When it comes to comprehensive economic assistance, the Trump administration has decided to abandon the economy. This decision on their part makes no sense from an economic perspective and a political one. Ideally, economic policy would have the government running deficits during a recession, then moving into balance as the economy approach’s full employment. Although critics of fiscal policy complain about election years economic policies resulting in never ending budget deficits regardless of the state of the economy or which party is in power.
The problem with the Trump economic agenda is that it follows no logical pattern. Early in 2017, when the economy was in the expansion phase of the business cycle and unemployment had declined for seven straight years to 4.1 percent, Trump and the Republicans decided it was time for a massive tax cut. Two years later in 2019, growth rates were lower than they were during Obama’s last year in office, although unemployment was 0.6 percent lower than it was in 2017.
As head scratching as the 2917 tax cut was, his refusal to see the obvious need for additional fiscal policy action is beyond explanation. It’s not like he hasn’t been prodded from all angles to act. The House passed the Hero’s Act months ago, it’s passage in the Senate would have kept the $600 per week supplementary unemployment insurance payments flowing to families until the end of 2020. But Trump has chosen not to push the Senate to act of the House bill.
On October 06, Fed Chairman Jerome Powell addressed the National Association for Business Economics and sent a clear message to the Trump administration. In his presentation Chairman Powell said, “In the early stages of the crisis, the fiscal response was truly extraordinary. The unanimous passage of the CARES Act and three other bills established wide-ranging programs that provided roughly $3 trillion in economic support overall. The fiscal aid gave vital support to households. The rise in transfers supported necessary spending and contributed to a sharp increase in household saving.”
Chairman Powell has also cautioned that any economic recovery is not guaranteed. Too little fiscal support (in the future) would lead to stagnation, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise harming the economy.
As long as the virus is a threat, a total reopening of the economy is off the table. We can get a feel for how big a health threat the virus is by comparing the annualized COVID-19 deaths to the number of yearly casualties WWII and the Civil War to. Yearly total casualties in WWII averaged 108 thousand, with yearly total casualties in the Civil War averaging 144 thousand. By comparison, the twelve month projections put COVID-19 deaths at 325 thousand by late February, even then, the end of the virus may not be insight.
Thus fiscal policies must be designed to compensate for the decline in income, but they will not move the economy back to its pre COVID condition. Until the virus is eliminated, the best we can hope for is to put the economy in a holding pattern. In other words, use the power of government spending to sustain families with little or no income, assist home owners and renters to avoid eviction, assist those suffering from the virus and the medical expenses they incur.
So while we know what we should be doing, the Trump administration has shown it has no plans to assist the economy. In May, the House of Representatives passed the HEROES Act that called for more than $3 trillion in spending. That was more than 60 days before the CARES Act expired, but the Senator McConnell refused to allow the HEROS Act to be voted on.
On October 6, the same day as Chairman Powell addressed an economics meeting, the President ordered the Secretary of the Treasury to end negotiations with House until after the election, an order he rescinded after the stock market took a dive.
Democrats and the Republicans are still arguing over the size of the next round of assistance payments, with Democrats seeking a $2.2 trillion package and the Republicans refusing to go past $1.8 trillion, even though Trump as of this past Wednesday endorsed the idea of a bigger stimulus package. Both sides are acting as though this was a one-off, it’s not. No matter what stimulus package is passed, more fiscal actions will need to be implemented over the next year to eighteen months. Whoever wins the election will have to come to the realization that until we eliminate COVID-19, abandoning the economy because of outmoded beliefs about the country can and cannot afford, is not an option.