The U.S. Congress has struck a deal on a stimulus package designed to inject $2 trillion into the economy to offset losses caused by the ongoing coronavirus pandemic. The stimulus package, which is expected to be voted on by the Senate today, includes payments of $1,200 to many adults, a loan program worth $367 billion to support small businesses, and a $500 billion lending fund for industries and state and local governments. The package provisions also increase spending for unemployment insurance programs and provide $100 billion for hospitals.
For insight on this unprecedented political and economic moment, the Hub reached out to Kathleen Day, a lecturer at the Johns Hopkins Carey Business School who is an expert in financial crises, government regulation and oversight, and business ethics. Her book Broken Bargain: Banks, Bailouts, and the Struggle to Tame Wall Street (Yale University Press, 2019) explores the history of economic crises in America from colonial days through today and demonstrates how, in each case, the American public has been left shouldering the economic burden.
The good news, Day says, is that with responsible oversight and funding allocation, the United States can weather the economic downturn caused by the current global health crisis. The bad news? We were likely already headed toward an economic downturn before COVID-19 crossed our borders.
Do you think we're nearing a recession in the U.S.? Why or why not?
I absolutely do, I'm sorry to say. First of all, it seemed like we were perhaps on the verge of a recession anyway—there were signs that the economy was slowing and that there were troubling pockets, such as a rise in high-risk corporate debt. The national debt is a disgrace and reflects, among other things, policies that do nothing to mitigate the disparity in wealth and income that existed going into this crisis. And, in any case, gains in employment since the housing crisis of 2008 have been uneven around the country. The economic recovery from that time simply never fully reached all pockets of America. So unfortunately, I think the coronavirus outbreak is something that is going to slam the economy, making something that was possible into something that's inevitable, and on top of that, worse than a recession otherwise would have been. There's no way around it.
Of course, the internet helps to mitigate some of the effects of the pandemic on the economy because many businesses can continue to operate remotely. So that's good. And then of course there are industries that will be bolstered by the outbreak—parts of the entertainment industry that deliver content electronically will probably get a boost, along with home delivery of groceries—so I don't think it's likely that the economy will grind to a halt. But I do think there are many major industries—airlines, small businesses, restaurants—that could take a hit. We'll have to see what happens.
Is the economic stimulus package currently before Congress effective at staving off a recession? Will it help bring our economy back from the brink?
Well, Milton Friedman, a very famous conservative economist, once described a scenario in which the government dropped money from a helicopter. And now here we are, in a proposed helicopter economy.
The effect will depend on how long this crisis lasts. So many people in this country live paycheck to paycheck. It's tragic, and it's a fundamental flaw in our economy and one we need to fix—a situation like this really underscores our need to fix it. If people get a one-time $1,200 check, or whatever it turns out to be, that's better than nothing, but will it tide people over and make them spend money to stimulate the economy? I'm not so sure. It may just mean they've made part of their rental payment. Does that buy them groceries? Let's hope so. It's better than nothing, but it's not necessarily what we need.
We need to keep careful track of any stimulus packages that include bailouts for companies because some of these firms—airlines, for example—have spent the past few years using their cash to buy back their own stock. That can boost stock price in the short run—which some shareholders like—but often helps trigger bonuses for top executives. That's not effective in the long run, especially for shareholders looking for growth in long-term value. Often, buybacks reflect managers' lack of vision on how to better use the money or how to save it for rough times, like now. So why should taxpayers bail out industries that engage in such practices? That doesn't seem right. An answer could be that a bailout for the airlines, for example, could be contingent on top managers who orchestrated and profited from buybacks being required to step down.
If there's a stimulus package, it really has to be targeted toward a bailout that benefits us all, such as by supporting small businesses and manufacturing. It should not be crony capitalism where the friends of the policymakers in charge are the ones who get the money. We really need to think about who benefits from this package and why and what impact it would then have. The package that now appears to be on the table is the result of compromises that do seem to have improved it over the original plan, which would have essentially given the U.S. Treasury secretary carte blanche to spend money with little oversight. Now there's more oversight and transparency on how the money will be allocated, and that's good.
Historically, have these kinds of measures worked?
The last economic meltdown was caused because people owed too much money—they were overly indebted with mortgages they couldn't repay. And by the way, it wasn't only the consumers' fault—most people had good mortgages they could afford, but they were talked by Wall Street into refinancing into mortgages they couldn't repay. When people are overly indebted and they fall in trouble, then if they get money they might be inclined to save it rather than spend it. That would not have the effect we want now.
The problem in 2007 and 2008 was that the government was willing to bail out industry but wasn't willing to bail out individuals whose foreclosures were driving the crisis. What we learned from that experience is that helping individuals is as important as helping industry, which of course also helps individuals by keeping them employed.
Don't forget—people account for 6-7 cents out of every 10 cents in the economy. If you hobble individual consumers, you are hobbling the economy. Conversely, if you want to stimulate it, you need to help make sure people have that money.
In 2007, there was a stimulus package to help prevent people from foreclosing, but it was so cumbersome and so poorly implemented that it had no effect. I know that sounds ridiculous, but never underestimate the capacity for bureaucracy to make things more complicated than they need to be—or more inefficient, such as putting money into the wrong hands.
What other measures are proven to work?
One of the things that state and local governments are doing is they're putting a freeze on evictions and foreclosures, which is in everyone's interest. It won't help anybody if someone is thrown out of their house and doesn't have a place to live. If you evict someone, as a renter you're not likely to get your money back, and if you foreclose, you as a lender probably won't get your money back, so why not push such financial obligations a little bit further down the calendar so people can pay you when they get their feet underneath them again? That's in everyone's interest.
I also noticed that in Washington, D.C., where I live, and I'm sure in other places, water companies are restoring service to the homes of people who were shut off because they couldn't pay their bills. Things like that are humanitarian gestures that I think as a society we have to do. It's not in anyone's interest during an epidemic to have people living in the street or living without running water.
What do you wish more people understood about these kinds of economic crises?
I wish they understood that bailouts—good bailouts—as distasteful as they are, are akin to putting out a fire, regardless of who caused it, so that the whole neighborhood doesn't burn down. When we bailed out the banks in 2007-2008 because of their bad behavior, everyone had to hold their nose to do it—no one liked it. But if we had allowed them to fail, it would have caused so much more pain and suffering. The fact is the banks were so big and so essential to our economy that when they faced going belly up, it was like having a gun to our collective society's head. We had to bail them out.
Now that was a crisis caused by the industry—that was an entirely avoidable crisis. This one is not. This crisis has been made worse by bad policy at the federal level and some irresponsible news coverage that downplayed the risks, and that has absolutely harmed people. But, even without those actions, there was going to be a health and economic crisis. So this is different from the last crisis, in that it has an external cause. So the things to look out for in this scenario are how to prevent predatory behaviors that take advantage of people while they're down and how to prevent excessively risky behavior that corporations might engage in to make up for lost revenue. You want to make sure people and companies are behaving humanely, ethically, and responsibly, especially when tax dollars are involved.