Fed Chair Says More Fiscal Action Necessary to Sustain Recovery from Pandemic Recession; Trump Calls Off Negotiations

Whatever the experts say, do the opposite—such appears to be Donald Trump’s plan for the remainder of his time in the White House.

Yesterday morning, Federal Reserve Chair Jerome Powell told the National Association for Business Economics that the government’s fiscal response to covid-19 in the spring—”by far the largest and most innovative fiscal response to an economic crisis since the Great Depression”—made a huge difference in protecting households, businesses, and the markets from a pandemic collapse:

First, the substantial fiscal aid has given vital support to households. The rise in transfers supported necessary spending and contributed to a sharp increase in household saving. Goods consumption is now above its pre-pandemic level. Services consumption remains low, although it seems likely that much of this weakness is the byproduct of health concerns and social distancing, rather than reductions in income and wealth. Consumption held up well through August after the expiration of expanded unemployment insurance benefits, indicating that savings from transfer payments continue to support economic activity. A recent Fed survey showed that households in July had surprisingly upbeat views of their current financial well-being, with 77 percent of adults either “doing okay” or “living comfortably,” an improvement even over the reading immediately preceding the pandemic.¹ Still, since it appears that many will undergo extended periods of unemployment, there is likely to be a need for further support.

Second, aid to firms—in particular, the Paycheck Protection Program—and the general boost to aggregate demand have so far partly forestalled an expected wave of bankruptcies and lessened permanent layoffs. Business investment appears to be on a renewed upward trajectory and new business formation similarly appears to be rebounding, pointing to some confidence in the path ahead.

Third, after briefly seizing up in March, financial markets have largely returned to normal functioning, albeit in the context of extensive ongoing policy support. Financial conditions are highly accommodative, and credit is available on reasonable terms for many—though not all—households and businesses. Interest-sensitive spending has been relatively strong, as shown in the housing and auto sectors.

Taken together, fiscal and monetary policy actions have so far supported a strong but incomplete recovery in demand and have—for now—substantially muted the normal recessionary dynamics that occur in a downturn. In a typical recession, there is a downward spiral in which layoffs lead to still lower demand, and subsequent additional layoffs. This dynamic was disrupted by the infusion of funds to households and businesses. Prompt and forceful policy actions were also likely responsible for reducing risk aversion in financial markets and business decisions more broadly [emphasis mine; Fed Chair Jerome Powell, speech to National Association for Business Economics virtual annual meeting, 2020.10.06].

As the words I highlight above show, Chairman Powell recognizes this government-driven recovery is “far from complete.” To keep from sacrificing what we’ve recovered so far, Powell says we first have to keep working to prevent the spread of coronavirus:

We should continue do what we can to manage downside risks to the outlook. One such risk is that COVID-19 cases might again rise to levels that more significantly limit economic activity, not to mention the tragic effects on lives and well-being. Managing this risk as the expansion continues will require following medical experts’ guidance, including using masks and social-distancing measures [Powell, 2020.10.06].

Chairman Powell also says continued government action is vital. We will suffer more if government does too little than if government somehow does too much to fight the pandemic recession:

At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods [emphasis mine; Powell, 2020.10.06].

Hours after Chairman Powell’s speech, Donald Trump canceled negotiations with Congress on the next round of the economic relief legislation that Chairman Powell just said we can’t do without. In full hostage-taker mode, Trump said he would only resume negotiations for the fiscal action Chairman after he wins the election. Trump directed (?!?) the Senate to instead “focus full time” on approving his nominee to the Supreme Court.

Pause there: The Supreme Court can work just fine for now without any immediate legislative action. It has eight justices. From a conservative standpoint, it has a five-justice conservative majority to deliver the verdicts Trump and his base want. The Supreme Court is not broken; the economy is. But giving one judge a promotion is more important to Trump than helping millions of Americans get their jobs back.

Markets, which think more like Chairman Powell, responded unfavorably:

Trump’s announcement caused the stock market, his preferred gauge of economic success, to close with notable losses. But the long-run impact of his decision and the broader failure to strike a deal could leave millions of Americans in financial peril amid a health crisis with no end in sight.

Roughly 26 million Americans are on some form of unemployment insurance and have suffered for months from the July 31 expiration of a boost to those benefits. Many of the first Americans who lost their jobs to the pandemic will see their benefits expire within months and may struggle to find jobs as entire sectors of the economy remain largely shutdown.

Thousands of small businesses are also teetering on the brink of failure as the prospect of spiking coronavirus cases this winter and fewer ways move operations to outdoors make for an uncertain future.

And millions of Americans who are struggling to pay rent could face homelessness despite a federal ban on evictions and several foreclosure moratoria that have been difficult to enforce [Sylvan Lane, “Stocks Plunge After Trump Orders End to Coronavirus Stimulus Talks,” The Hill, 2020.10.06].

Either cowed or thrilled by market chaos, Trump then tweeted that he agrees with Chairman Powell that there’s low risk of overdoing fiscal response to the pandemic recession and wants immediate support for airlines, an extension of the Paycheck Protection Program, and another round of individual stimulus checks. But when the White House kicks the legs out from under negotiations that were approaching a deal, then claims to want a deal, how can anyone trying to forge a solution rely on the Executive Branch and its party for good-faith gestures?

Joe Biden (who speaks in paragraphs, not Tweets, the way a President should) comes to the only logical conclusion: Donald Trump isn’t even trying to help us survive this pandemic. As in every other instant in his life, Trump is only looking out for himself:

Donald Trump ended the efforts to pass bipartisan relief that our nation desperately needs. He ended talks that would get help for our businesses and schools, for families struggling and for those unemployed — that would have preserved hundreds of thousands of jobs. Make no mistake: if you are out of work, if your business is closed, if your child’s school is shut down, if you are seeing layoffs in your community, Donald Trump decided today that none of that — none of it — matters to him. There will be no help from Washington for the foreseeable future. Instead, he wants the Senate to use it’s time to confirm his Supreme Court Justice nominee before the election, in a mad dash to make sure that the Court takes away your health care coverage as quickly as possible.

He turned his back on the small businesses that are struggling to keep their doors open. He turned his back on the firefighters and police officers and other first responders who depend on state and local government budgets that are strained to the breaking point. He turned his back on teachers and school children — standing in the way of support to get the PPE and cleaning supplies and ventilation needed to safely reopen schools. He turned his back on every single worker whose job hasn’t come back yet–and who are left to wonder when they’ll get the break they deserve. He turned his back on families struggling to pay rent, put food on their table, and take care of their kids.

Worse yet, he never even really tried to get a deal for these Americans. Not once did he bring Republicans and Democrats together in the Oval Office, on the phone, or by Zoom, to get a relief package that would help working people and small businesses in this country. Not once in the months since the House passed a relief package in May has he stepped up to lead.

Today, I spoke to the country about the need to pull people together, regardless of their political background, to unite our country and to get things done for the American people.

That’s the job. To deliver for the people of this country. That’s what I did when I went to Congress and got the votes for the Recovery Act and led its implementation to pull our nation back from the brink in 2009 and kick off the longest uninterrupted streak of job growth in our history. That’s what I will do as president. And it’s what Donald Trump has again made clear he has no intention of doing ever [Joe Biden, campaign press release, 2020.10.06].

If you think the job of President is to provide madcap entertainment, you’ve got your man in the White House. But if you think the job of the President is to listen to experts like Chairman Powell and act in the interest of the American people, you need to vote for new management.

p.s.: To his credit, Congressman Dusty Johnson said yesterday that inaction is not an option: