Thread by @IrvingSwisher

COVID-19 and Low Interest Rates Make Fiscal Stimulus And Enhanced Automatic Stabilizers A No-Brainer

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1. I think the debate about whether COVID-19 represents a supply shock or a demand shock misses the point. It is an income shock for many households and businesses. Private sector actors aren't just resource-constrained, but financially-constrained

2. The point of macroeconomic policy is to address ease these financial constraints so that we don't risk setting off the vicious cycle of layoffs and bankruptcies that are hard to reverse once set in motion.

3. The Fed is the conventional institution for staving off this process. The lender of last resort is supposed to ensure that private sector actors can access the necessary financing to survive such a shock. In practice, interest rate policy is imperfect in achieving this end.

4. Regardless of your confidence in interest rate policy, it has reached its logical conclusion. Short-term interest rates are already priced to go to the zero lower bound soon. Long-term interest rates are so low that QE and forward guidance offer little affirmative benefit

5. But while there has been a lot of bellyaching about how the Fed is running out of policy space, that is only true in a unilateral sense. This is a historic opportunity for fiscal policy to step up to the plate and take advantage of the Fed's accommodative actions

6. With government borrowing costs so historically low, the discussion about pay-fors really does need to take a backseat here. For those concerned about debt/gdp, a good policy response will keep nominal gdp growth at its current pace of 4-5%, well in excess of Treasury yields

7. As for where to direct stimulus efforts:
a.) State governments
b.) Households
c.) Businesses

More on each to follow

7a.) State govt finance is unhelpfully procyclical. Because of balanced budget laws, when the economy is weak, they cut back further. We should boost Medicaid & public health funding to states rn, as Jason Furman has already proposed in Recession Ready: hamiltonproject.org/papers/increas…

7b.) There are a variety of proposals for households that could help, especially the most adversely affected:
Esuring paid sick leave
Direct payments to households (like Feb-2008 stimulus)
Enhancements to unemployment insurance (relaxing restrictions, extending eligibility)

7c.) (1) Helping business here is something I've tweeted out before. Coordinated action is essential. The Fed and Treasury can ensure that larger firms can access cheap financing if Mnuchin signs off on a Commercial Paper Funding Facility

7c.) (2) The institutional capacity for lending directly to smaller businesses will likely require the Small Business Administration. (Small businesses don't really issue commercial paper). Congressional authorization will likely be needed for a scaled up effort here.

8. The really important thing here is to cut out the spillover effects. There are natural capacity challenges that come with dealing with a public health shock of this magnitude, but the right policies can ensure there is no shortage of financial resources right now.

9. The point here is to make the financial resources available so that businesses and households are able to ride out the shock without opting for layoffs and sharp cutbacks in consumption. Prospects of a vicious cycle need to be nipped in the bud

10. Now we don't know how bad COVID-19 will ultimately be. Could always be worse or better than expected. But that is also the nature of all macroeconomic shocks. Which is why fiscal policy action needs to be dynamic and respond quickly as the conditions change.

11. Automatic stabilizers offer the most robust solution both to the present challenge of COVID-19 and recessionary shocks in general. The legislative process is important but going back to the well after each new development is likely to slow down and politicize the response.

12. If Congress preemptively authorizes stimulative measures in response to recession risks and outcomes, I think both the Fed and financial markets would sleep easier despite interest rates so close to the zero lower bound.

13. Fiscal policy has its set of challenges (speed, political gamesmanship) but automatic stabilizers address those weaknesses while still highlighting its strengths vs monetary policy: more targeted relief, more equitable relief, and the lack of a zero lower bound constraint

End: This is an opportune moment for Congress and the White House not just to insure against the current economic impact but future sources of recessions, regardless of whether they stem from private sector deleveraging, financial market panic, or, as is the case now, a pandemic.