Two Crises and the Response in 2020
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Ben Tafoya
May 10, 2020
The anxiety of an economy in freefall propelled by events where the average person has no control feels too familiar for those of us who went through the events of 2007 to 2009. In a simple model, the crisis of 2008 was caused by a bursting housing bubble that spread to the financial system. The spread was caused by the tight interconnection between the bubble and the financial instruments that promoted the growth of speculation in housing and the gambling on the related securities. This caused both a giant hole in demand and a destabilizing crisis in the financial sector.
The response should have been straightforward, even by the constraints of conventional policy; Fill in the hole and demand that fiscal policy utilize the Federal Reserve to stabilize finance. Unfortunately, the first part of the response was inadequate and the second part was too aggressive. This was symbolized by the long slow accumulation of jobs, GDP growth and wage increases and an imbalance of benefits away from the vast majority and toward the 1%. With the concentration of economic firepower in monetary policy to channel money to the banks the result was trillions of dollars staying in those financial institutions.
The origins of this downturn are different, the impact is far more dramatic and the policy prescriptions will also vary significantly. This crisis is due to the necessary imposition of social distancing to ward off a virus for which there is no vaccine or treatment except isolation. The service sector of our economy has been devastated, led by historic drops in activity in restaurants, hotels, transportation, retail stores and personal care services. We have seen the preliminary numbers from Q1 of 2020 and know that the numbers from the second quarter will show an even deeper plunge. Europe’s contraction is at almost three times our rate because it started to shut down earlier, and China even earlier still and also more dramatic.
A large part of the fiscal response to the Great Recession involved tax cuts. In short, government tried to increase disposal income by cutting taxes enabling consumers to take more money and spend it on products and services that boost the economy. The challenge this time is that the growing ranks of the unemployed need money for basic necessities such as rent, food and medical care. With the shutdown of stores and the restrictions on shopping, little economic activity can occur even if people have more disposable income to spend. The lack of entertainment venues, sporting events and days at the beach also limit choices for spending money on leisure activities. The Q1 numbers revealed this, as through March the savings rate of United States income increased by a dramatic 2%.
So, given these constraints, what can fill that hole in demand? The Congress and the President have taken steps to preserve payrolls in some selective sectors and channel additional money to the unemployed. Frankly, this crisis shows the messy and inadequate social safety net in our country. Tens of millions will need to resort to COBRA or Medicaid for health insurance and neither system is ready for the numbers. Food insecurity is growing, and we have seen giant crowds gathering for distributions as well as increases in applications for SNAP benefits.
It is clear that the hole will require significantly higher transfers of cash from the federal government to the unemployed and the underemployed. Our households should not suffer as the result of a massive failure of our inadequate public health system. Debt relief is required, or the cash will just go to increased savings (by paying down debt). Rent control and an end to evictions are also necessary to make sure there are not dislocations in the midst of the emergency. Moratoriums on mortgage foreclosures, both residential and commercial, are a priority as individual banks are unable to handle the flood of requests for forbearance.
State and local government is still hard at work but threatened by the downturn. It is critically important that the federal government provide unrestricted aid to the states, not just for the COVID-19 response but to support education, healthcare, public safety and the services that support our quality of life. The National Governor’s Association called for $500 Billion in aid to support the near term. This may not be enough, but it is a start. Without this support the unemployment situation will get worse and the quality of education and other important services will suffer substantial harm.
As we look to the future, we must properly prepare for the next few months and the tentative steps toward expanding the range of activity outside the home. This includes making sure that the voices of workers, and their unions and community organizations are heard as we explore the issues of how people can return to work. This isn’t some management problem. This is a public health problem putting all members of our community at risk. We need to care for everyone in society as we start our recovery and learn from the mistakes of the past. We must prioritize social justice in the response.
Author: Ben Tafoya holds a doctorate from Northeastern University where he serves as an adjunct lecturer in economics. He works as a research director in Boston and is a former local elected official. Ben is the author of a chapter on social equity and public administration in the recently published volume, “Public Affairs Practicum” from Birkdale Publishers. He can be reached at [email protected] and @policyben on Twitter.
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Two Crises and the Response in 2020
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Ben Tafoya
May 10, 2020
The anxiety of an economy in freefall propelled by events where the average person has no control feels too familiar for those of us who went through the events of 2007 to 2009. In a simple model, the crisis of 2008 was caused by a bursting housing bubble that spread to the financial system. The spread was caused by the tight interconnection between the bubble and the financial instruments that promoted the growth of speculation in housing and the gambling on the related securities. This caused both a giant hole in demand and a destabilizing crisis in the financial sector.
The response should have been straightforward, even by the constraints of conventional policy; Fill in the hole and demand that fiscal policy utilize the Federal Reserve to stabilize finance. Unfortunately, the first part of the response was inadequate and the second part was too aggressive. This was symbolized by the long slow accumulation of jobs, GDP growth and wage increases and an imbalance of benefits away from the vast majority and toward the 1%. With the concentration of economic firepower in monetary policy to channel money to the banks the result was trillions of dollars staying in those financial institutions.
The origins of this downturn are different, the impact is far more dramatic and the policy prescriptions will also vary significantly. This crisis is due to the necessary imposition of social distancing to ward off a virus for which there is no vaccine or treatment except isolation. The service sector of our economy has been devastated, led by historic drops in activity in restaurants, hotels, transportation, retail stores and personal care services. We have seen the preliminary numbers from Q1 of 2020 and know that the numbers from the second quarter will show an even deeper plunge. Europe’s contraction is at almost three times our rate because it started to shut down earlier, and China even earlier still and also more dramatic.
A large part of the fiscal response to the Great Recession involved tax cuts. In short, government tried to increase disposal income by cutting taxes enabling consumers to take more money and spend it on products and services that boost the economy. The challenge this time is that the growing ranks of the unemployed need money for basic necessities such as rent, food and medical care. With the shutdown of stores and the restrictions on shopping, little economic activity can occur even if people have more disposable income to spend. The lack of entertainment venues, sporting events and days at the beach also limit choices for spending money on leisure activities. The Q1 numbers revealed this, as through March the savings rate of United States income increased by a dramatic 2%.
So, given these constraints, what can fill that hole in demand? The Congress and the President have taken steps to preserve payrolls in some selective sectors and channel additional money to the unemployed. Frankly, this crisis shows the messy and inadequate social safety net in our country. Tens of millions will need to resort to COBRA or Medicaid for health insurance and neither system is ready for the numbers. Food insecurity is growing, and we have seen giant crowds gathering for distributions as well as increases in applications for SNAP benefits.
It is clear that the hole will require significantly higher transfers of cash from the federal government to the unemployed and the underemployed. Our households should not suffer as the result of a massive failure of our inadequate public health system. Debt relief is required, or the cash will just go to increased savings (by paying down debt). Rent control and an end to evictions are also necessary to make sure there are not dislocations in the midst of the emergency. Moratoriums on mortgage foreclosures, both residential and commercial, are a priority as individual banks are unable to handle the flood of requests for forbearance.
State and local government is still hard at work but threatened by the downturn. It is critically important that the federal government provide unrestricted aid to the states, not just for the COVID-19 response but to support education, healthcare, public safety and the services that support our quality of life. The National Governor’s Association called for $500 Billion in aid to support the near term. This may not be enough, but it is a start. Without this support the unemployment situation will get worse and the quality of education and other important services will suffer substantial harm.
As we look to the future, we must properly prepare for the next few months and the tentative steps toward expanding the range of activity outside the home. This includes making sure that the voices of workers, and their unions and community organizations are heard as we explore the issues of how people can return to work. This isn’t some management problem. This is a public health problem putting all members of our community at risk. We need to care for everyone in society as we start our recovery and learn from the mistakes of the past. We must prioritize social justice in the response.
Author: Ben Tafoya holds a doctorate from Northeastern University where he serves as an adjunct lecturer in economics. He works as a research director in Boston and is a former local elected official. Ben is the author of a chapter on social equity and public administration in the recently published volume, “Public Affairs Practicum” from Birkdale Publishers. He can be reached at [email protected] and @policyben on Twitter.
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