Tags: Coronavirus | Trump Administration | trump | trillion | coronavirus | slowdown | economy

Trump Needs $2.5 Trillion Stimulus

Trump Needs $2.5 Trillion Stimulus
(Mandel Ngan/Getty Images)

By Tuesday, 17 March 2020 06:19 PM Current | Bio | Archive

President Donald Trump's administration proposed $1.2 trillion plan to counter the economic crunch brought on by the coronavirus. It is a step in the right direction. But we need a much bigger and much better targeted fiscal stimulus.

Like most forecasters, I expect a considerable amount of economic drag from Covid-19 and social distancing. However, unlike them, I see this drag lasting well into next year.

This recent analysis from a team of researchers in the U.K. suggests that, until a vaccine is developed, governments will have to choose between two unpalatable options:

  • exponential growth in the number of Covid-19 patients, which will crush health-care systems in a matter of weeks
  • or stringent social-distancing policies to keep disease transmission under control

Using either of these options -- or alternating between them -- is likely to be associated with large amounts of uncertainty for businesses and households. This uncertainty will impose a significant burden on the U.S. economy until a vaccine is implemented, which experts say might only be available by late 2021.

Responding to this kind of protracted slowdown will require a bigger stimulus than the 6% of gross domestic product proposed by the administration. Instead, policy makers should be planning for two years in which, in the absence of a fiscal intervention, the output gap will be significantly negative -- possibly as much as 6% of GDP, or on the same scale as the recession caused by the 2008-09 financial crisis. It’s going to take a much larger fiscal infusion to make up for that shortfall -- something more on the order of $2.5 trillion rather than $1.2 trillion.

In designing a fiscal stimulus, it is important to ensure that the money gets into the hands of those with the highest propensity to spend it. The administration’s plan doesn't seem to meet this criterion. A payroll-tax cut puts money into the hands of those who already have a job. But they typically have a lower propensity to spend than those who are unemployed. Meanwhile, a bailout of the airlines serves to protect the wealth of their shareholders and debt holders. But those people also typically have a lower propensity to spend than those who with limited financial resources.

How, then, should a fiscal stimulus be structured? There are many ways to improve on the Trump administration's proposal. Here are three proposals that I see as useful. First, the government should pay $10,000 to every adult and child younger than 40. They are more likely to go out and spend this money, partly because Covid-19 presents much less of a health risk to them. Second, the government should pay a bonus to each person who gets tested for the coronavirus (as long as they haven’t been tested in the prior week). Finally, as was done in the Great Recession, the government should both increase and extend unemployment-insurance benefits beyond the normal 26 weeks. 

We know there is going to be a downturn and, unfortunately, there are good reasons to believe that it will be both long and deep. The Federal Reserve has done what it can using monetary policy. Now we need a strong and well-designed fiscal policy response from the U.S. government.

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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NarayanaKocherlakota
President Donald Trump's administration proposed $1.2 trillion plan to counter the economic crunch brought on by the coronavirus. It is a step in the right direction. But we need a much bigger and much better targeted fiscal stimulus.
trump, trillion, coronavirus, slowdown, economy
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2020-19-17
Tuesday, 17 March 2020 06:19 PM
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