Things will get worse and it’s up to other people to do something about it, according to Fed Chairman Jerome Powell and White House medical adviser Anthony Fauci in separate statements this week.
That provoked a nearly 4% two-day fall in the S&P 500 Index and a nearly 7% fall in the small-cap Russell 2000 Index.
Dr Fauci’s testimony Tuesday before the Senate and Chairman Powell’s speech to the Peterson Institute for International Economics stated in so many words that the government didn’t know how bad the Covid-19 pandemic would get, and the Fed didn’t know how much damage it would do to the economy.
Strictly speaking, those are accurate statements, but they came from the public officials responsible for doing something about it. Their statements had the tone of the sort of memos that bureaucrats write to file to show that they weren’t to be blamed for a disaster already in progress.
The late comedian Robin Williams featured in his 1970s night club act “an impression of President Jimmy Carter on the eve of World War III.” Williams drawled into the microphone: “That’s, g’night, yer on yer own.” Back then it was a joke. Investors weren’t laughing about Fauci and Powell this week.
Fauci told the Senate Health and Education Committee that if the United States reopens the economy too soon, “there is a real risk that you will trigger an outbreak that you might not be able to control, which, in fact, paradoxically, will set you back, not only leading to some suffering and death that could be avoided, but could even set you back on the road to trying to get economic recovery. We would almost turn the clock back, rather than going forward.”
That is the administrative equivalent of saying, “Don’t ask me – I’m just in charge.” The administration’s senior official for epidemic control offered no gauge by which risks could be measured and no plan to mitigate them.
Fed Chair Powell Wednesday noted that “the scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II,” and warned: “deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy.
“Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt.
“The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes.”
The Fed is doing everything it can, Powell said: “The Fed can lend, but it cannot spend.” In fact, the Fed’s balance sheet has grown by $2.6 trillion to $6.7 trillion since late February. The problem now redounds to Congress, Powell concluded: “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
Powell also said: “We’re not looking at negative interest rates,” a less-than-successful monetary experiment already tried by the Bank of Japan and the European Central Bank. If Powell isn’t looking at negative interest rates, negative interest rates nonetheless are staring him in the face.
Interest rate futures market already price in negative interest rates later this year in shorter-term US Treasury debt. Market expectations of negative interest rates suggest that the economy will remain depressed for a long time.
Powell didn’t have any specific advice for lawmakers, though. He mentioned the plight of small businesses and the risks to future employment.
Businesses with fewer than 50 employees provide nearly half the nation’s jobs. Should the government provide a payroll tax holiday to encourage businesses to hire and workers to spend?
Should it eliminate capital gains taxes on small business? Should it offer long-term tax relief for business that re-hire some of the 30 million workers laid off since February? Should it launch the $2 trillion infrastructure spending plan that President Trump has proposed?
There are a lot of things the US Federal government can to do to prevent the recession from turning into a prolonged depression, and the public expects its leaders to come before the public with more than hand-wringing.
What would it take for the United States to re-open its economy with confidence? How much testing, and with what resources, and by what deadline? How much contact tracing, and by what means?
Does Dr Fauci want to emulate the approach taken in South Korea and Israel, among other countries, where smartphone apps check the location of likely Covid-19 carriers? Does he have an opinion as to what safeguards for individual privacy might be required, or a recommendation that Americans trade off privacy for safety?
Americans deserve something better than a debate about whether it’s riskier to reopen the economy than to stay at home until the economy implodes. And they deserve clear guidance from the Federal Reserve about measures to restore economic activity rather than a repetition of what they already know – that economic pain is intense and spreading.
Conservative activists on the periphery of the Trump camp have claimed all along that Dr Fauci secretly wants to sandbag the president’s re-election campaign. That’s far-fetched, but he couldn’t have damaged the president more if he had wanted to.