Economic actions to fight the coronavirus

The expected economic damage from the coronavirus is starting to become apparent.  Many sectors of the economy have shut down or will do so soon.  Within 48 hours of Governor Cooper’s announcement that closed bars and restaurants in North Carolina, 18,000 people filed for unemployment benefits.  This is more than the number that filed in all of February.  These numbers will only accelerate in the coming weeks.  

The need for economic action is now, but what actions will best serve our citizens?  Many in Washington are calling for a replay of the actions that were effective in past recessions, including cuts in payroll taxes, direct payments of $1000 to all citizens, bailouts to specific companies, and lower interest rates.  

The generals of our economy are fighting the last war.  Although everyone no doubt will like having Washington send them an extra $1000 to $2000, most of those checks will be saved, not spent because most of the service economy is shut down.  Payroll tax cuts will help those with jobs to a small extent but will do nothing for those out of the labor force.  A further problem with these approaches is that they are not targeted toward those who will have the greatest need, especially those unable to work and without savings to tide them over.  Owners of small and medium size businesses are at risk as well.  

From an economic perspective, I see three challenges that can be addressed through wise policies: public health, income maintenance and financial stability.  On the public health front, Congress needs to make sure that Dr. Anthony Fauci and his colleagues get whatever they say they need, including test kits and vaccine research support.  The bill passed last week is a good start.  

Income maintenance can be achieved through a variety of actions, but the primary focus should be on expanding the eligibility and generosity of unemployment benefits and making paid sick leave more widely available.  The average unemployment benefits check in North Carolina is $250 per week and they run out after 20 weeks.  Thanks to actions taken by the NC General Assembly to reduce benefit generosity in 2013, the state system has $4 billion in the bank.  It is time to put that surplus to work.  

The Federal Reserve will need to think outside the box on financial stability.  Job one will be to maintain liquidity in financial markets, just as it did in the Great Recession.  But the virus poses an additional challenge.  Businesses such as airlines and hotels were healthy a month ago and will be healthy again in six to 12 months.  Owners of hair salons and local restaurants operate on thin margins and many have little in the way of savings to fall back on.  What can we do to keep them going in the interim?  

Some politicians are calling for direct payments to the companies.  A better idea would be to loan Delta Airlines and Marriott Hotels the funds needed to pay off loans and roll over bonds over the coming months, with the Fed or Treasury accepting planes and buildings as collateral.  The Fed ended up in the mortgage market in the Great Recession; it may need to provide bridge funding to some cruise ships and casinos this time around.  Special programs for small to medium size businesses will be needed as well.  

Nobel prizes in economics

Kudos to Thomas Sargent of NYU and Chris Sims of Princeton for receiving the Nobel Award in Economics, announced on Monday.  (Click for NYT and WSJ stories.) Both were Harvard PhDs but made their reputations at the University of Minnesota.  Sargent did important theoretical and empirical work on what came to be known as the "rational expectations" theory of how the economy would respond to monetary and fiscal policy.  Sims is well known for developing a technique called vector autoregression that can be used to identify shocks to the economy and the response to those shocks.  Sargent and Sims will split a richly deserved $1.5m award.  Sims said he intended to keep his in cash for awhile. 

What? Some people hate economics?

So says economist Stephen Moore in an WSJ op-ed yesterday.  Moore claims that economics is the least favorite subject of most students, although I am not sure there are any data that confirm his assertion.  He then goes on to argue that the reason economics is so unpopular is that "too often economic theories defy common sense." Most of the article focuses on macroeconomics, with Moore ridiculing numerous tenets of Keynesian theory.  As my students in MBA 505 will soon learn, this ridicule is well-earned in many cases.  In a case cited by Moore, White House press secretary Jay Carney recently was quoted as saying that unemployment insurance creates jobs.  Unemployment insurance is financed by taxing workers to fund benefits for those out of work, thereby simultaneously reducing the payoff to working while increasing the reward for being jobless.  There may be lots of good reasons to have unemployment benefits, but job creation is certainly not one of them. 

Most economists focus on microeconomics, the study of individual consumers and firms and how they interact in the marketplace.  Students should find that microeconomics, once properly understood, passes the common sense test.  Does that mean they will come to love micro?  Not sure I want to go that far. 

An honest assessment of our economic situation

From Greg Mankiw in yesterday's NYT.

After more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers. 

 His column focuses on three key issues:

1. How long will it take to achieve full employment?  The recovery has been slow, either because (pick one) we did not get enough stimulus, we got the wrong type of stimulus, or the economy was in worse shape than anyone thought.  The average unemployed person has been out of work nearly 40 weeks, which raises questions about how many of today's unemployed will ever be able to recover their pre-recession living standards.
2. Will inflation remain under control?  Food and commodity prices are soaring, but overall inflation remains tame (thank housing prices).  The Fed continues to keep short term interest rates at rock bottom levels, but that may not continue if inflation becomes more widespread.  
3. How long will foreigners lend money to the US at rock bottom rates?  If our politicians in Washington are unable to reach some agreement on deficit and debt reduction, we start looking all too much like Greece.  

Mankiw cautions:

If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.