Out of the Spotlight: COVID & the U.S. Economy
How deep is the potential COVID-19 driven economic recession? What is likely to happen to state and local economies? How will the financial issues caused by COVID-19 exacerbate economic inequalities across the United States? The Brookings Institution discussed these questions at length in a Monday webinar, “COVID-19 and the economy: What Washington has done and the challenges to state and local governments.”
Moderated by David Wessel Director of the Hutchins Center on Fiscal and Monetary Policy, the session included former Chair of the Federal Reserve Bank Dr. Janet Yellen, Vice President & Director of the Metropolitan Policy Program Amy Liu, Policy Director of the Center on Fiscal and Monetary Policy Louise Sheiner, and Senior Fellow of the Urban-Brookings Tax Policy Center Adam Looney.
The U.S. economy has been at a near standstill as states implement lockdowns and urge people to practice social distancing while the country tries to contain the COVID-19 outbreak. Dr. Yellen contended that there are many factors that could impact how quickly and efficiently the economy can respond to the public health crisis. Although the Federal Reserve has lowered interest rates, Dr. Yellen emphasized that the depth of the economic recession depends largely on the length of the shelter at home and social distancing measures and the financial condition of the economy once lockdowns are over. Dr. Yellen warned that even after social distancing ends, many businesses – including larger corporations – are likely to suffer. “Firms will experience losses such as bankruptcies, debt burdens, and decreased hiring,” Dr. Yellen said.
Recognizing the scale of the challenge, the Federal Reserve has also begun to undertake more drastic action. Last week, the Fed announced they are beginning to evaluate lending programs for small and medium sized businesses that could complement the work of the Small Business Association. They are also offering regulatory reporting relief for smaller financial institutions.
Dr. Yellen said the coronavirus relief package (or CARES Act) recently passed by Congress offers “a great deal of support to households in the coming months,” and noted that the three stimulus bills Congress has passed equate to 13% of annual GDP. However, she advised that “since these are temporary measures, Congress will have to do more if the shutdown is prolonged.”
Participants also stressed the damage to state and local governments as they struggle to process an influx of unemployment applications and additional Medicaid needs. According to Louise Sheiner, state and local governments “are likely to experience fiscal stresses that the CARE Act didn’t address.” Sheiner cited the $150 billion state funds in the stimulus package as helpful to the states’ public house spending related to the coronavirus, but said that what states really need is “general aid for declining revenue and increases in state spending.” Another issue highlighted by Adam Looney is how long it could take for families to receive the financial aid provided for in the CARE Act and how soon lenders and regulators within states can begin processing loans to struggling businesses.
The coronavirus has also amplified the increasing inequalities in different regions of the country and the lack of systems set up to fix economic gaps. “This disaster exposed structural challenges that we already had,” said Amy Liu. Liu recommended that policymakers structure federal aid in a way that prioritizes at-risk locations, given that COVID-19 threatens vulnerable communities and neighborhoods more than others. Referring to a study by Tim Bartik, Liu also shared that economically vulnerable communities take approximately a decade to recover from a financial crisis of this magnitude. For economically vulnerable communities, Liu added, “it is a constant balancing act between managing public health, economic inequalities, and the recovery.”
The full webinar can be found here.