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Congress and covid-19: America's backwards coronavirus strategy.

The federal government's approach is like a hospital that invests in palliative care while abolishing the oncology department. The senate's status as "the world's greatest deliberative body", as President James Buchanan allegedly described it, has been exaggerated for a while. Legislation is accomplished not through considered debate, but rushed, secretive crafting of law by senior party leaders on the eve of some cataclysmic deadline. In the past decade this brinkmanship has led to one struggle over "sequestration", two debt-ceiling crises and three shutdowns of the federal government, but little in the way of substantive lawmaking. The same dynamic will shape the latest gargantuan stimulus package needed to cushion the fallout from the epidemic of covid-19. But this time, the consequences of brinkmanship and delay could be even more severe.When Congress passed the cares Act, a fiscal-stimulus package costing $2.2trn, in March, it included important stabilisers for an economy placed in a medical coma. Among these were much-increased unemployment benefitsboosted from $370 a week on average to $970and a suspension of evictions and foreclosures in federally backed housing until the end of July. These measures were set to expire after four months, by which time the epidemic was expected to be under control.

That is not the case. New confirmed infections are surpassing their previous peaks in mid-April, sometimes exceeding 70,000 per day. The unemployment rate in June was 11.1%, and the Congressional Budget Office (cbo) expects it to decline only modestly to 8.4% in 2021. The "v-shaped recovery" that America had hoped for seems out of reach. About 18m are still unemployed, compared with 6m before the recession. Surveys from the Census Bureau show that 16% of adults who owe rent or mortgage payments missed them last month, and 11% report that they do not have enough to eat at least some of the time (compared with 8.8% in early March). Eviction notices, many filed by landlords who are also struggling, have begun to pile up.Hence the need for another stimulus package. Democrats released their proposal, a $3.4trn behemoth called the Heroes Act, two months ago. Republicans have gone from suggesting a "pause" on future stimulus, as Mitch McConnell, the Senate majority leader, said in May, to agreeing that something more is needed. The Republican counterproposal, which is yet to be fully unveiled, will be more modestly priced, perhaps at $1trn or so. Neither side expects the bill to be negotiated by the end of the month, when the provisions on unemployment and evictions in the cares Act expire. The resulting gap could up-end the lives of millions of American families and set the economy back.Researchers from Columbia University calculate that without the enhanced safety-net benefits, the poverty rate would have risen by four percentage points, representing 12m people. Instead it has remained flat. Some of the more sophisticated proposals, such as indexing benefits to previous earnings up to a maximum level, are conceptually elegant but might delay cheques for weeks. State unemployment offices, reliant on antiquated computer software and few staff, have struggled to implement something as simple as adding $600 to every cheque. First, though Congress needs to pass a law. A better solution to avoid recurring cliff-edgesautomatically tethering unemployment generosity to local unemployment rates, as Michael Bennet, a senator from Colorado, has proposed would do a lot of good. But because it would limit political leverage in future negotiations, it is unlikely to fly this time.

The negotiations, which began in earnest only this week, must resolve many differences. Democrats would like to extend the generous unemployment benefits until the end of the year. Republicans worry that these are too generous. Indeed, for the majority of eligible workers, the benefits now exceed their former wages (see article). The Democratic proposal would send nearly $1trn to shore up the budgets of states and cities. Republicans worry that this generosity would reward profligacy in pre-pandemic times. Mr McConnell seems to have two priorities: passing a liability shield for businesses from lawsuits over covid-19 exposure and incentivising schools to reopen with cash grants. Both sides at least seem amenable to sending another unconditional cheque to Americans, regardless of employment status.

President Donald Trump is not a direct interlocutor in these negotiations, leaving Steven Mnuchin, his treasury secretary, as the administration's ambassador. Mr Trump has offered some policy suggestions, but they are not being taken very seriously, even among senators and representatives of his own party. One is that the bill include a holiday for the payroll taxes that employers pay for Social Security and Medicare, the government programmes that provide pensions and health insurance for the elderly. This would do nothing to benefit the currently employed, but it would deplete the trust funds for both schemes. A second, reported in the Washington Post, is that the bill should strip out billions in funding for additional testing for covid-19. Mr Trump has been insisting that the rise in cases is due to the rise in tests. "Many of those cases are young people that would heal in a day," he told Fox News. "They have the sniffles, and we put it down as a test."

Step back, and this strategy of repeated enormous stimulus to cushion the blow of an ineffectual national strategy for containment resembles a hospital that invests mightily in palliative care while eliminating the oncology department. America has already spent 13% of gdp on fiscal stimulus, with more on the way. The most important economic policy, in the absence of a vaccine, is to contain the virus's spread. Leaving it all up to governors no longer seems like a viable White House strategy. Nor does the campaign of attacking the public-health messenger, Anthony Fauci.

Facing flagging confidence in his handling of the crisis (and trailing in polls behind Joe Biden, his Democratic challenger), Mr Trump has resurrected his daily coronavirus briefings. Presidential leadership of this sort might be expected to add coherence and clarity to what has been a helter-skelter national strategy. In Mr Trump's case, it's likely to make things worse.

After the disease, the debt

To cope with the expensive legacy of the pandemic, governments will have to find the right path between stimulus and restraint.

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National leaders like to talk about the struggle against covid-19 as a war. Mostly this is a figure of speech, but in one respect they are right. Public borrowing in the rich world is set to soar to levels last seen amid the rubble and smoke of 1945. As the economy falls into ruins, governments are writing millions of cheques to households and firms in order to help them survive lockdowns. At the same time, with factories, shops and offices shut, tax revenues are collapsing. Long after the covid-19 wards have emptied, countries will be living with the consequences. An astonishing deterioration in the public finances is unfolding (see article). America's government is set to run a deficit of 15% of gdp this yeara figure that will go up if more stimulus is needed. Across the rich world, the imf says gross government debt will rise by $6trn, to $66trn at the end of this year, or from 105% of gdp to 122%a greater increase than was seen in any year during the global financial crisis. If the lockdowns last longer, the load will be greater. Managing such colossal debts will burden Western societies for decades to come. Few subjects in economics attract more scaremongering than government borrowing. The national-debt clock ticking near Times Square in New York has warned of imminent fiscal Armageddon since 1989. In fact a country's public debt is not like a household's credit-card balance. When the national debt is owned by its citizens, a country in effect owes money to itself. Debt may be high, but what matters is the cost of servicing it and, as long as interest rates are low, this is still cheap. In 2019 America spent 1.8% of gdp on debt interest, less than it did 20 years ago. In 2019 Japan's gross public debt was already almost 240% of gdp, but there were few signs that it could not be sustained. In countries that print their own money, central banks can hold down interest rates by buying bonds, as they have in recent weeks on an unprecedented scale (the Federal Reserve has bought more Treasuries in five weeks than were issued, on net, in the year to March). Just now there is no risk of inflation, particularly since oil prices have collapsed. Most economists worry less that governments will borrow recklessly, than that they will be too timid because of an irrational fear of rising public debt. Inadequate fiscal support today risks pushing the economy into a spiral of decline.

Yet while spending freely now to avoid a deeper slump is the only sensible path, wild borrowing for years would eventually threaten trouble. America has strong defences against an outright debt crisis, because the dollar is the world's reserve currency and foreigners want to own its bonds. But other rich countries do not have that luxury. Italy's towering debt and membership of the euro zone condemn it to live with the perennial threat of a financial panic should the ecb stop buying its bonds.

The good news is that financial markets suggest rates will stay comfortingly low for decades. But so much is still unknown about the virus and its effects that, now of all times, investors cannot see clearly very far into the future. Some economists worry, that once the virus abates, a price-and-interest-rate spiral could get under way as a burst of demand runs up against supply chains that have been wrecked by the pandemic. Governments will thus have to walk a treacherous path between stimulus today and prudence tomorrow. Success is not guaranteed. After the second world war countries shrank their debts over the course of decades, but only by using a bossy combination of high taxes on capital, financial repression (forcing domestic investors to hold debt at artificially low interest rates) and inflation, which erodes the real value of debts over time. A baby boom and rapidly rising levels of education made it easier for economies to grow their way out of debt. Japan has not faced a bond-market crisis since the 1990s, but its debt-to-gdp ratio has continued to rise. After the financial crisis in 2007-09 some European countries opted for budget cuts in order to cut debts, with mixed results and a big political backlash.

The politics of deficit reduction will be toxic. The pandemic will increase calls for lavish spending, not belt-tightening, especially on medical services. Ageing populations mean that there will be surging demand for pension and health spending in the 2030s and 2040s. It will get more expensive to maintain public services, let alone improve them. Politicians who trim benefits for pensioners will be punished by legions of elderly voters. There will be less spare cash to fight future crises, such as climate change or even another pandemic.

Faced with this daunting reality, rich-world governments will make a big mistake if they succumb to premature and excessive worries about budgets. While they are in the throes of the pandemic, the withdrawal of emergency support would be self-defeating.

Modestly higher inflation would help, by boosting the economy's nominal growth rate. When this exceeds the interest rate, existing debts shrink relative to gdp over time. Unfortunately, central banks have recently undershot their inflation targets. Over the past ten years the cumulative shortfall in America and the euro zone has been about 5-6%. Central banks should pledge to make up the shortfall with catch-up inflation in the future. This would ease debt burdens without breaking past promises to hew to inflation targets.

And governments should prepare for the grim business of balancing budgets later in the decade. Done right, this would be fairer and more efficient than keeping rates low and letting inflation rip, which would transfer wealth in regressive and arbitrary ways, for example by reducing the debts of recklessly leveraged companies and homeowners. Better to raise taxes on land, inheritance, carbon emissions and, in America, consumptionand at least try to trim spending on the elderly.

National-debt service

Perhaps interest rates really will stay low while growth rebounds and inflation rises just slightly, easing the burden of debt. More likely is that living with high debts will be a nerve-racking and gruelling slog. Making budgets add up looks as if it will be a defining challenge of the post-covid worldone that today's politicians have not yet even started to confront.

1. What would you recommend the federal government do to close our current recessionary output gap? Use the AD-AS model, the class readings on Fiscal Policy and the descriptive details contained in the Economist (titled "Congress and Covid-19") to describe your policy proposals.

2."Even before our current recession, our long-term budget outlook was troubling. With our annual deficits exceeding $1 trillion starting in 2019, and into the foreseeable future, it is essential for the present administration to clearly lay out a realistic plan, showing how they intend to deal with America's long-term fiscal problems, after they have successfully tackled the current recession. The lack of clarity will adversely impact business confidence and interest rates causing damage to the economy."

Explain the above statement and offer some suggestions on how you would deal with the long-term fiscal problems using the class readings on Fiscal Policy, the data presented in this document the Economist, titled "Government finances - After the disease, the debt"

"The crowding-out effect from government borrowing to finance the public debt is reduced when a significant percentage of the government borrowing is used to fund infrastructure projects, scientific research, education and resource management".

Explain the above statement and indicate whether you agree with it.

If the federal government were required by law to balance its budget, how would such a law impact our response to the current recession?