing to ensure that their health-care system aren’t overwhelmed. So businesses across the country will have to stay shut, and millions of people will remain out of work, at least until a vaccine becomes widely available — and that’s not expected to happen until the second half of next year, at best.

Given the dire outlook, the U.S. government’s economic relief measures are much too limited. The CARES Act seems to assume that the economy will recover strongly this summer: Its $1200 individual payments amount to just ten days’ income for the median wage earner, and enhanced unemployment benefits last only until the end of July. People, businesses and state and local governments will need a lot more support to get through the long, difficult time ahead. 

The Federal Reserve, too, must be more ambitious. Most likely, the economic slump will cause inflation to fall well below the central bank’s target of 2% for an extended period. Fed officials should pledge clearly now that they will keep doing whatever they can to support growth until inflation rises persistently above 2%, and maybe even higher. They should also specify that they won’t be swayed in the unlikely event that supply-side constraints — such as difficulties in getting factories and supply chains back into action — lead to short bursts of inflation over the next year or two.

In the COVID-19 era, economic policy has to be based on a solid forecast of what the government is capable of achieving in the public health arena. That forecast suggests that a lot more economic support is needed — and that doing too little would be a much greater mistake than doing too much.

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

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America’s leaders face a difficult question in deciding the scale of intervention needed to prop up the economy: How long will severe restrictions be required in the battle against the coronavirus?
economic, slump, 2 year, virus
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2020-34-09
Thursday, 09 April 2020 09:34 AM
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