Economic Relief Isn’t Enough. Do Stimulus, Too

(Bloomberg Opinion) -- The U.S. government’s multi-trillion-dollar coronavirus package can’t really be called a stimulus: Its main goal is merely to provide relief while the economy is in “lockdown” mode. That’s unfortunate, because it is possible for traditional stimulus to create much needed jobs in some areas of the economy. 

All over the country, states have imposed restrictions on economic activity designed to slow the deadly spread of Covid-19. But it would be misleading to say these measures have shut down the economy. The country’s output won’t fall to (anything close to) zero. It’s still possible to produce goods and services (like takeout food) that are deemed essential, or that (like online education) can be consumed without personal contact.  Traditional stimulus could, in the usual way, boost employment in these sectors of the economy. Suppose, for example, that Congress gave $10,000 to every household. People could use that money to spend more on essential or safe goods and services. The added demand, in turn, would create more jobs in the relevant areas.

It’s hard to see any downside to such employment-boosting stimulus. It would require more government borrowing, but with the inflation-adjusted interest rate on 30-year Treasury bonds at less than zero, the longer-term cost (in terms of future taxes) seems manageable. It could also generate inflation, as the added demand pushed up prices of all goods and services, including those in constrained supply. The inflationary effect could even be larger than usual, because so many sectors wouldn’t be able to respond by increasing employment.

In the current environment, though, boosting inflation wouldn’t be a bad thing. Even in the “normal” times of 2019, inflation was running below the Federal Reserve’s target of 2%. Officials now expect it to fall still further amid a deep recession. The prices of inflation-indexed bonds suggest that investors expect the Fed’s preferred measure of inflation  to average well below 1% over the next five years. Given that unemployment could get as high as 20%, officials should be aiming much higher in their efforts to stimulate growth, even if that temporarily pushes inflation to 3% or 4%.

In a crisis that has deprived millions of people and businesses of essential income, it’s natural and right to provide cash relief. But many of those people would welcome a chance to work. The government should also use its spending might to increase the jobs that can and must be done.  

See this recent paper by Guerrieri, Lorenzoni, Straub, and Werning for a related academic treatment of these issues. It makes clear the importance of using a multi-sector macroeconomic model to understand the impact of Covid-19.

Treasury inflation-protected securities are indexed to the Labor Department’s measure of consumer price inflation, which typically runs about 0.3 to 0.4 percentage points above the Fed’s preferred measure, the Commerce Department’s personal consumption expenditure price index.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

©2020 Bloomberg L.P.

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