A Federal Stimulus Plan to Counter Economic Impact of Coronavirus?

Former Council of Economic Advisers Chairman Jason Furman speaks during a forum held by Democratic members of the House Ways and Means Committee discussing Republican tax legislation and the U.S. economy, in Washington on Dec. 13, 2017. (Zach Gibson/Getty Images)

Commentary

It’s still early in 2020, but I’d be willing to wager even money that the coronavirus will be the major story of the year.

Apart from whatever the impact on human health turns out to be, the virus is already causing major economic disruptions. Those disruptions in turn have the potential to remake the long-term political landscape in both China, where Xi Jinping’s Communist Party has discredited itself, and in the United States by potentially weakening the economy enough to erase President Donald Trump’s No. 1 electoral advantage—a strong economy.

(An aside: if you think the presidential race is ugly now, wait until Democrats try to pin both a slowing economy and the severity of the virus on Trump. And please, Mr. President, quit shooting yourself in the foot by offering your opinions about how severe the health impact of the virus will be. Nobody knows, and unfounded opinions can only make you look foolish.)

In an attempt to counter the negative impact of the virus, the Federal Reserve unveiled a large emergency interest rate cut of a half-percent. This was followed by Jason Furman, chairman of the White House Council of Economic Advisers during President Barack Obama’s second term, calling for a legislative “stimulus plan” of “about $350 billion” on March 5 in The Wall Street Journal. (There was no explanation of why that amount. Like many Washington spending proposals, the number seems arbitrary.)

There are multiple reasons why such a proposal should be rejected. First is simple math: With the annual federal budget deficit already exceeding a trillion dollars, do we want to make a bad situation worse? Even by the standards of today’s debased dollar, $350 billion is a lot of money.

Second, “stimulus plans” don’t do what they’re advertised to do—they don’t stimulate economic growth. They didn’t work for Presidents Herbert Hoover and Franklin D. Roosevelt during the Great Depression, nor did they work for Presidents George W. Bush and Obama during the Great Recession.

The notion of government “stimulus” is a dogma of Keynesian economics, but when it comes to public policy, such plans are quackery. (John Maynard Keynes, arguably the most influential economist of the 20th century, introduced a bit of mysticism into the economics profession. In the April 8, 1943, “Paper of the British Experts,” Keynes wrote that credit expansion performs the “miracle ... of turning a stone into bread”—his way of arguing that it was possible for a society to spend itself into prosperity.)

By the way, if you want to know what policy mix has ever cured an economic depression quickly, take a look at the Depression of 1920–21, when the GDP collapsed 23.9 percent in a year and unemployment ballooned to over 14 percent from under 5 percent in a matter of months. The Harding/Coolidge administration cut government spending in half while slashing income tax rates, and the Federal Reserve allowed interest rates to rise. By 1923, unemployment fell to as low as 2.4 percent and industrial production soared over 27 percent.

Third, money isn’t going to repair broken supply chains, lure workers back to temporarily shuttered factories in various countries, or calm the fear that is causing many people to cancel travel plans, cut back on dining out, or cancel public events.

Adam Smith taught us over two centuries ago that money isn’t real wealth. Printing presses and today’s computer entries don’t make and deliver real goods and services. (The man on the street grasps this, but the point eludes many economists.)

The core of Furman’s proposal is for Congress to give “$1,000 to every adult who is a U.S. citizen or a taxpaying U.S. resident, and $500 to every child who meets the same criteria.” This sounds like a stealth approach to passing a guaranteed universal income—a type of social engineering that has been tried and rejected in countries such as Finland and Canada.

Furman wants Uncle Sam to disburse this money this year, and also next year “if the unemployment rate rises to 5.5% and remains there” (for how long, he doesn’t say). This is a political gambit, not a viable economic solution.

Government programs that give out free money may buy the votes of those who grow to expect such handouts, but it does nothing to facilitate the market adjustments that are needed at a time of economic stress.

Another economically unwise aspect of this “stimulus plan” is the call to extend unemployment compensation on a permanent basis. Studies have shown that many unemployed people have a knack for getting a job just as their unemployment benefits run out. Extending those benefits, then, seems to prolong unemployment rather than quickly reintegrating the unemployed into the ranks of the employed.

Although I disagree with his proposal, I do agree with Furman that Trump’s suggestion of a 2 percent payroll tax cut is a bad idea. Furman believes such a cut is unfair, because it would put more money into the pockets of higher-wage workers than those earning more modest wages. My objection is that it’s unfair to younger Americans to put the Social Security program into a deeper fiscal hole. Social Security’s finances need to be strengthened, not weakened.

Understandably, many Americans are struggling now with fear and uncertainty about the economic impact of the coronavirus. But let’s not compound the problem with a panicky stampede into a policy prescription (a “stimulus plan”) that may sound good, but which has, in fact, a very poor track record.

Mark Hendrickson, an economist, recently retired from the faculty of Grove City College, where he remains a fellow for economic and social policy at the Institute for Faith & Freedom.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.