“If the coronavirus were a Category 5 hurricane, threatening the United States with a massive, widespread disaster, the entire government would be rapidly mobilized to prepare and respond to the most severe possibility, even if its path might miss the country. It would be “all hands-on deck” without reservation. The coronavirus should be thought of as a CAT 5 hurricane that may hit not just a few states but the entire country, may cause nationwide destruction, and may cripple the financial system, and the U.S. economy.
We must prepare now to respond on a scale like the financial crash of 2008 when the government effectively nationalized the entire global financial system. Dozens of new programs were created virtually overnight to lend, spend, guarantee or otherwise make available at least $29 trillion to the financial system
to stop the crisis. No less should be done now to save Main Street families from the potential disaster caused by the coronavirus pandemic.
What could happen? Tens of millions of Americans – if not more – could be quarantined and have no income for months while facing widespread panic and an increasingly lethal pandemic. Relatively quickly, large parts of the U.S. economy could shut down, causing unemployment and bankruptcies to skyrocket. As the virus and panic spread, entire cities and regions can expect to be closed, as happened in China and is happening now in Italy.
Effectively, large parts of the United States will be sheltering in place, mostly in their homes. As a result, tens of millions of people will be out of work. As consumer purchases plummet, every business that depends on customers, particularly small businesses, will rapidly fail, putting many more people out of work.
Given that 70% of U.S. GDP is consumer-driven
, the impact cannot be overstated. The economic devastation from what could quickly become historically high unemployment will be compounded by the dramatic drop in tax revenue, effectively defunding the government at a time of greatest need. Thus, the federal government will have to step in as it did in the 2008 financial crisis.
What should be done? As an initial matter, it is critical to recognize that the responses used in the 2008 financial crisis won’t work here. First, tax cuts, payroll, investment income or otherwise, won’t work as the economy grinds to a halt. They are also regressive, helping the fewest and least in need, while being mostly irrelevant to the large population of impacted working, retired and elderly people.
Second, the Fed should not cut rates – fiscal responses are required, not monetary responses and the inevitable negative rates will only compound the economic and financial problems.
Third, infrastructure stimulus won’t work because it takes too long and sick, quarantined and otherwise impacted people are not going to be able to do the work necessary to expend the stimulus.
What would work: However, there are a number of extraordinary actions that the government should plan to undertake.
First, the priority has to be a comprehensive, data-driven, science and medical-based effort led by public health professionals to limit the spread, treat the ill, and find a vaccine for the virus. That will require preparing for a tsunami of patients overwhelming the health care system as has already happened elsewhere. Supply-chain shortages of critical medical devices and ingredients used to make about 150 prescription drugs
will have to be addressed.
Second, all medical expenses incurred by those with or suspected to have the virus will have to be covered by the government, along with all the expenses of the medical system, from hospitals to nurses and ambulances to quarantine facilities. In addition, any of those people who miss work should be provided with paid sick leave.
Third, the basic necessities for everyone who loses their job or income as a result of the virus will have to be covered by the government, partly by expanding all the automatic stabilizers including food stamps, unemployment insurance, and other programs (including prescriptions and non-virus medical treatment). Some of that will have to be direct cash payments to families and some can be direct transfers from the government to financial firms on their behalf.
Finally, all pending financial deregulation should be immediately suspended until the crisis is over. The financial system is simply not as strong as it must be after years of deregulation. In addition, all capital distributions via buybacks, dividends or otherwise at financial firms must be suspended so that the financial system can be strengthened to survive the economic downturn.
Like a CAT 5 hurricane, the economic, social and financial implications of the coronavirus might be significantly less severe than the worst case, but any responsible government must nevertheless prepare now to do whatever it takes to respond quickly and effectively for what could be an unimaginable calamity.
That requires planning for massive, widespread and unprecedented – albeit temporary – intervention in the economy and for spending $1 trillion or more to save the country and as many lives as possible.”