The Daily - Can Government Spending Save the Economy?

Episode Date: May 18, 2020

As the American economy plunges toward a recession, economists and policymakers are triaging proposals to stanch the bleeding. All of their ideas will cost money the government doesn’t have. That leaves Democrats and Republicans with two major questions: How much should be borrowed for bailouts — and what spending is needed to avoid permanent economic damage? Guest: Ben Casselman, an economics reporter at The New York Times.For more information on today’s episode, visit nytimes.com/thedaily Background reading: Jerome H. Powell, the Federal Reserve chair, has urged Congress to spend more on economic relief — even if doing so means increasing the federal deficit. He warned that the United States was experiencing an economic hit “without modern precedent.”

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, saving the U.S. economy from the fallout of the pandemic may require a historic infusion of cash. Ben Castleman on the debate over that spending. Ben Castleman on the debate over that spending. It's Monday, May 18th. Ben, we're talking to you on Friday morning, and a bunch of big, ugly economic numbers just came out this morning.

So we wanted to sift through them with you. Yeah, it's been a pretty dark morning for the economy. Where do you think we should start? Maybe the place to start is actually on Thursday. We turn now to the economy. Nearly 3 million more Americans filed for unemployment benefits last week. When we learned that another 3 million Americans had filed for unemployment benefits. That's more than 36 million people in two months.

We're two months into this crisis, and yet we are still losing millions of jobs every week. For eight straight weeks now, jobless claims have been in the millions, with 3 million more people filing for unemployment last week. Right. Every week. Every week. This did not happen naturally. All of these companies didn't just go out of business because demand disappeared. We turned our economy off. Right. Think about New York. Think about the state of California. If you ran a restaurant, a mini golf course or a clothing store, there's a really good chance you would have laid your workers off.

And then Friday morning we get up. It's the services industries that are getting crushed here. And we learn that retail sales in April were down more than 16%. That's by far the worst that we've ever seen. But as far as these retail sales go, worse than expected month over month. Over the last two months, restaurants lost half their business. Apparel and clothing stores

have lost nearly 90% of their business. You know, the country's shut down and people aren't buying stuff. I mean, I hate to state the obvious, but they're not buying cars down 12%. They're not buying furnishings and home furnishing items down 58 percent. Clothing and clothing accessories down 78 percent. And then we got another data point that said that industrial production, this is the actual stuff that we make in the economy, was down by the most in the more than a century that we've been keeping records,

meaning worse than the Great Depression. In other words, as bad as it gets. As bad as it has ever gotten. Hmm. We know that this is deep. We know that it is broad-based. We don't yet know how long it will last. And that's the fundamental question going forward. So given all that, I want to turn to a speech. Good morning. It's my pleasure and privilege to welcome back Chair Jay Powell. That the chairman of the Federal Reserve, Jerome Powell, made a couple of days ago that I think speaks to all this data.

Yeah. And, of course, the chairman of the Federal Reserve doesn't make a ton of speeches. So I know that his words carry a lot of weight. Yeah. So Jerome Powell comes out. The coronavirus has left a devastating human and economic toll on its wake. Of course, he's giving the speech remotely. So he's sort of in front of these blue curtains, or maybe they're digitally superimposed blue curtains.

I'm not actually sure. On a Zoom-style call. But he comes out with this really stark message. The scope and speed of this downturn are without modern precedent. And he's saying this economic crisis is incredibly deep. We are seeing a severe decline in economic activity and employment. It's incredibly broad. And already the job gains of the last decade have been erased.

And it is hitting the most vulnerable workers more than anyone. He has this line early in the speech where he says, while we're all affected, while we are all affected, the burden has fallen most heavily on those least able to bear it. The burden has fallen most heavily on those least able to bear it. Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March. Lower income Americans, Black Americans, less educated Americans. But the coronavirus crisis raises longer term concerns as well. The record shows that deeper

and longer recessions can leave behind lasting damage to the productive capacity of the economy. the productive capacity of the economy. And Ben Powell talks about this specter of permanent economic damage in this speech. And perhaps he was referring most urgently to these lower-income workers. But I want to understand that concept because it feels a little bit new to me. I think of almost all economic conditions as temporary. So what did he mean by that? You're right to think about most economic conditions as temporary because historically that is the way economists have thought about recessions and economic downturns,

is some people lose their jobs and then they get those jobs back when things get better. Some businesses lose business or maybe they go out of business, but other things come back up and replace them. But we've learned over time that that is not the way recessions always work, and especially long and deep recessions. That when people lose their jobs, if they're out of work for too long, they can drift away from the labor market, they can lose their connections. And all of a sudden, even when the economy starts to get better, it's very hard for them to get back to work. I wonder if you can give me an example of this to kind of bring it to life. Well, imagine a small company, right, that maybe somebody has spent their lives, maybe a couple generations building. You can imagine if this crisis were to last a few weeks, they lose some revenue, they take a hit,

but they start right back up where they left off. But as this drags on and they fall behind on loans, you fall behind on your rent payments, and all of a sudden, you can get to a place where you can't reopen that business, where you can't restart. And sure, the business owner might be able to go and find another job, but that business is lost forever. And so that is what Powell is referring to when he talks about permanent economic damage from this pandemic. That's what Powell fears, and that's what he wants to make sure we avoid. What kind of solution,

what kind of plan does he have in mind in this speech to avoid permanent economic damage? Well, Powell starts by talking about all the things that we have already done, and he's full of praise for that. The response here in the United States has been particularly swift and forceful. He talks about what the Fed itself has done, of course,

but he also talks about... To date, Congress has provided roughly $2.9 trillion. What Congress has done, the nearly $3 trillion in emergency spending that Congress has approved. For households, businesses, health care providers, and state and local governments. And there are a lot of programs that Congress has enacted to try to deal with this, right? They've written checks to virtually every American.

They've offered loans and grants to businesses. And Powell says that all of those things have been incredibly important to softening the blow of this crisis. The overall policy response to date has provided a measure of relief and stability and will provide some support to the recovery when it comes. But then he says... But the coronavirus crisis raises longer-term concerns as well.

Basically, we're not done yet. Hmm. That that was not enough. That it probably won't be enough. That we know now that this is not a crisis that is going to last for just a month or just a couple of months. It's going to drag on.

And that as it drags on, if the government doesn't step in and do enough to keep people and businesses afloat, then we're going to see a lot more of that kind of permanent damage that Powell is talking about. And when he suggests that we aren't done yet, what is he really saying? What he's really saying is to Congress, you need to keep spending. The Fed will do what it can do, but the Fed can only lend money. It's Congress that has the ability to spend money, to give money to people, to give money to businesses. And that is

in all likelihood what it will take to get through this period. He describes what's been done so far as a bridge, a bridge across temporary interruptions, he says. And what he's basically saying is the bridge doesn't yet reach all the way across the river. And a bridge doesn't do you much good if it stops when you're still over water. No, it does not. I mean, is that normal for the chairman of the Fed to do this, to be advising Congress to spend a lot more money in this manner? Not in as direct terms as this, but this was, at least by the standards of Fed chairs, a pretty direct call to action.

Additional fiscal support could be costly, but worth it if it helps avoid long-term damage and leaves us with a stronger recovery. This trade-off is one for our elected representatives who wield powers of taxation and spending. And can we safely assume that when the chairman of the Federal Reserve tells Congress, this is what I think you should do, that he assumes that that is what Congress will do? Oh, I don't think we should assume that Powell thinks that Congress will do it. I think Powell knew that he was speaking at a moment when there's a major political debate that's playing out between Democrats and Republicans about what the role of government is in this crisis.

And he's, in effect, weighing in on one side of that debate. But I don't think he's under any illusion that he alone will resolve it. We'll be right back. So Ben, describe the divisions between Democrats and Republicans in Congress about this advice from Jerome Powell, the chairman of the Federal Reserve. Well, think back for a moment to those trillions of dollars in spending that have already taken place. I want to highlight a few areas of bipartisan economic relief we will be voting on today. Recovery checks to give Americans needed cash to provide for their families.

When Congress approved those measures, it was really bipartisan. Right. This is a strange and evil disease. There is much we still don't know about it, and it is keeping us apart. But that came at a moment when the economy was in the process of shutting down. And there was pretty widespread agreement that that had to happen. When we pass this bill, instead of hugging each other, we'll wave from a distance.

None of us can know when this plague will pass. The only thing we know for sure is that we must summon the same spirit that saw previous generations through America's darkest hours. We're now in a very different moment. Jeff Craig, leader. Well, it's been two weeks since Leader McConnell called us back into session.

Where there are real divisions between Republicans and Democrats about how quickly reopening should take place. In that time, it was announced that 30 million Americans filed for unemployment. Americans filed for unemployment. And yet the Republican leader has scheduled exactly zero votes, zero, on legislation related to the corona crisis. And with that comes real disagreement about the role of the federal government in continuing to support businesses and especially workers. Let's solve the problem right now. What are we going to do for people who are out of work?

The Democrats are by and large saying much of the country is still shut down. What are we going to do for businesses that are going under? And so the government has to continue to support workers and businesses. It has to keep on spending. The Republican side is a little more complicated. This emergency is very serious. So the Senate's response has been serious.

It's not unanimous, but there is certainly, at least in Congress, more of an inclination to say... Look, here in the real world, Senate Republicans are working seriously to help the country reopen. Let's see how this reopening process goes. Let's see if the businesses reopen. And if they do, maybe we don't need to do very much more. And if they don't come back and there's a need for further action, then we can talk about that then. So it's a bit more of a wait and see whether Congress really needs to spend all that much more money. That's right. And that question of spending is what's hanging over this,

that Republicans are looking at the trillions with a T that have been spent so far and saying, can we wait to spend more? The crushing unemployment figures show us that no amount of federal spending could substitute for the entirety of the U.S. economy. We need to be smart and we need to be safe, but we have to find a more sustainable middle ground. Ben, how tied are these different approaches to the kind of longstanding economic ideologies of the Democratic and Republican parties? Well, look, Republicans have a longstanding discomfort with programs like unemployment insurance.

At a certain point, these benefits are going to do more harm than good, and I would say they already are starting to do that. So extending unemployment benefits through next year would deter people from trying to return to work because why would they? Why would someone choose to do more work for less money? So it's not surprising that as we move from the acute phase of this crisis into the long, slow recovery, that Republicans would be the first to start raising questions about the spending and to start thinking about pulling back on some of those programs.

So we're already looking at staggering debt that we are going to have to deal with at some point because it's immoral to expect our kids and grandkids to pay that money back after we've already cashed those checks. Democrats have long advocated for more generous unemployment benefits, expect our kids and grandkids to pay that money back after we've already cashed those checks. Democrats have long advocated for more generous unemployment benefits, for a larger role for government. And so it's not too surprising that they are more comfortable with these programs lasting longer. We need to show that we have a government that understands the scale of this problem and understands that the approach to it is to get money down into the scale of this problem, and understands that the approach to it is to get money down into the hands of the people

who will put it down at the grassroots level and help support this economy from the ground up. And so this is the longstanding, very inflexible, ideological terrain that Powell is entering when he goes to Congress and says, hey, cough up trillions of dollars more. That's right. But it feels like in this debate, the real anxiety is over just the enormity of the scale

of money that we're talking about. And I feel at this point, I have to ask you the question that we all kind of pretend to know the answer to, which is, where does all this money come from that Powell is suggesting Congress spend and that Democrats and Republicans are not really agreeing on whether to spend? In the simplest terms, we're borrowing it. The Congressional Budget Office projects that the deficit this year will be $3.7 trillion. And we're borrowing those trillions of dollars from whom? So Congress decides how much it's going to spend, and it, of course, sets tax rates as well. And any time that Congress decides to spend more than it brings in in tax rates, then the Treasury Department has to sell bonds to make up the difference.

And that just means that it's asking people, investors, foreign governments to lend the United States money. money. You give us money now, we'll give you money back with a small amount of interest in anywhere from a few days to 10 years. Right. So when we hear about treasury bonds and their yields, that is the interest payment that the U.S. government is giving to someone who buys a treasury bond and in the process has kind of lent money to the U.S. and to Congress. That's right. Every time the government sells a bond, it's borrowing money from the public. It's paying some interest on that. Just like if you borrowed money to buy a house or to make a purchase to buy a car, the only difference is the federal government gets a much better interest rate than you or I ever will. So we kind of become the bank.

We become the bank. And to hear someone like Jerome Powell describe it, that doesn't seem all that risky for Congress to spend all that money, which would require the U.S. borrowing that much from us and anyone who wants to buy U.S. Treasury bonds. But is it risky? So in the short term, there's really no risk here. We can keep borrowing as long as people will keep lending us money. In the long term, of course, we have to make good on those loans. Right. And we have to pay interest on those loans. And so there will certainly be a debate when we come out the other side of this crisis about what the government should do about these huge deficits. But that debate is still years away because we're at a very particular moment right now, which is that we're in the middle of an immediate crisis.

And if we don't get our economy back on track, then none of that longer-run debate matters. That debate is conditional on having an economy at all on the other side of this. Right. So you could have an economy with little debt, but you might not have much of an economy at all. Yeah, Powell is saying the debt is the least of our worries right now. It's not that it doesn't matter. It's not that it will never matter. but we have to try to get the economy through this period and moving again before we can worry about any of those other long-run concerns. You could think about it like performing CPR, right? Performing CPR often involves breaking ribs, and that's a real consequence, but that doesn't mean you don't perform CPR.

consequence. But that doesn't mean you don't perform CPR. You perform CPR, you try to get somebody's heart started again, and then you worry about the other consequences once the person's heart is beating again. And just to be clear, in this metaphor, the broken ribs is massive U.S. debt spending on stimulus. And the heart is the American economy, which right now is stopped and which we somehow have to get beating again. And so what you now have is Powell and lots of other economists who, like him, would normally be worried about the debt, who are saying now is not the moment. That includes people who were advisors to George W. Bush, people who were advisors to Republican candidates and Republican leaders throughout the last several decades. Pretty much all of the economists that I talk to and that my colleagues have been talking to are saying the same thing, which is now is not

the moment to worry about the debt. So if this is the broad consensus of economists across the United States, Ben, why is this much of a debate in Congress at all? I mean, economists like to think that they issue these sage pieces of advice and everybody on Capitol Hill and in state houses will rush to follow them. But of course, that's not the way the world works. And so it may well be the case that many members of Congress thank the Federal Reserve Chairman, but say, you know, we're not going to follow that advice. And we've already heard Republicans in Congress saying exactly that. Look, I mean, we can't spend enough money to prop this economy up forever. People need to be able to begin to be productive again, consistent with the guidelines that have been laid down by the healthcare professionals

toward opening up the economy. It's the only solution to the dilemma with which we are confronted. They just don't believe that what Powell is saying right now is the real solution to our economic problems, even though many of their own economic advisors are telling them the same thing. Ben, thank you very much. Thanks for having me. We'll be right back. Here's what else you need to know today. Yay! Congratulations! You did it!

We're so proud of you, Davey. Thousands of high school and college seniors across the country Congratulations! Good stuff! Good summer! celebrated their graduation over the weekend in virtual ceremonies. Happy graduation, Madison! We all love you! Love you! And were toasted in commencement speeches by everyone from Oprah Winfrey to Tom Hanks. You are the chosen ones. You are the chosen ones because of a fate unimagined when you began your right state adventures. You started in the olden times and the world back before the great pandemic of 2020.

You will talk of those earlier years in your lives just that way. Well, that was back before the COVID-19. In his commencement speeches, former President Barack Obama delivered pointed criticism of how the U.S. government has handled the pandemic. More than anything, this pandemic has fully finally torn back the curtain on the idea that so many of the folks in charge know what they're doing. A lot of them aren't even pretending to be in charge. Obama did not mention President Trump by name, but his remarks were seen as a clear indictment of his successor. indictment of his successor. All those adults that you used to think were in charge

and knew what they were doing, turns out they don't have all the answers. A lot of them aren't even asking the right questions. So, if the world's going to get better, it's going to be up to you. That's it for The Daily.

I'm Michael Barbaro. See you tomorrow.