Economic Perspective: Potential Government Responses to the Coronavirus

MARY WALDEN:

“Today’s program looks at government responses to the coronavirus. Mike, as the coronavirus persists and spreads there are calls for government action. What kinds of actions can the government take, and would they be effective?”

MIKE WALDEN:

“And of course the reason the government is being called to do something, and this was a totally unexepected event, it’s really overwhelming local governments, state governments, individuals. The federal government is really the only entity that has the resources that could be martialed to address this.”

“If we look at the federal government’s response to date, we’ve had a major response from the Federal Reserve which has a big influence on the credit markets. First of all, they have now lowered their key-interest rate to almost zero percent. So that makes it cheaper for people to borrow money, and businesses to borrow money who need to.”

“Also, and this is very important, the Federal Reserve has dedicated over one trillion dollars to be used in the financial markets in the event that there’s a situation where, for example, a seller, or a would-be seller of a financial investment, can’t find a buyer. That’s not good. That causes credit markets to freeze up, and so the Federal Reserve in that situation will step in and buy that financial asset.”

“Now beyond this the Congress and the President have been looking at other ways. For example, they’ve already passed a bill that will provide money to state and local governments to help in terms of caring for people who have the coronavirus. The federal government is working with the private sector to provide more testing kits.”

“Beyond this there are bigger things that many want the federal government to do. For example, what happens if workers are told to stay home, and they exceed their sick leave, and so they’re losing money? There is a move to get those folks at least two weeks of paid leave. There’s also the question of whether we need a fiscal stimulus similar to what we had during the Great Recession.”

“Some have said to give everyone $1,000. Others in the administration want to eliminate the payroll tax for the rest of the year. That would be a trillion dollar infusion of money into the economy. I think one of the questions there is that this is a different kind of situation than the Great Recession which was economically based. This is obviously medically based, and, in fact, people are being told don’t go out. Don’t go to stores. Don’t go to restaurants. Don’t spend money. So there’s a question of whether getting people more money will actually cause them to spend, and mitigate what I think will be a slowness in the economy.”

“And then the final question is will the federal government take action to help certain businesses that have really been devastated by this event? The cruise line business. The airline business. The hotel business. Maybe even restaurants. That’s probably the biggest question of all, and that will be heavily debated.”

Mike Walden is a William Neal Reynolds Distinguished Professor in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.