Expert says coronavirus bailout package is economically appropriate, urges caution

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Federal stimulus

Federal stimulus

The White House and Senate March 25 reached a historic $2 trillion legislative package to counteract the negative shock from the coronavirus to the U.S. economy.

Congress should be applauded for putting together such an unprecedentedly massive package so quickly, according to Jeffrey Bergstrand, professor of finance at the University of Notre Dame’s Mendoza College of Business.

Bergstrand, a former Federal Reserve economist, said the size of the package is economically appropriate, however, he urged caution on several fronts.

“First, this program is only insurance against the viable possibility of a depression,” Bergstrand said. “At this time, $500 billion in cash payments to households, $350 billion in loans to small businesses, $100 billion to hospitals, $500 billion in support for large corporations in selected industries and an increase in unemployment benefits provides liquidity to households and businesses just to stay open. This will simply postpone closure of businesses and personal bankruptcies.

Jeffrey Bergstrand. Photo by Barbara Johnston/University of Notre Dame.
Jeffrey Bergstrand

“It should not be viewed as a stimulus program, as it is not likely to push the economy back to its fourth quarter 2019 GDP level. The economy is certain to recede in the first, second and third quarters of 2020,” he added.

Economists have suggested this is a temporary negative shock to the economy, implying falling economic activity for the second and perhaps third quarters of 2020, but then economic activity will resume. However, Bergstrand is wary of claims of a temporary recession. At the time, the economic shock suffered globally during the Great Recession of 2008-2009 was also initially viewed as temporary, he said.

“As we know from history, the Federal Reserve and the U.S. Treasury acted in concert to provide liquidity – at that time, also, an unprecedented timely increase – which stabilized both the banking system and the economy,” said Bergstrand. “However, it is important to recall that the economy operated below full employment for eight more years, from 2009 to 2017.”

“U.S. economic activity is not immune to the rest of the world,” he said. “U.S. exports account for approximately 12 percent of demand for U.S. GDP. As during the Great Recession, the eurozone is fiscally constrained without the economic framework for the type of massive fiscal spending and government deficits that the U.S. government can allow. It is unlikely that they will respond as quickly or as magnanimously as the United States’ federal government, hurting the U.S. recovery. Also, we have yet to see with any confidence the economic impact on Southern Hemisphere economies in Latin America and Africa.”

While the $2 trillion legislative package will provide liquidity to maintain solvency of households and businesses over the next two quarters, Bergstrand cautions only proper health guidelines from government will allay a major component of the decline in economic activity before some current state lock-downs.

“Even before present lock-downs,” he explained, “aggregate demand in consumer and investment spending had fallen by households and firms due to uncertainty about individuals’ health. The lack of a majority of U.S. states imposing shelter-in-place and the recent prospect of less federal government support for shelter-in-place will cause uncertainty to rise again, stifling a possible recovery and potentially prolonging the recession – and deepening it.”

 

Contact: Jeffrey Bergstrand, 574-261-1071, Bergstrand.1@nd.edu