Antidotes for a recession: Economic policy in the USA during the Covid-19 pandemic

By Ethan Choi

2020 saw the genesis of an unprecedented economic recession. Inevitable as the recession is (cue the talk about economists predicting recessions), it stemmed widespread discussion over economic policy. Though the employment of monetary and fiscal policy is useful and productive, has there been too much curtailing or insufficient curtailing on economic freedoms? To minimise losses, economists seek ways to reduce the overwhelming impacts that Covid-19 has on the recession curve. This article discusses the ideal requirements for expansionary economic policy to combat the pandemic, and evaluates some empirical examples from the United States.

Traditionally, economic policy is divided into monetary policy and fiscal policy. Monetary policy deals with how the central bank allocates spending and resources, and how it influences money supply. Fiscal policy, on the other hand, deals with government actions pertaining to spending. They both constitute stabilisation policy - policy intended to maintain the money supply through expansionary and contractionary policy, thus balancing out the business cycle.

What does ideal economic policy look like?

Before trying to rekindle businesses, we must turn towards some basic economic principles. Addressing the elephant in the room, we must protect vulnerable individuals. This is done through direct grants and subsidies, stimulus packages, and government hiring to promote equity. It is useful to adopt forbearance. Forbearance allows borrowers to repay loans or payments at a later date - to accommodate for economic hardships and to allow for individuals to pay for more critical expenses. It is imperative to protect the economy while enduring this recession. From individuals to households to firms to governments, transparent and marked steps must be taken in our economic cushioning.

Though, let’s take off our hindsight glasses and travel back to the early months of 2020. Workers all across the world are experiencing furloughs, unpaid work hours, and layoffs due to the financial and economic burden induced by lockdowns. The moot point turns towards whether to give payments and subsidies to all households, or to target low-income households. The US Federal Reserve adds liquidity to treasury markets, changing reserve requirement ratios to 0% on March 26th, 2020.

Monetary Policy

The reserve ratio measures the portion of deposits banks and financial institutions hold as reserves. The purposes of reserve requirements are, evidently, to regulate money supply and to control the liquidity of the money market. In line with the “ample-reserves regime” as outlined by the US Fed in January 2019, the US has developed a system where an ample supply of reserves ensures that it is not necessary to actively manage the supply of reserves. Instead, it is through administered rates that the bulk of monetary policy is handled. Thus, this eliminates the need for depository institutions to maintain accounts at reserve banks. This “abundant reserve” framework ensures that federal reserves are oversupplied. Thus, there is no more need to establish a stable demand for reserves.

The elimination of reserve requirements is an integral move with regards to expansionary monetary policy. The “ample-reserves regime”, as aforementioned, provides increased economic growth. With reserve requirements being set, banks had to reduce lending and take in fewer deposits. Reserve requirements, for the last few decades, served as a backup source of liquidity. This change is justified, for many of the world’s largest economies (Canada, United Kingdom, Australia, Hong Kong) have abolished reserve requirements in the past few decades.

In conclusion, money that the Federal Reserve System was not providing to households and firms for lending was money wasted. By setting reserve requirements to zero, the Fed could increase the supply of money to independent small business, and also eliminate the risk of competing banks increasing the liquidity risk.

Fiscal Policy

The CARES act, budgetary fiscal support, and unemployment insurance benefits form some of the fiscal policies employed by the United States. The CARES act was signed by then-US President Donald Trump on March 27th, 2020. It is a 2.2 trillion dollar economic stimulus bill, providing $300 billion in one-time cash payments, $260 billion in increased unemployment benefits, $500 billion in loans for corporations, and $339.8 billion to state and local governments, culminating with the Paycheck Protection Program, providing $953 billion for small businesses and organisations. Though do these large numbers really sum up to a comprehensive economic stimulus?

The beauty and allure of the CARES act is veiled behind a dreadful list of design flaws. “Industry rescues” - a buzzword thrown around to refer to means of bolstering the economy. Are the wages of lower-class workers prioritised over the overbearing wealth of corporate executives through industry rescues? The CARES act invariably made a turn towards protecting large businesses instead of families in dire need.

The CARES, HEROES etc. acts are relief packages, which do not address economic stimuli - known to bolster economic activity. All these packages - five in total, including the American Rescues Plan Act of 2021, fall short in their empirical considerations. To illustrate this, 45% of the relief funds of the CARES act went to 4% of the businesses. Additionally, stimuli or relief packages will only be given to Americans who fill in tax returns, meaning that those who don’t - including veterans and low-income households, will have to tread through muddy waters to do so. Not to mention the 16.7 million US residents who do not have a social security number, as well as the 500,000 homeless residents.

In conclusion, the United States has taken clear steps to manage the issues induced by economic downturns. With regards to fiscal policy, cash assistance must be provided inclusive of all Americans. What have we learned from Covid-19? The main takeaway going forward, is that we must construct robust economic infrastructure. Using electronic card transfers to conduct these economic stimuli, filling in holes created by the various stimuli packages, and directing money towards hospital authorities and high risk individuals are good places to start.