The outbreak of COVID-19, caused by the novel coronavirus, has created a global market downturn and put the United States on track for its first recession since the 2008 financial crisis. Quarantines, social distancing, and other proactive measures that are necessary to contain the pandemic are already limiting commerce and disrupting global supply chains, essentially ensuring that the U.S. economy will contract for at least some period of time in 2020. Policymakers must adopt a combination of thoughtful public health and macroeconomic policy measures that will limit the damage caused by both this and future recessions.
Although Congress has already taken some strong first steps, much more will be needed. The Federal Reserve’s target interest rate has been reduced to zero percent, meaning it has already used its most potent tool for fighting a serious recession. But fortunately, low interest rates also make it cheaper than ever for Congress to borrow money to provide needed economic stimulus. This stimulus package must be aggressive enough to prevent an economic contagion that spirals into another financial crisis, or worse, a second great depression, but it should also be targeted towards those who are most in need and most likely to spend the money at a time when public health measures have slowed commerce to a crawl.
The best way to accomplish this goal is through the expansion of “automatic stabilizers” – policies that cause spending to rise or taxes to fall automatically when the economy contracts. These policies are more responsive to real economic needs because they are unconstrained by the political processes that often slow the passage of discretionary stimulus. Moreover, as the economy recovers, well-designed automatic stabilizers will actually reduce federal budget deficits and help pay back the debt that was used to finance stimulus. This structure prevents stimulus from being prematurely shut off (as it was following the 2008 financial crisis) and removes fiscal concerns as a political impediment to essential borrowing.
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