By Pavlina R. Tcherneva
As the coronavirus barrels toward the U.S., all eyes are on the Federal Reserve. On March 3 it delivered a 50-basis-point interest-rate cut, as other central banks around the world declared a readiness to respond as needed.
But what could lowering interest rates do? The hope is that it would calm jittery markets and help restore faltering investment and growth. The first of those did not happen. Markets continued to plummet after the cut, though it is possible the drop would have been bigger without it. The second — spurring investment and growth — is unlikely to follow, but may not be what’s required anyway. At least not right now. Not today.
Families will need to get back on their feet. They will need good and stable jobs. Congress will continue to play a key role, by providing public investment, direct employment and other assistance to families as they return to work.
In the absence of a vaccine, the only way to stunt the rapid transmission of this virus so far has been to slow down economic activity for a period of time — to close schools, stores and workplaces, as needed. Should this happen in the U.S., it also means that things would get much worse before they would get better. A viral epidemic, unfortunately, does not just sicken families; it also sickens the economy, and ours is quite vulnerable already.
Today millions of Americans live paycheck to paycheck. The median annual income for 44% of workers is $18,000. Millions of people cannot find $400 for emergency expenses. They simply cannot afford to stay home and self-quarantine, which increases the risk of dissemination. At the same time, canceled flights mean furloughed flight attendants, disrupted supply chains mean laid-off retail workers, empty restaurants mean additional job losses, and on and on.
The contagion effect of the virus and unemployment will spread from one community to another. People who are unemployed are sicker , weaker, and experience homelessness and poverty in greater numbers. Fragile labor markets, inadequate safety nets, lack of universal health care and mandatory paid leave mean that public-health concerns are worsened and multiplied by economic insecurity.
Wall Street vs Main Street
What could the Fed do about all that? Very little, despite President Trump’s protestations that rates were still too high, threatening exports and U.S. competitiveness. But neither exports nor competitiveness would resolve this crisis. What we need now is aggressive public-health-services mobilization and an economic stabilization package. And that’s the job of Congress, not the Fed.
Lowering interest rates are not the wrong thing to do, but they don’t do the trick either. They are akin to administering a temporary placebo, at best. Once confidence collapses and unemployment accelerates, firms will not be willing to boost investment, nor will banks be eager to refinance, no matter how low interest rates go.
If financial jitters trigger losses in large financial institutions, it is not difficult to imagine a different sort of contagion effect — the one we witnessed during the Great Financial Crisis. The Fed could help by providing needed liquidity, as it did 10 years ago, though any “bailouts” to defaulting institutions is not something it can decide on its own.
These require Congressional authorization. And if the public perceives that the Fed and Congress are once again helping out Wall Street, and not Main Street, we are in trouble. The pitchforks might as well come out.
Protection for families
What we need (apart from aggressive emergency preparedness) is protection for households. Policy makers must start planning now to ensure that families are not foreclosed on or evicted if they cannot make mortgage or rent payments, that they have income to weather the storm, that credit scores aren’t ruined because of the epidemic, and that kids are not denied school lunches because parents cannot pay the bills.
Whatever financial relief families need today, it must be provided. The government can beef up unemployment insurance, send everyone a stimulus check, reduce payroll taxes and guarantee free testing, medication and treatment for anyone with symptoms. President Trump on March 6 passed an $8 billion-plus emergency spending package to combat the coronavirus outbreak.
But tomorrow, families will need to get back on their feet. They will need good and stable jobs. Congress will continue to play a key role, by providing public investment, direct employment and other assistance to families as they return to private-sector work.
It would also need to launch a bold program for preparedness and prevention in case of future epidemics. And that is still the tip of the iceberg of what our economy needs to be more resilient to crises of all sorts.
The Fed’s other tools
The bottom line is this: Contrary to popular belief, the Fed is not in the driver’s seat. Congress is, both today (while the virus rages) and tomorrow (when it has been contained and the economy tries to recover). Interest rates are a blunt tool for tackling the many challenges before us.
But the Fed has other tools that are critical and underutilized, including financial oversight and regulation. Policy makers can ensure that, when a crisis hits, it is not magnified by overleveraged and defaulting mega-banks.
Epidemics, climate disasters, disrupted supply chains, and shortages of essential equipment, food and medication are hard enough to tackle. What we don’t need is another risk — a bloated and too-big-to-fail financial sector.
And that’s a problem the Fed can do something about.
Pavlina R. Tcherneva is an associate professor of economics and director of the economics program at Bard College, a research scholar at the Levy Economics Institute, and author of the forthcoming book, “The Case for a Job Guarantee” (Polity, July 27, 2020). Follow her on Twitter.