View from Washington: Buying Time, Not Certainty

The difference between the COVID-19 economic response and the 2009 recovery package is that, this time, the contagion is still out there.

Scott Pattison

March 22, 2020

The term “uncharted territory” being uttered by many elected officials about the current health and economic crisis throughout the world seems to be an understatement. In the United States a few short weeks ago, the economy was roaring with a record-setting February 12th Dow Jones stock market index peak of over 29,500 points. Today, the entire stock market gains of the Trump presidency have vanished. Goldman Sachs predicts a 24 percent decline in economic activity this quarter. They predict a huge increase in the current unemployment numbers, with up to 2.25 million additional unemployed Americans over the next few weeks.

At the same time the market was peaking, there were virtually no cases of the COVID-19 virus in the U.S. Today, over 32,300 cases of the virus have been identified and 400 deaths recorded, 60 in New York City alone. In Canada, the identified cases are roughly 1300, with 19 deaths.

Officials at all levels of government are scrambling to deal with this astonishing turnabout. Hospitals and the health care community are preparing for an influx of seriously ill patients. Unfortunately, shortages of medical equipment — such as respirators, masks and gloves — will hamper efforts to contain the virus. Medical experts are predicting significantly exponential growth of victims of the virus over the next two to three weeks. This is partly due to the increasing availability of testing for the virus, something virtually non-existent in the U.S. a few weeks ago.

As an indicator as to how significant the virus is expected to impact the U.S. in the next few weeks, the military is increasing its role. The Army Corps of Engineers is converting dorms and vacant hotels into hospitals should they be needed. Navy hospital ships have been ordered to New York and California. The military is also planning to distribute much needed ventilators and other items like masks to hospitals. Some state governors — who have control over their National Guard troops except when the federal government calls them up for war — are deploying those guard troops for activities to combat the virus.

To deal with these potentially dire health care system consequences, governors and mayors have ordered many residents to stay home and closed many businesses such as restaurants and gyms. Layoffs are occurring and unemployment has increased — and numerous businesses have voluntarily closed or have virtually no customers.

This obviously is having an enormous and quick negative economic impact. The economy is clearly contracting – and fast. As a result, Congressional leadership and the Trump Administration are currently in negotiations to pass an unprecedented $1.8 trillion economic stimulus package. It’s hard to believe that on March 6th the Congress passed a $8.3 billion stimulus package, which was up from an Administration proposal of $2.5 billion. That package, now considered “Phase I”, was a modest package of additional funds for federal health care agencies, COVID-19 tests and small business loan subsidies.

Phase II was passed on March 18th and included $100 billion in stimulus, primarily in funds for the food stamp program, unemployment and funds to states for Medicaid, the health care program for low-income individuals.

Current negotiations have been going on throughout the weekend with key negotiators being House Speaker Nancy Pelosi, Senate Majority Leader Mitch McConnell, Senate Minority Leader Chuck Schumer and for the administration, Treasury Secretary Stephen Mnuchin. There are serious sticking points at this writing for Democrats who did not not support the package in a Sunday evening vote, saying it fails to protect workers and attaches too few conditions for bailed-out businesses. Negotiations will continue however and the pressure will be intense to pass something soon. The markets will likely go down further with such news and with such pressures, the package will likely be passed early this week.

The Republican leadership has been pushing for direct checks to most Americans of $1,000 or more, as well as stimulus aid for businesses. The Democrats want significant funds for emergency health care and increases in unemployment insurance. The real sticking point is an approximate $500 billion proposal Republicans are pushing to give businesses subsidies with the funds being provided to corporations under the direction of the Treasury Secretary. The Democrats are raising concerns over the lack of restrictions to these proposed funds and worry corporations will not use the money to assist workers with pay raises and additional sick leave.

This partisan back and forth is reminiscent of the negotiations for the 2009 stimulus to address the financial crisis. Republicans accused the Democrats, in control of both the House and Senate at the time, of not including them in the negotiations. But 2020 is somewhat different since the House is controlled by the Democrats and the Republicans control the Senate and Presidency. Both parties really do have to agree on a package.

One bright spot in the current stimulus negotiations is bipartisan agreement on a major program for small businesses. A package of as much as $300 billion or more for small business grants and guaranteed loans has been negotiated by Republican Senators Marco Rubio of Florida, Susan Collins of Maine and Democratic Senator Ben Cardin of Maryland and House Member Nydia Velazquez (Democrat of New York). This small business package is noteworthy in its showing as to how astonishing the change in the U.S. approach has been to this crisis. Just 10 days ago, the proposals were roughly $50 billion, only to grow to a staggering $300 billion now.

These are incredibly fast changing and uncertain times. Even with an approximately $1.8 trillion stimulus package this week, the crisis will continue. With increased test availability and more getting sick, the numbers of COVID-19 cases will surely increase. Economic activity will continue to contract.

The stimulus, along with interest rate cuts and other actions by the Federal Reserve, will help. Whether it will be sufficient to save the economy is an open question. Plus, until the virus is under control, economic consequences will continue to be significant.

Scott Pattison, senior fellow of the Institute for Fiscal Studies and Democracy at University of Ottawa, is a former CEO of the U.S. National Governors Association and former executive director of the National Association of State Budget Officers.