(Bloomberg Opinion) -- There is a broad national consensus that more stimulus is needed to safely shepherd the U.S. economy to the other side of Covid-19. President Donald Trump knows it. Federal Reserve Chair Jerome Powell knows it. House Democrats know it. And economists across the political spectrum have said as much. Senate Republicans are apparently the only ones who don’t know it.
Just three days after torpedoing stimulus talks with House Speaker Nancy Pelosi last week, Trump told conservative radio host Rush Limbaugh on Friday that he wants even more relief money than the $2.2 trillion Democrats have proposed. Senate Majority Leader Mitch McConnell, who favors additional bailouts, albeit a fraction of what Trump and Democrats have in mind, wasted no time crushing that idea, saying at a Kentucky event that a stimulus deal is unlikely before the election.
One reason McConnell isn’t more optimistic is that Senate Republicans will be busy ramming through a Supreme Court confirmation during the next three weeks. But the bigger obstacle is ideology: By McConnell’s own account, most Republicans, whose opposition to government intervention is philosophically baked in, won’t agree to a stimulus bill as hefty as the one Trump and Pelosi envision. Some of them think the government has already provided enough relief.
Eight months after the coronavirus slammed into the U.S., the economy remains vulnerable to a protracted slump. The labor market shed more than 22 million jobs in March and April, or roughly 15% of total nonfarm jobs at the time. That’s by far the deepest jobs recession, either in absolute numbers or as a percentage of total jobs, since the Labor Department began tracking the numbers in 1939. Without drastic intervention, the recession could have quickly deteriorated into a depression as millions of newly unemployed workers pulled back on spending, endangering ever more jobs. That’s the kind of downward spiral government intervention is meant to forestall.
When Congress and the Fed injected $7 trillion into the economy in the spring, the hope was that the pandemic would pass quickly and that lost jobs would return soon. That seemed plausible when the daily count of new coronavirus cases began to recede in April and 7.5 million jobs returned in May and June.
But that is no longer the case. The number of new daily cases is nearly twice what it was at the first peak in early April, and the coronavirus is widely expected to bedevil the U.S. well into next year. Meanwhile, the economy has added fewer jobs every month since June, including an anemic 661,000 last month — and there are still 11 million fewer jobs than before the pandemic began. The first round of stimulus for workers evaporated in July, and the spending hole left by millions of unemployed Americans once again threatens to do serious, long-lasting damage to the economy.
Republicans undoubtedly know all this, which raises the worrisome possibility that they are simply rejecting hard-learned lessons about what happens when a failing economy is left to sort its fate on its own.
It’s easy to take for granted the long stretches of economic stability the U.S. has enjoyed in recent decades. Consider that during the country’s first roughly 150 years, from independence to the Great Depression, the U.S. encountered 35 recessions, or a downturn every four years on average. But in the 80 years since the Great Depression, there have been 13 recessions, including the current one, for an average of one every six years. And since 1982, there have been just four recessions, or once a decade on average.
It’s not just the frequency of recessions that has diminished but their duration and severity. During the 150 years before the Great Depression, recessions lasted roughly two years on average. Since the Great Depression, that average has dropped to less than a year. The U.S. also hasn’t experienced a depression in nearly 100 years, a proposition that would have seemed incredible to Americans a century ago because depressions were once, well, depressingly common. There were anywhere between four and seven depressions before 1930, depending on where the line is drawn between ordinary recessions and more serious downturns. Indeed, there’s a reason why the depression of the 1930s was called “great” — it was merely the most severe in what had been a series of them.
The modern economy’s improved stability is no accident. It’s the work of smart policy tools the government put in place early in the last century, occasionally supplementing and refining them in the ensuing years. Congress and the Fed’s muscular response to the onset of the coronavirus has its roots in a financial crisis dating back to 1907. A recession that began in May of that year sparked a run on banks and trust companies in October, threatening to bring down the entire financial system and the U.S. economy with it.
Lacking the tools to coordinate a government-led rescue, policy makers watched helplessly as the crisis deepened. Legendary financier J.P. Morgan eventually organized a bailout by locking the heads of the country’s biggest banks in his library until they committed to joining him in putting up as much money as necessary to rescue insolvent banks. The scare led to the creation of the Federal Reserve System in 1913. In future panics, the central bank could come to the rescue of failing financial institutions before they threatened the entire system.
The Fed was also tasked with its so-called dual mandate of maximizing employment and stabilizing prices, but it was less eager to inject itself into the economy in those early days. The U.S. economy suffered four recessions between the Fed’s creation in 1913 and the Great Depression, one of them severe enough to credibly be called a depression, and yet the central bank did little to intervene. Those recessions were relatively short-lived, just more than a year on average, so the damage from inaction was modest.
The next recession would not be as forgiving. Economists disagree about why the Great Depression, which began in 1929 and continued through most of the 1930s, was so long and severe. One theory blames a precipitous decline in spending — that rising unemployment and economic uncertainty caused Americans to cut back, deepening and prolonging the recession. Another theory faults the Fed for tightening the money supply when it should have expanded it. The tools were in place, but policy makers either lacked the will or awareness to use them. Those mistakes would be corrected in subsequent downturns, including the current one, with Congress stepping in to bolster spending and the Fed injecting money into the economy.
The broad, empirical lesson imparted by decades of combating punishing downturns during the country’s first 150 years, and punctuated by the Great Depression, is that it’s unwise to leave the economy unattended when it stumbles.
The success of recent interventions should make that truth even clearer. Fed Chair Paul Volcker tamed stagflation in the 1970s and early 1980s by aggressively raising short-term interest rates to as high as 19% in 1981. Two decades later, Fed Chair Alan Greenspan reduced short-term rates to near zero to support the economy following the dot-com bust in 2000. And in the aftermath of the 2008 financial crisis, the Fed dropped rates again and injected $3 trillion into the economy; Congress spent an additional $2.8 trillion mostly on corporate bailouts and tax cuts.
Those calamities would have likely been longer and more severe without intervention, as would the damage the coronavirus has inflicted so far today. That doesn’t mean previous rescue efforts have been perfect. As we have argued repeatedly, relief should go directly to workers and families rather than through intermediaries such as banks and businesses. It also doesn’t mean Congress can run deficits or that the Fed can print money indefinitely — yes, policy makers should be cautious about both during boom times.
But Republicans appear to be forgetting that the ability and willingness to bolster the economy during downturns has contributed to unusually long stretches of prosperity in recent decades. It’s been nearly 100 years since the last depression. Let’s not roll back the clock.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.
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