An ambitious destination shouldn’t derail a constructive step in the journey to it. This is an important consideration as the White House intensifies talks with Congress about how to respond to the historic economic shock delivered by Covid-19 and, in the process, relieve the excessive burden on monetary policy.
Four elements underpin optimal fiscal policy at this juncture of the virus crisis: providing more relief; better aligning public health and economic well-being during this period of “living with Covid-19”; countering long-term downward pressures on productivity; and limiting the rise in household economic insecurity. Throughout, the focus should predominantly be on supporting people directly and effectively rather than going through markets.
With Covid-19 infections and hospitalizations on the rise, the U.S. faces a renewed need to provide emergency relief, albeit in a more focused and pro-work manner. In addition to direct federal payments to households, this should involve state and local aid. More difficult is how best to support businesses that, once again, find themselves under mandated lockdowns and how best to approach moratoriums on evictions.
Providing relief should not come at the cost of doing more to better reconcile public health and economic recovery while an effective vaccine is being developed. Indeed, as more is done in this regard, there will be less need for continued relief measures and a greater hope of minimizing damage to long-term economic well-being and sustainability.
Although key efforts include reducing the spread of infection — including through better testing and contact tracing — and dealing better with hospitalizations — including personal protective equipment, bed capacity and therapeutics — there are other priorities as well. For example, there is a need to support the struggling child-care sector, the viability of which is critical to ensuring that women in particular are not disadvantaged even more by the Covid-19 shock, and a need to provide a more healthy transportation system. Medical practices are still under undue pressure, requiring an intensification of measures including lifting the current tight cap on loans provided by the Small Business Administration. And one of this should come at the expense of sufficient funding for the production and dissemination of vaccines.
Progress in these areas is essential to winning the war against Covid-19. But it is not sufficient to avoid the mistake made in the aftermath of the 2008 global financial crisis — that of failing to secure the peace of high sustainable growth and genuine financial stability.
Two priorities stand out.
First, countering the erosion in productivity that would result from the rewiring of supply lines that will accompany a multiyear period of deglobalization; mitigating the risks associated with zombie companies and zombie markets; and easing long-term unemployment. This involves clearing the way for comprehensive measures aimed at enhancing the productivity of both capital and labor, such as infrastructure modernization, labor retooling and better skill acquisition and training. Making room for appropriate funding, directly and through well-organized public-private partnerships, would couple well with steps to reduce the antigrowth bias of the budget.
The second priority is countering rising household economic insecurity. Indeed, through tax reform, including realigned tax rates and the elimination of loopholes such as the approach to taxing carried interest, room can be made for better safety nets. Since March, more than 30% of the U.S. working population has experienced unemployment at some point, including some that held jobs long regarded as secure. The number of people having to turn to food banks for emergency assistance has soared. And forward-looking insecurity has increased as a result of the growing concerns, both genuine and perceived, that certain jobs are not coming back.
Simultaneous progress on all four is highly desirable but also unlikely in practice for several reasons. As the November elections get closer, the mood for repeating the bipartisan effort that underpinned the initial impressive policy response is evaporating. The simultaneous-approach price tag would be difficult for this Congress to accept. And the ability to execute the measures would most likely be challenging, resulting in multiple slippages and high risk of reputational damage.
More feasible is a disciplined phased approach that A) sets out the destination in which all four priorities are met; B) provides a rough draft of the journey; and C) takes a notable first step through the focused funding of the first two elements and the initiation of technical work on the second two.
It is often said that the perfect should not be the enemy of the good. That is certainly true in crisis management when policy has to respond urgently in a highly fluid and uncertain environment. But when designing a multiround response to a crisis that is posing both immediate and longer-term threats, it is important that the increasingly well informed series of short-term goods lead to a near-perfection when aggregated over time. Working together, Congress and the administration have a window to do just that.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include 'The Only Game in Town' and 'When Markets Collide.'
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