The EconomistMarch 21st 2020 BriefingThe pandemic 212 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, whichhad 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 practicalitiesthan 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. 7Rummaging in the toolbox^3Source:MorganStanley *PPP-basedGDP-weightedaverageforeconomiescoveredbyMorganStanleyGlobalmonetary-policyrate*,% Centralbanks’remainingmonetary-policy
options,atMarch18th1999 2005 10 15 2002468(^10) Euro
US area JapanBritain
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