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Monday Insight: Amid virus, US embraces big government - for now

 

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Signed and sealed: US President Donald Trump signs the coronavirus stimulus relief package in the Oval Office. AP Photo/Evan Vucci

Signed and sealed: US President Donald Trump signs the coronavirus stimulus relief package in the Oval Office. AP Photo/Evan Vucci

AP

Signed and sealed: US President Donald Trump signs the coronavirus stimulus relief package in the Oval Office. AP Photo/Evan Vucci

It may, as the US House majority leader and Maryland Democrat Steny Hoyer said on Friday, be out of love that the United States agreed to shut down much of its economy to stop a viral epidemic and save lives.

It may, as Treasury Secretary Steven Mnuchin said, be out of necessity that the federal government agreed to foot the bill.

Whatever the motivation, in the scope of two frantic weeks, US elected officials and central bankers have engineered an economic intervention unparalleled outside of wartime.

All in, it would supplant perhaps 30pc of gross domestic product with government spending and loans, drive the federal deficit as high as needed to make that happen, and broaden US social spending in ways that just a few weeks ago, Republicans and President Donald Trump were branding as "socialist".

After Congress delivered final approval following a week of negotiation, on Friday Mr Trump signed legislation that would authorise more than $2trn (€1.8trn) in direct payments to households, loans to small and large companies, and funding that the Federal Reserve may leverage into as much as $4trn more in credit - money that will leave a deep government imprint on a pre-crisis economy of $21trn.

That has happened with striking speed and, in a country known for its paralysed and polarised politics, remarkably little haggling over either the moral qualms liberals often have about bailing out companies, or that conservatives often have about increasing benefits for those out of work.

Confronting an outside enemy that is imperilling both employers and employees, the well-buffered as well as the uninsured, those concerns have fallen away.

"No question that officials and politicians, even Republicans in the Senate, are prepared to abandon old shibboleths like 'government should keep its hands off the private sector,'" while the crisis is underway, said economics professor Barry Eichengreen of the University of California, Berkeley.

As of last Friday, the coronavirus had infected more than 100,000 people in the US, now the world leader in cases of Covid-19, the illness named after the virus was first identified in China late last year.

Ten of millions will likely face at least a short spell of unemployment - not because business conditions became soft, but because they became dangerous.

Epidemiologists have warned that every human interaction increases the risk that the coronavirus spreads uncontrolled.

"Economic statistics, at the moment, are not relevant. We're in an unprecedented situation," Mr Mnuchin said on Thursday, making what has now become a broadly understood point: the current economic turmoil is by design.

No doubt there will be second-guessing in the months ahead.

"There will be plenty of soul-searching" once the crisis is past, Mr Eichengreen said. "Attitudes about the appropriate role for government are going to be contested even more than was the case."

There has been little concern about the annual government deficit, for example, even though Fed officials have said it could top the 90pc of gross domestic product level some academics view as a "red line" for trouble.

Similarly, there may be a reckoning over how the world's largest economy can spend roughly 18pc of its annual output on healthcare and be short of basic tools.

"Why can't the greatest economy in the history of the world produce swabs, face masks and ventilators in adequate supply?" former treasury secretary Lawrence Summers said on Twitter last week.

Just as the financial crisis a decade ago reinvented the rules for banking, the coronavirus pandemic too may prompt its own stripe of fundamental economic change.

The Fed spent a decade laying plans to "normalise" monetary policy after the 2007 to 2009 crisis.

For a brief time, it even raised interest rates and shed some of the trillions of dollars in bonds it had bought to support the economy.

Interest rates are back to zero, and the Fed has restarted bond-buying.

The central bank's asset holdings topped a record $5trn last week, and could be on pace to even double that, perhaps hitting a level equivalent to 50pc of GDP or more.

A decade ago, as the Fed expanded its role in markets and the economy, there was widespread fretting about the risks involved: financial instability, inflation, or just the propriety of a central bank owning so much.

But the list of assets has now expanded, in effect to include the bonds of private corporations.

No one's complaining.

"The only chance we have to prevent our health care system from being overwhelmed is for as many Americans to stay home as possible," Mr Hoyer said as the House opened debate on the bill Friday morning.

"We are keeping a distance not out of hostility ... but out of love." ©Bloomberg

Bloomberg