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President Donald Trump has delivered for the voters that elected him — and many who didn’t. With the economic policy response to the coronavirus pandemic, his administration has pushed the Federal Reserve to innovate and warring factions in Congress to make deals.
Trump was slow to acknowledge the threat posed by the pandemic emerging in China — then spreading to Italy, the American West Coast and the New York metro area — but so were governors like Andrew Cuomo and leaders of larger Western European economies. The latter did not respond as quickly with containment measures like social distancing as poorer countries in Central and Eastern Europe who are suffering fewer casualties.
With the aid of an epidemic, Trump has forced the Washington establishment to act quickly for the benefit of ordinary working folks through the Federal Reserve and the stimulus package.
As Chinese and then Western leaders acted, the coronavirus created a menacing supply-side shock — shortages of Chinese components for factories and products on store shelves and the shutdown of businesses in New York, California and many other states. And then a classic Keynesian contraction — the collapse of spending as Americans sheltered in place.
Over the past five weeks, 26 million Americans have filed for unemployment benefits, many others are working at reduced speed at home or fewer hours at workplaces still open, and the observed unemployment rate is likely headed for 20%. That translates into a similar loss in GDP.
If a second wave of infections materializes as the history of epidemics indicates, both those sad numbers could worsen.
Many corporations and small businesses don’t have enough cash to tide them over. Without lines of credit, many will permanently close — some smaller firms already have. Banks can’t be expected to extend too much credit when no one knows when the economy will fully reopen or what the new normal will look like.
After cutting interest rates to near zero and purchasing massive amounts of bonds — throwing the proverbial kitchen sink to no avail—Jerome Powell acted outside the box — the traditional playbook prescribed by academic economists and central bankers.
The Fed is becoming a private asset manager and investment banker — buying and underwriting corporate, state and municipal bonds, credit card debt and auto loans — and a private commercial bank — lending directly to corporations and small businesses. Even propping up the bonds of firms downgraded below investment grade as a consequence of the recession.
The Fed needs agents on Wall Street and at local banks to execute all this. The Fed has no loan officers or corporate bond traders at its Constitution Avenue headquarters or regional branches, but its balance sheet will shoulder the risks with an infusion of Treasury capital.
The stimulus package provides one-time direct cash payments from the IRS to households with incomes up to $198,000, temporary weekly unemployment insurance payments of $600 to supplement ordinary state benefits, unemployment benefits to private contractors and gig workers, and other loans and grants through the Small Business Administration.
The usual congressional factions that block everything — liberals that decry bailouts for business and conservatives who are repulsed by payments that could discourage the unemployed from seeking new jobs — were outmaneuvered.
Treasury Secretary Stephen Mnuchin, Speaker Nancy Pelosi and Sens. Chuck Schumer and Mitch McConnell made the usual noises but quietly cut a deal that, as it should, makes no one completely happy. Then they effectively told the ideological wings of the Democratic and Republican Parties to scream all they like but vote yes or get nothing.
With loan money that may be converted to grants for small businesses exhausted, Democrats and Republicans have compromised to provide another $310 billion for small businesses plus additional money for hospitals, testing and other purposes.
Now that the Fed is a commercial lender and private bond buyer, several members of Congress recognize establishing accounts at the Fed for ordinary folks — creating digital dollars — would better enable the Treasury to more quickly dole out future stimulus payments to households.
Currently, ordinary folks have to pay retailers with paper money that no one wants to carry around or bank-sponsored credit cards that come with hefty fees. Digital dollars would make no-fee direct payments a reality.
That’s Mr. Trump’s New Deal — Fed reforms and pragmatic government policies to benefit ordinary citizens when help is needed most.
