$2 Trillion in Additional Stimulus: The Good and the Bad

The US government seems poised to pass the third and biggest stimulus package intended to support a faltering economy being battered by the coronavirus pandemic.

The first package provided $8.3 billion which is being used primarily for emergency healthcare needs; the second focused on providing paid sick leave, expanding our safety net, and free testing for the coronavirus; and this third, still in the works, proposes a major stimulus that according to a Bloomberg article on the agreement:

"...provides direct payments to lower- and middle-income Americans of $1,200 for each adult, as well as $500 for each child. Unemployment insurance would be extended to four months, the benefits would be bolstered by $600 weekly and eligibility would be expanded to cover more workers.

"...includes about $500 billion that can be used to back loans and assistance to companies, including $50 billion for loans to U.S. airlines, as well as state and local governments. It also has more than $350 billion to aid small businesses. Then there is $150 billion for hospitals and other health-care providers for equipment and supplies" (Bloomberg article).

What's there to Cheer?

First, there is the reaction by the government to the problems facing the economy - the huge loss of jobs and therefore of incomes for many individuals and households.

Second, it boosts confidence in the economy: families strapped for cash in uncertain times can be less anxious. Businesses also that would see continued spending on their products, in addition to the support to their businesses in the form of loans should they need it to help cushion their losses and higher costs associated with production.

Third, by the multiplier effect, spending generates production, which generates incomes, which boosts spending, this should lead boost overall spending in the economy and as is typically expected, should help to stave off an economic slowdown, or reduce the length of an inevitable one (most economists think a US and recession is inevitable).

Fourth, keeping in mind that the Fed is also hard at work with a lot of monetary stimulus being pumped into the economy, this reinforces those actions and enables the economy to keep spending to hopefully boost economic activity and mitigate any slowdown.

What's not to Cheer about?

I would have hoped that all we had to talk about would be that this is something to cheer about and that the stimulus would get us back to our normal lives, but it turns out that whatever there is to cheer, is probably going to be short lived...

It is already apparent that prices of goods and services have been going up. While there is a significant amount of hoarding taking place - out of fear and for unscrupulous profit seeking objectives by some individuals, there is also the reality that production has fallen. The fall in production is both due to a fall in spending and a scarcity of labor and other resources being kept back from production given the need for social distancing.

So, the stimulus does help to boost spending by households and businesses, however it does not address the inability to produce.

Limiting social interactions has meant the need to close down businesses, factories, production lines, and in many cases even delivery services have to be somewhat limited. So while we see a single driver doing some delivery, there is some hub where the driver interacts with others and policies to keep people fairly apart will likely interfere with the normal process of such deliveries, thus reducing them in the aggregate.

People do not go out anymore to work or shop because there are in many places restrictions in the form of "shelter in place" or curfews, so they stay home and whip out the computer, their phones and shop online. For some reason we believe that the stores or businesses we plan to purchase stuff from are still open and churning out products. For the most part, it appears that they are, but they are also having to adjust how they produce and ship, for same aforementioned reasons.

This means that costs of production (including shipping) are going up for businesses.

As a result all of the stimulus can only do so much. In the immediate short term some families may be able to support the loss in their incomes, but with time, the reality that there is a shortage of output out there will be full blown as prices go up. The monetary and income stimulus will not be enough to cover the now higher prices on the reduced output. Any additional production will incur bigger costs and require higher prices.

As the government tries to clamp down on price gouging, black markets will become a lot more prevalent. It has to be kept in mind that with some of the price increases that will ensue it is only price gouging to the many who do not understand how economics works, but the perception will exist and this will make businesses to rather not produce or not offer their products for sale. At least not openly.

Scarcity drives up value, that is the only way to incentivize both its production and how it is allocated. Clamping down on prices will only worsen the scarcity and make the items only available in black markets, which will in time likely come to be filled with 'lemons' as well. As these transactions are mostly illegal, behavior associated with these might spur further criminal activities to enforce transactions. There is a reason people are stocking up on guns, but let's hope things don't spiral into that outcome.

It still is a Supply Side problem

The reason the cheer associated with the stimulus is short-lived is because as I have said in several blogs, it is a supply side problem. The coronavirus has decimated our supply capabilities. Workers are at home or working reduced hours to facilitate limited interactions.

This is the preferred policy though, as to do otherwise would see more infections and more hospitalizations and this would lead to even worse outcomes as our healthcare facilities become overwhelmed and the number of fatalities grow rapidly, Italy being an unfortunate case in point. So we need to have these social distancing policies in place.

So what can be done?

All hands have to be on deck to address the coronavirus or the uncertainty about it that keeps people from being able to get back to work. Incentives always matter and here I think the target of the stimulus, especially those going to businesses, should be focused on the following:

Research into finding a drug or group of drugs that work and ultimately for vaccines that can be used effectively against the disease. Funds should not be spared in this respect.

Research into and the production of protective gear and equipment for healthcare workers and all those at the frontline of health services including law enforcement.

Research into and the production of similar wearable protective gear and equipment to be made available to identified businesses whose factories are producing and delivering critical and essential products needed at this time both by healthcare facilities and also by households in general. This would allow them to be exempt from social distancing so that they can carry on with producing these goods and services unhindered and safely.

Generally, such head to toe protective gear should be made available only to these three groups of individuals in the economy - the frontline healthcare workers, the workers in the production facilities and deliveries mentioned above, and law enforcement, since by nature of their work, they might have to violate social distancing requirements.

Further spending could also be allocated to research into advanced robotization and remote use of these in extensive production and delivery of critical items including necessities. This will allow for continued production of these things with limited social interactions. Similarly spending should also be directed toward education and training workers to develop the skills to man these new technologies remotely.

Addressing the pandemic need not think solely in terms of scoring political points but it gives us opportunities to restructure things that allow us to both overcome the problem and to be better prepared for any future problems. It's not always about demand side stimulus because it is politically attractive or supply side ones that only target status quo businesses with political connections. It is time to think properly and do the right thing.