The Economist - USA (2020-03-21)

The EconomistMarch 21st 2020 BriefingThe pandemic 21

2 automatic economic stabilisers, such as
generous unemployment insurance, than
most other rich countries. As a result, its
discretionary fiscal boost needs to be espe-
cially large to make a difference.
It might be. The Trump administration’s
plan to funnel money directly to house-
holds, if approved by Congress, is the most
significant policy. It bears some resem-
blance to a scheme that was introduced in
February in Hong Kong, in which the gov-
ernment offered HK$10,000 ($1,290) di-
rectly to every permanent resident. Mr
Mnuchin is thought to favour a cheque of
$1,000 per American—roughly equal to
one week’s average wages for a private-sec-
tor worker—with the possibility of a sec-
ond cheque later. Some $500bn-worth of
direct payments could soon be in the post.
Some economists are leery about such a
policy. For one thing, it would do little to
prevent employers from letting people go,
unlike the plans in northern Europe. An-
other potential problem, judging by Hong
Kong’s experience, is administration of the
plan: the territory’s finance secretary
hopes to make the first payments in “late
summer”, far too far away for people who
lost work last week. Mr Mnuchin promises
that payments will happen much sooner.

Chequered past

America has done something similar be-

fore, with results that were not entirely en-

couraging. The government sent out

cheques in both 2001 and 2008 to head off a

slowdown. The evidence suggests that peo-

ple saved a large chunk of it. The psycho-

logical reassurance of a bit of extra cash

could be significant for many Americans,

but the sums involved are not especially

impressive. Bernie Sanders, a Democratic

presidential contender, is not known for

his smart economic policymaking, but his

suggestion of $2,000 per household per

month until the crisis is over is probably

closer to what is required.

Indeed, more fiscal stimulus will be

needed across the world, especially if mea-

sures to contain the spread of the virus fall

short. After the Japanese government

passes the budget for next fiscal year at the

end of this month, it can begin work on a

supplementary budget that takes the virus

into full account. Britain’s Parliament has

given Rishi Sunak, the chancellor of the ex-

chequer, carte blanche to offer whatever

support he deems necessary, without limit.

How much further can fiscal policy real-

istically go? Last year the 35-odd rich coun-

tries tracked by the imfran combined fiscal

deficits of $1.5trn (2.9% of gdp). On the not-

unrealistic assumption that the average

deficit rose by five percentage points of

gdp, total rich-country borrowing would

rise to over $4trn this year. Investors have

to be willing to finance that splurge. The

yield on ten-year Treasury bonds, which

had fallen as low as 0.5% as fears of the vi-

rus took hold and traders sought havens,

has recently risen above 1%. This is proba-

bly due to firms and investors selling even

their safest assets to raise cash, but might

reflect some anxiety over the scale of

planned government borrowing.

Still, 1% is still extremely low by histori-

cal standards. For a variety of reasons, in-

cluding population ageing, there is—in

normal times, at least—unprecedented de-

mand for low-risk government securities.

The Bank of Japan has promised to buy as

many bonds as necessary to hold the yield

on its government’s ten-year bonds close to

zero. Investors remain queasy over some

rich countries’ bonds, especially slow-

growing European states. Theecb’s latest

intervention should allow heavily indebt-

ed economies viewed with suspicion by

markets, such as Italy, to borrow more

cheaply—though it does not fully dispel

doubts around the euro zone’s willingness

to act to avert crisis.

The question of financing the spending

splurge may be more one of practicalities

than of feasibility. America’s Treasury can-

not issue trillions of dollars of new bonds

overnight. It can, however, issue notes and

bonds to the Federal Reserve, which could

then credit the Treasury’s account, allow-

ing vast sums to be spent immediately,

points out Ian Shepherdson of Pantheon

Macroeconomics, a consultancy. The

bonds could then be sold to investors at a

later date. This approach amounts to mon-

ey-printing, but with little risk of runaway

inflation in these straitened times.

The economic hit from covid-19 will be

bad enough for rich countries, in both hu-

man and economic terms. But they are in a

relatively fortunate position, with strong

health-care systems, and investors who,

for now, remain willing to lend to them on

cheap terms. Poorer countries, where the

threat posed by the virus is also growing

rapidly, have less room to borrow and job

markets with a higher share of informal

workers who are ineligible for many pro-

tections. The rich world faces tough times,

but will get through the crisis. The pros-

pects of poorer places are far less certain. 7

Rummaging in the toolbox^3

Source:MorganStanley *PPP-basedGDP-weightedaverageforeconomiescoveredbyMorganStanley

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