Ramesh is correct that the Fed was right to cut interest rates on Tuesday. While it’s true that lower interest rates wouldn’t be able to put people back to work in a closed factory or get needed parts to a manufacturer, it is the case that, if the coronavirus impacted the economy’s ability to produce goods and services that severely, then there would also be a reduction in aggregate demand. That would require rate cuts, and the Fed was right to get out in front of that potential development. (Though it would have been much, much better if the Fed’s response were better coordinated with other nations.)
The Fed’s policy rate is now in the range of 1 percent to 1.25 percent. That does not leave much ammunition to fight a downturn. If the economy takes a major hit from the coronavirus — and that is still very much an if scenario at this point — then fiscal policy will also be required. What would that look like? I discuss in my latest Bloomberg column.
Here are two suggestions in the column:
Washington could help counteract the economic distress that would result from international supply-chain disruptions. Congress could create a mechanism to give businesses taking hits from broken supply chains access to loans to meet payroll and other expenses. These loans should be repaid at reasonable, market-based interest rates. And a major friction in international commerce is President Trump’s trade wars. The president should immediately rescind all of his tariff increases and commit to markets and trading partners that no new tariffs will be implemented at least until the economic threat from the coronavirus has passed.
This would help businesses and the overall economy. Importantly, it would inspire confidence in markets that the president takes the threat seriously and is willing to take necessary measures to address it.
Some of the ideas being discussed are not the best way to proceed:
Reports suggest that Rep. Richard E. Neal, the Massachusetts Democrat who chairs the House Ways and Means Committee, believes that a stimulus package should be based on infrastructure spending. Treasury secretary Steven Mnuchin has reportedly expressed his support for including infrastructure spending in a stimulus bill.
But the boost to aggregate demand from investment in roads, bridges and airports would probably arrive long after it is needed. Shovel-ready jobs are hard to come by. The best course would be not to include infrastructure in any fiscal response. But if it must be included for political reasons, then Congress should identify projects that have high social value — in other words, projects that would make sense to fund even in the absence of an economic downturn.
Check out the column for my full argument, and for several other ideas, including a temporary payroll tax cut. Your comments, as always, are very welcome.