A day after the 7% dive in U.S. stock markets on Monday, the White House proposed policies that could address the growing negative economic impact of the spreading coronavirus and stocks rallied.
Major stock indexes gained 5% on Tuesday, offsetting much, though not all, of Monday’s big losses.
No decisions have been made yet on what stimulus plans to implement to offset the broad economic effects of the virus. The White House held a meeting with congressional Republicans on Tuesday and suggested a payroll tax cut, which was met with skepticism by Democrats and Republicans, as well as financial help for airlines, cruise lines and the hotel industry.
“With the Federal Reserve running out of options to help, the onus on lawmakers to provide fiscal stimulus — deficit-financed temporary tax cuts and government spending increases — is intensifying,” writes Mark Zandi, chief economist at Moody’s Analytics, in a new report.
Zandi is not opposed to a payroll tax holiday, and he supports tax rebate checks and expanded unemployment insurance benefits, more funding for the food stamp program, and easier loan terms and loan guarantees for small businesses via the Small Business Administration and the Export-Import Bank.
“The $8.5 billion emergency spending package passed at the beginning of March to pay for the costs of responding to the crisis is just a start,” writes Zandi. “Most immediately, the federal government must provide financial support to those Americans who get sick, need to care for those that do, and cannot work because their job sites are disrupted or their children are unable to go to school and daycare.”
With that in mind, Zandi recommends that lawmakers provide funds to pay medical costs related to the virus, including funds to pay for a coronavirus vaccine when it becomes available. “Without this government support, confidence is almost sure to flag further and a recession inevitable,” he says. “Even with this support, the economy may suffer a downturn, and additional tried-and-true fiscal stimulus measures will be needed to ensure the downturn is short-lived and less severe.”
BlackRock recommends a “decisive, preemptive and coordinated policy response” between monetary and fiscal authorities “to avoid a raft of financial failures at the grassroots level due to demand shortfalls, production disruptions or payment delays that can all lead to cash flow squeezes.”
The first step, says BlackRock, is financial support for “frontline public health agencies.” BlackRock also recommends “a comprehensive global response” that includes:
- Generous sick pay support and short-time work schemes to stabilize incomes and limit job losses
- Suspension of tax collections and Social Security contributions from companies to provide temporary cash flow relief and help the self-employed while accelerating government bill payments to the private sector. Cash grants from local governments and natural disaster relief from federal agencies could also be included.
- Preparation by monetary authorities to deploy direct and targeted liquidity support, including the expansion of funding-for-lending facilities specifically earmarked for companies harmed by the virus outbreak. Government guarantees to help cover bank lending at preferential rates to provide additional working capital for companies can also help.
“Policy action now would help avoid opening the door to more radical ideas and uncontrolled fiscal spending,” according to BlackRock.
Time is of the essence. The director of the Centers for Disease Control and Prevention, Robert Redfield, told a congressional hearing Tuesday that full containment of the virus in the U.S. is no longer possible and the focus now is mitigation blended with containment.
Redfield said the U.S.’ failure to quickly roll out tests for the virus had impeded the early efforts to contain it.
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