What's the Right Stimulus for a Pandemic?
What a difference a week makes. Former Vice President Joe Biden, now with the Democratic nomination for president well within his grasp, is the 2020 presumptive Democratic presidential nominee. Students at Harvard, American, and Ohio State, as well as several other universities, are being forced to leave campus, and an entire community in New York is under strict quarantine. And the murmurings inside the Beltway from last week about a coronavirus stimulus are now full-throated cries.
Congress has already provided the administration and the states $8.3 billion to respond to the crisis. Aside from a provision in the bill that allows the Small Business Administration to issue up to $7 billion in disaster loans to small businesses, that bill is not considered a stimulus meant to address the economic impacts of the virus. Instead, funding from that legislation will go to the local, state, and federal agencies that are on the front lines of containment efforts and patient testing and treatment, as well as to agencies that are trying to deliver and develop vaccines for COVID-19.
Outside of that legislation, the Trump administration has eliminated the 7.5 percent tariff that the United States had in place for face masks and other medical products from China. (The National Association of Manufacturers has asked the White House to consider additional tariff deferrals for Chinese goods in order to help goods-making industries.)
While the media had reported President Donald Trump would unveil a full-scale stimulus proposal at an event Tuesday, that event never came to pass. The president did meet with Senate Republicans, however, and based on information from that gathering, it appears the president’s favored stimulus idea is a total payroll tax cut, that would last at least until the end of 2020. (Social Security payroll taxes are set at 12.4 percent—employees pay half while employers pay the rest. Currently, this levy applies to incomes up to $137,700.)
But even members of the president’s own party seemed cool to the payroll tax cut idea, however, wondering how giving consumers more money to spend would help during a crisis in which health officials are urging people to stay home and away from crowds. Politico has reported some of President Trump’s own top economic advisers also do not like the idea.
CNN says Republicans yesterday also discussed “targeted relief for hard-hit industries,” including airlines, the cruise industry, and others in the services sector, and a proposal to provide tax credits to smaller companies that want to provide family and sick leave to their employees during the crisis.
U.S. Treasury Secretary Steve Mnuchin is considering more basic and long-term investments in the U.S. economy. Last week at a House Ways and Means Committee, he said a major infrastructure package would be the “soundest way” to provide economic stimulus. Democrats on the panel appeared open to that idea. (So it looks like another infrastructure week may be upon us soon.)
President Trump is also reportedly considering aid to oil and natural gas producers in the form of low-interest loans. (Interestingly, some industry representatives actually denied that they are asking for anything. American Petroleum Institute President Mike Sommers said, “We shouldn't be reacting to one day of market downturn.”) Bloomberg report the administration also could consider buying oil from the Strategic Petroleum Reserve. According to Politico, the industry also has proposed that policymakers speed up drilling permits on federal land and lower the royalty rate on oil and gas produced on public lands.
Meanwhile, Democrats are assembling their own stimulus package in the House, which, according to Politico is likely to include provisions that grant paid sick leave to certain workers, provide additional funding for children’s school lunches and social safety net programs, expand unemployment insurance, and cover the cost of coronavirus tests and care for individuals who fall ill. Staff in the U.S. House do not know exactly how much funding their leaders will ask for, but the costs, they said, likely will be in the “tens of billions.” As of this writing, the White House signaled it could agree to the House Democrats’ package as the first phase of a multipronged stimulus effort.
These fiscal proposals are both similar and different from the ones we have seen during past crises.
In the months after the financial meltdown of 2008, Congress provided direct aid to banks and to automakers. It also allowed small businesses to make reduced quarterly tax payments until the end of the year. Then in February 2009, lawmakers passed President Barack Obama’s stimulus package, which included more than $830 billion over 10 years in spending and tax incentives. Gerald Carlino explained in a paper for the Federal Reserve Bank of Philadelphia that about $425 billion of that package came in the form of tax cuts for households and businesses. More than $200 billion went to current government programs while $130 billion was allotted for new federal expenditures on transportation, communication, wastewater and sewer infrastructure improvements, and scientific research, and for extending federal unemployment benefits.
More than 18 months later, in December 2010, Congress and President Obama agreed to a payroll tax cut but that package was negotiated as part of the deal to extend Bush-era tax cuts, not as an economic stimulus bill.
When Hurricane Katrina hit the Gulf in 2005, the federal government not only provided disaster aid, it offered $71 billion in infrastructure spending to rebuild Louisiana and other parts of the region. After the September 11, 2001 terrorist attacks, Congress quickly provided disaster aid, but, according to the Congressional Research Service, a stimulus bill that included an unemployment benefits extension and accelerated depreciation rates for corporate investment did not pass until March 2002. More than a full year after 9/11, in November 2002, Congress and the Bush White House enacted the Terrorism Risk Insurance Act, which provided a federal backstop to private insurers in the event of catastrophic losses resulting from terrorist attacks.
During a downturn in 1993, the Clinton administration proposed an almost $20 billion stimulus package, but Congress quashed it. Lawmakers finally agreed to provide funding for federal unemployment benefits instead.
In the face of a recession in the early 1980s, President Ronald Reagan relied on tax cuts to help the economy. With Congress, he reduced the highest personal income tax rate from 70 percent to 38.5 percent and also cut the capital gains rate. And, as we discussed last week, the Cuban Missile Crisis spurred a mini-bear market during President John F. Kennedy’s tenure. JFK asked for a series of tax cuts—and Congress answered by cutting corporate and personal income tax rates.
Now, the question is: no matter what Congress does, will it work?
It is as hard to answer that question as it to answer questions about how long this crisis will last. As New York Times columnist Ben Casselman has noted, this crisis is not 9/11 or the financial crisis. It is not a man-made, nor is it really even an economic event. Casselman explained, “The usual tools that economic policymakers rely on, like tax cuts and stimulus spending, won’t restore canceled conferences, unclog supply chains or persuade wary consumers to go out to bars and restaurants.” And he concluded, “Even if such policies would help, they conflict with the advice of health officials who are urging ‘social distancing’ to slow the spread of the virus.”
We can—and should—look to history to try to determine what will happen next in Washington, but lawmakers also cannot rely solely on past playbooks to tackle this novel crisis.