Rates of coronavirus infection and hospitalization have begun to ebb, and government officials have begun to consider how to reopen the economy—and none too soon, for the nationwide lockdown has put the U.S. economy at great risk. The immediate economic losses from keeping workers home from their jobs and consumers away from stores and restaurants and movie theaters has been partially mitigated by monetary and fiscal policies to help individuals and businesses bridge this distress. But behind this immediate problem is the threat of something much worse—that a prolonged emergency will overwhelm Washington’s bridging policies and metastasize into an entrenched and lasting recession, something that would require a wholly different sort of policy response.
The immediate pain of the shutdowns and quarantines has become increasingly evident in recent weeks. Retail sales fell 8.7 percent in March from February. This one-month drop more than wiped out all the gains of the past year, so that sales levels in March stood 6.2 percent below levels of March 2019. Since the shutdown and quarantines were in effect for only half the month, April will almost certainly look worse. According to the Labor Department, payrolls in March fell by more than 700,000, and the unemployment rate rose from 3.5 percent to 4.4 percent. These figures surely understate the economic pain. The surveys on which the Labor Department relies for these data occurred in the middle of the month, before the lockdowns and quarantines really got started. Claims for unemployment insurance have risen by some 20 million over the past four weeks, so the unemployment rate is probably 12 percentage points higher than reported—or more than 15 percent of the workforce. As more data become available, more unpleasant details will emerge.
Washington has aimed more than $4 trillion in fiscal and monetary stimulus at alleviating the economic distress. The policy effort clearly rests on the presumption that helping firms and people bridge the period of lockdown and quarantine will help the economy spring back quickly when the emergency lifts. Without going into an in-depth review of these policies, three examples can suffice to describe their nature and intent. By extending unemployment insurance to people not usually eligible and paying a greater amount over a longer time frame, the hope is that recipients will resist the temptation to reduce their living standards during the emergency and feel confident enough when normal life returns to resume spending quickly. Second, and with a similar objective in mind, the Federal Reserve has reconstituted what it calls its Term Asset-Backed Lending Facility (TALF) to support credit card and other consumer lending. Third, the Trump administration has also implemented the Payroll Protection Program, extending loans to small businesses that will be forgiven if they can keep employees on payroll during the crisis. The Fed has extended a similar program to medium-size businesses.
But such policies will lose their potency the longer the shutdowns and quarantines last. No matter how generous Washington is with lending and benefits, the loss of revenue will eventually convince firms to abandon short-term adjustments and make more drastic and lasting cuts, and shutter facilities that they might previously have maintained in the hopes of a quick return to business. Those newly laid-off workers—and those who previously thought their period of unemployment might not last long—will change their habits and be less inclined to spend, even after employment prospects improve. Other firms will simply go bankrupt, leaving their workers bereft of income, and the economy will contract. Recovery will require a good deal more time and effort than presently contemplated, and a different set of policies.
The economy does not yet face this last, most sinister risk. That is why the relatively good news on the course of the virus and the talk of a tentative economic reopening is so welcome. If the lifting of constraints is done aggressively enough to stem the flow of economic loss but cautiously enough to avoid a renewed contagion—and the round of lockdowns and quarantines that would accompany it—there is good reason to expect that the economy will avoid a deep recession. Perhaps the best news is that leadership—in Washington and in state capitals—seems increasingly aware of the delicate balancing act needed.