Economy

Beyond Rate Cuts, How Can Governments Boost the Economy During a Pandemic Outbreak?

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The economic fallout from the COVID-19 outbreak has felt like a pandemic whether it has been classified that way or not. While the first concern should be about those who are ill and who have lost loved ones, the novel coronavirus already has created a very negative impact on the global economy. The U.S. stock market has gone from record highs to a formal correction (a 10% drop or more) in just two weeks. The public knows there is no cure and no vaccine for the coronavirus and testing is spotty.

One of the biggest concerns in the financial markets at this time is that governments and central banks have few obvious policy tools to help keep their economies going if what was seen in China happens in the United States and elsewhere.

With the United States seeing its stock market fall more than 10% in less than two weeks and with the long-term U.S. Treasury yields hitting record lows, the writing is on the wall that economic risks are rising. Some investors, analysts and economists are beginning to expect some sort of coordinated central bank action. The question is when and what tools can be used.

China already has begun returning its workforce back to some normalization, but the spread of the coronavirus has moved into higher numbers in South Korea, Japan, Iran, Italy, other parts of the Middle East and elsewhere. The United States has yet to see wide outbreaks. School districts are making preparations about school closures if needed, and many companies have started at least internal discussions about what options they have for their offices and for their workforce if the coronavirus outbreak becomes widespread as the Centers for Disease Control and Prevention (CDC) has warned.

24/7 Wall St. would warn against expecting major economic supportive actions just because the stock market is down. That said, it’s important to consider what the governments and central banks can do to help the public during any pandemic scare. Until there are layoffs and more direct impacts on other non-travel aspects of spending, the U.S. Federal Reserve and central banks from China, Japan, Korea, Europe and elsewhere would at least be considering what sort of accommodative actions they can take and are willing to take.

It has become assumed in the past few days that the Federal Open Market Committee (FOMC) will lower interest rates far faster than they communicated even a week or two ago. One problem for 2020 is that interest rates in Europe and Japan are already at negative yields, and record low yields in long-term U.S. Treasury rates may mean that cutting interest rates might have a limited impact.

Let’s just assume that the Federal Reserve will lower interest rates and that even the other central banks that already have lower or negative interest rates make rate cuts again. Lessons of the Great Recession, terrorist attacks, natural disasters and other events in the past may hold some lessons for what central banks and the U.S. government could do beyond rate cuts to stimulate the economy even if the coronavirus becomes much more widespread in the United States and elsewhere.

The public needs to understand that some of these actions may not exactly be legal or constitutional, but that doesn’t mean they are criminal acts. In times of need, particularly in a crisis, sometimes bold steps that are not in the playbooks are required.

Loan Relief, Tax Relief

During times of natural disasters like hurricanes and storms, the private sector on its own has allowed for loan relief. The government can backstop these efforts so that companies do not have to feel the full brunt of those delays, and that is not just the U.S. government.

The U.S. Treasury has allowed for longer delays in tax filings and has delayed some payment dates and other penalties for those people who have been in affected areas. The U.S. tax filing date of April 15 is just a month and a half away, and if the coronavirus does expand into an outbreak around multiple geographies in the United States, the Treasury could allow for delays.

It seems hard to imagine that the United States would again cut taxes in 2020. How that would help in a viral outbreak may be questionable, but cutting taxes is a tool that leaves additional funds in the public’s bank accounts.

Helicopter Money

Some members of Congress already have shown ignorance over who Ben Bernanke is, but there was a time when the chair of the Federal Reserve, who took the role after Alan Greenspan, was called “Helicopter Ben” before becoming chair. His use of the term signaled a potential tool to fight deflation and to avoid when systemic breaks occur. The term “helicopter money” actually is credited to economist Milton Friedman. The implication is effectively dropping money out of helicopters to the public and institutions, but that could be seen via many types of efforts.


While we have shown some other alternatives below, many of these would effectively represent some form of helicopter money, or additional quantitative easing tools. Money has to come from somewhere, and the old printing presses of the past now might be more digital ledgering.

Federal Reserve and Entities Can Buy Stocks

The U.S. Federal Reserve (Fed) balance sheet had worked itself down to about $3.75 billion in August of 2019, after peaking above $4.5 trillion back in 2014 and 2015 after quantitative easing measures went beyond just managing interest rates. The size of that Fed balance sheet has come back up to nearly $4.2 trillion in February of 2020. Rather than solely buying Treasury notes and bonds, government agencies and mortgage-backed securities this time around, what if the Fed was more creative with asset purchases?

Central banks in Europe have bought corporate bonds, and Bloomberg noted in 2019 that the Bank of Japan and central banks in Switzerland and Israel have purchased equities in the past. With the widespread reporting of the “Plunge Protection Team,” would anyone really be surprised if stocks started to get a new mystery buyer?

Beyond simply buying stocks and then having to dump them in the future, there are “other means” that could be considered. There have been calls in the past that the money put into Social Security should have at least some equity market allocations.

Many other nations may not directly own stocks for their treasuries, but there are massive sovereign wealth funds that exist. Norway, China, Abu Dhabi, Kuwait and Hong Kong have nearly $4 trillion in combined assets in their sovereign wealth funds, with dozens of other countries and entities having an equivalent of sovereign wealth funds well. Not all the available funds could be or should be targeted toward stocks, but maybe some should be considered if needed.

Writing Checks to Impacted Industries

The world already has seen bailouts occur in the bank and financial sectors in the Great Recession. The government also bailed out the U.S. auto sector a decade or so ago. And after the 2001 (9/11) terror attacks, the government propped up the airline industry with billions of dollars worth of “gifts” that were reported to have gone way down the line beyond just air carriers. Subsidies for farmers are well known in America and in many other nations, whether the economy is good or bad.

The airline sector’s woes of the 737 Max fleet grounding in 2019 were followed by the impact of the coronavirus in 2020, as flights into and out of China were canceled. The airlines are in better shape in 2020 than in 2001, but the impact could be massive well just beyond major air carriers. It could spill into hotels, restaurants and drinking establishments and beyond.

As for airlines in 2020, travel companies already have warned that travel plans are being curtailed and cancellations are on the rise in North America. Refinitiv listed its consensus analyst revenue forecasts (rounded) as $45 billion for United, $47 billion for American, $49 billion for Delta and $23 billion for Southwest. That’s already almost $165 billion in expected annual revenues, before even getting into the rest of the carriers, and a large portion of that now at risk.

As (and if) airlines will have to cut more routes or lower their numbers of flights, it means less work for pilots, flight crews and maintenance and other workers that are needed, and it remains to be seen how their labor unions would act in a time of need. According to the U.S. Department of Transportation’s statistics, there were almost 600,000 full-time workers and almost 119,000 part-time workers for the major airlines alone.

It may seem odd to throw money at hotels and restaurants (and bars for that matter) in a time of need, but the Bureau of Labor Statistics (BLS) data shows that there are nearly 13.9 million non-seasonally adjusted workers tied solely to the “accommodation and food services” industries. About 2 million are tied to accommodation, with about 11.9 million people tied to the “food services and drinking places.”

If people are not traveling for business and on vacation, they likely are eating out and going out drinking far less than when they stay at home. It means they are also using far fewer hotel rooms. If workers have to tend to kids for weeks at a time, and if the summer rush is thwarted because of extended school years, some establishments simply may not have the worker availability even to open their doors.

On top of that, the population would not want to go out as they normally would if they feared getting sick. That said, those people who supplement their income or property expenses with Airbnb, Vrbo and other place-sharing services likely will not get a penny in assistance. Catering companies also may be overlooked.

Setting Up Backstops for Retail Trade

The calculation for gross domestic product (GDP) in the United States is close to 70% tied to consumer spending activities. That means that the retail trade sector must be kept alive, and there would be a serious struggle to get people out of their homes to go to a store or retail location if they are fearful of getting sick. For the employment side of the equation, the “retail trade” was shown in the BLS data to employ more than 15.5 million worked in January 2020. Would the government just write stimulus checks or offer credit to owners in retail?

Putting businesses further in debt by expanding credit lines may not be much of a help if they are already having a hard time paying bills. Retail already has suffered from the ongoing e-commerce trends every year for the past two decades, with the Amazon apocalypse and the omnichannel trends hurting traditional brick-and-mortar. In an effort to prevent retail shop owners of all sorts from closing down and laying off workers, incentives could be offered and checks could be written, if needed.

Whether it was the Treasury or the Federal Reserve that wrote the checks might not matter. After all, we already have noted that some of these efforts might not exactly be legal or constitutional.

Helping Banks and Financial Institutions — or Not

The good news about this time around is that the major banks and the financial sector players are still in great shape. They were forced into keeping massive capital reserves, and that would give the nation’s top banks time to operate through a recession, if all those stress tests have any truth in them. That said, making it through a viral outbreak, assuming it is not a long constant issue, should be sufficient.

The banks could get the benefit of lower short-term rates, but the reality is that the banks just do better with higher interest rates and a positive and normal yield curve. Either way, the banking sector should do just fine for now, as far as being in need of government money.

Mandated Purchases of Supplies

The U.S. government and states have special powers, or could pass special powers if needed, in times of certain emergencies. Whether it is using the Federal Emergency Management Agency (FEMA) or activating the reserves in a natural disaster, the government’s health agencies could be ordered to begin stockpiling medical supplies, medicines and all sorts of goods. That could even be dried or canned foods and other “meals ready to eat” (MRE) alternatives. Rather than using the special powers to “borrow” or seize those assets that might help the public well-being, companies that make medicines, facial masks, sanitation and other products could be ordered to crank up their output.

This cannot occur overnight, and many instances of supply chain interruptions already have been announced, but if the agencies are given exceptions about pricing, they could effectively get more money to companies and workers alike.

Government and Federal Reserve Commodity Purchases

Having the Federal Reserve and government agencies purchase commodities outright might seem counterintuitive. That said, every playbook in central bank policies has wanted to thwart the specter of deflation. The United States has wanted to unload some of the oil held in the Strategic Petroleum Reserves, but the lower oil prices of late (under $45 per barrel on Friday) can create deflation of its own. That said, it does free up cash from the consumer that can be used for other purchases.

There might be backlash from the portion of the population that is against the use of fossil fuels of any sort, but this potentially would be more stimulative than a government stockpile of solar panels and wind turbines.

Before taking these efforts to heart as an all-or-none effort, note that it probably be ludicrous to assume that all these efforts would be made at once. Governments are known for often being inept and inefficient. That said, there are at least some blueprints that could be used to keep the economy going under a pandemic scare.

If the COVID-19 outbreak gets far worse than even what was this last week, now you won’t be as surprised to see how far governments are willing to go to keep their economic wheels rolling forward and onward.

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