Is Fiscal Stimulus the Answer to Preventing a Coronavirus Recession?

As governments seek to contain the economic damage from the coronavirus outbreak, expect to hear two words that have been absent from the Washington lexicon for years: fiscal stimulus.

Prominent economists and some lawmakers — most notably the senator and presidential candidate Elizabeth Warren, who released a stimulus plan Monday — are starting to wrestle with how the government might use its power to tax and spend to mitigate the economic pain.

The attention to fiscal policy reflects the little room remaining for the Federal Reserve to cut interest rates — the usual first line of defense against economic slumps. The complexities of responding to a pandemic and the desire of lawmakers to show they are getting something done in an election year could strengthen the case.

“This is not a shock that central banks alone can address,” Laurence Boone, chief economist of the Organization for Economic Cooperation and Development, told reporters in a briefing Monday. “It really, really needs to be accompanied by fiscal measures.”

Talk of fiscal stimulus is still in the earliest phases, reflecting the suddenness with which signs have emerged that the new coronavirus will hurt the economy.

A senior administration official said Monday afternoon that Mr. Trump and his advisers think that any bumps in the next quarter or two are likely to be temporary, and that they don’t think temporary policies work to stimulate growth.

But in a tweet late Monday evening, President Trump seemed to endorse a one-year payroll tax holiday, suggesting stimulus along those lines would be “great for the middle class, great for the USA!”

Those who closely track the machinations of Washington believe there will be a meaningful push for some fiscal action if the economic outlook deteriorates. Whether it would eventually pass, of course, is a different matter given deep partisan divides in Congress.

“I think members of Congress and the White House are contemplating what their options are,” said Brian Gardner, who tracks economic policy in Washington as managing director at Keefe Bruyette & Woods. “We’re in an era of hyperpartisanship, and neither party is going to want to give the other a win going into the election.

“At the same time I think politicians don’t want to be seen as stonewalling on a possible answer to a crisis, so I think the politics are a little more friendly to getting some kind of fiscal package through than it might seem.”

Ms. Warren on Monday proposed a $400 billion package of measures to pump money into the economy.

She suggested the government offer low-interest loans to companies affected by temporary coronavirus disruptions; expand unemployment insurance and other direct payments to Americans; and give aid to state and local governments losing money because of the virus.

Her plan also included provisions less directly connected to addressing immediate damage from the virus, such as encouraging American-made manufacture of pharmaceuticals and clean energy investments.

If Congress does move toward fiscal stimulus in the coming months, it will be an uncommonly quick response to an economic threat.

In early 2008, for example, the George W. Bush administration and congressional Democrats successfully negotiated a $152 billion stimulus meant to ease the effects of the housing crash and a financial crisis then underway. But that came about six months after financial markets first flashed signs of panic, in August 2007.

It would probably take some more solid evidence that the virus was causing deteriorating business conditions for Congress and the Trump administration to conclude that action was needed. But that time shouldn’t be wasted, said Jason Furman, former chief White House economist in the Obama administration, who is now at the Harvard Kennedy School.

“I think people should be preparing a fiscal expansion,” Mr. Furman said. “It may very well be needed. But even like two or three weeks of additional information might be useful.”

He draws a distinction between spending needed to address the public health risks from coronavirus — most likely several billion dollars on things like medical equipment and aid to states dealing with the crisis — and the kind of spending that might be warranted to prop up overall demand in the economy. The latter would probably run in the hundreds of billions of dollars.

In that stimulus scenario, the goal would be to put more money into Americans’ pockets, such as with payroll tax reductions or more generous unemployment insurance benefits, to ensure that disruptions because of coronavirus do not spill out into an economywide recession.

Douglas Holtz-Eakin, a former director of the Congressional Budget Office and president of the American Action Forum, said that the new coronavirus would be likely to have a short but substantial effect on the economy — a “V” shape — and that it would be difficult to create a stimulus that matched the timing and severity of the economic disruption.

“Do we know enough about the V shape to merit a policy response?” Mr. Holtz-Eakin said. “It makes me skeptical. It’s really hard.”

At a minimum, he says, if Congress considers a stimulus, it ought to look at policies that are desirable on their own terms, not merely for what they might do to aggregate demand in the economy for a quarter or two.

Even if there is more of a widespread embrace of fiscal policy as the virus’s economic impact broadens, the politics will be fraught.

President Trump has repeated that the economy is strong, the virus well contained. He says the recent decline in the stock market is a result of an alarmist media and insufficient interest-rate cuts by the Federal Reserve. Presumably, he would need to modify that outlook to justify a nine-figure stimulus package.

And Democrats who control the House would be reluctant to give President Trump an economic boost heading into the November elections. They would probably demand a high price in the form of the Republican Senate’s agreeing to Democratic spending priorities.

All of that makes the legislative prognosis for stimulus uncertain at best. But so is the level of risk the economy faces. And if conditions get bad, it has a way of forcing even bitter political enemies to the negotiating table.


Jim Tankersley contributed reporting.