Urgency Grows for Fiscal Stimulus. What Will It Look Like?

• Global markets settle after Monday’s historic losses
• Trump to ask Congress for $850 billion bailout package
• Lawmakers seek other measures to help small businesses and individuals

Global markets are settling this morning following Monday’s selloff, which was one of the worst for European and U.S. markets in history. Health officials finally got their message across to political leaders and central bankers, describing what could be a “worst case scenario” for the U.S. wherein as many as 2.2 million Americans could die from coronavirus, the economy slides into a deep recession, unemployment spikes and businesses default on their debt or close shop as activity disappears.

The Federal Reserve launched more stimulus missiles yesterday, agreeing to inject another $500 billion into the overnight repo market to ensure that banks are lending to one another amid the crisis. While the plunge in global markets is getting all the headlines, the commercial paper market – where companies borrow short-term money for the financing of accounts payable and inventories and other liabilities, is showing signs of seizing up.

As the health crisis in the U.S. escalates and the likelihood of a recession nears 100%, it’s clear that the U.S. government must open its coffers further.

Yesterday we learned that U.S. airlines are seeking over $50 billion in direct grants and zero-interest loans from the government as COVID-19 threatens the industry’s existence. Boeing is asking for short term access to public and private liquidity for itself, suppliers and airlines. Trump has said he will back airlines 100% and left the door open for other industries in a tweet yesterday.

The Washington Post reports the administration is asking Congress to approve a massive economic stimulus package of around $850 billion. According to the newspaper’s sources, “the package would be mostly devoted to flooding the economy with cash, through a payroll tax cut or other mechanism, with some $50 billion directed specifically to helping the airline industry.”

Helicopter Money and Bailouts

There’s pressure on the government to support businesses and ordinary Americans whose livelihoods maybe threatened. The Trump administration has so far proposed a payroll tax holiday and signed a $8.3 billion emergency funding bill to help federal agencies and states.

“We are going to need to get large amounts of money — you might call it ‘helicopter money’ — to those people who are going to be under enormous stress,” said Nobel Prize-winning economist Joseph Stiglitz to CNBC, adding that deficit concerns can be dealt with later like was the case with World War II. “It is clearly a case where targeted fiscal policy is what is needed. It’s been true for a long while that monetary policies has had only have limited efficacy.”

Economist Jason Furman, the former chair of the Council of Economic Advisers under President Obama, has said the payroll tax cut would be too slow and would not help everyone. He has suggested sending every American citizen or tax-paying resident $1,000 with an additional $500 for each child, which would cost about $350 billion, and the idea is gaining traction in Congress. Even Mitt Romney supports it. “If the economic shock is small and stimulus proves to be unnecessary, its negative effects are likely to be small. But if the shock is bigger and policy makers fail to act now, it will be harder to reverse the economic damage. With the federal government able to borrow at a negative real interest rate, doing too much is a minimal risk,” Furman argued in a WSJ column.

The U.S. Chamber of Commerce, one of the most powerful lobbying groups in the country, has listed three policy recommendations in a letter sent to Trump and congressional leadership – canceling payment of all payroll taxes paid by employers for the months of March, April, and May, expanding and streamlining loan programs for small businesses experiencing revenue loss, and the creation of credit facilities to provide loans and loan guarantees to employers with more than 500 employees experiencing significant revenue loss.

The March jobs report will be out in a few weeks and it could show up to a million jobs lost, according to former White House economist Kevin Hassett. “If Congress doesn’t understand that we’re looking at maybe one of the worst jobs numbers we’ve ever seen, and we’re looking at a negative GDP number in the second quarter that’s really large, if they don’t understand that, then they cannot do a stimulus for sure. But they need to understand that and they need to give a big stimulus right now,” he said on CNN.