We’re going to see an economic contraction due to COVID-19. No one knows how deep it will be, but there are going to be sectors of the economy that experience depression-like pain. Restaurants, bars, travel, etc are very likely to see 50%+ year over year declines in revenue. I don’t know how long this will last, but based on past experience with Coronaviruses we should assume that it won’t be brief. We should assume this will last 6, 9, 12 or more months.
Now, all recessions are painful. But most past recessions are just monetary events that indirectly harm people in terms of their actual health. This is different. This is a human health recession. And because of that the response should be completely different. We have to attack this thing like we’re at war with it. And we should throw every resource we have at it until it’s dead and we’ve won.
I was starting to calculate how big of a fiscal response we can “afford” to throw at this thing without creating high inflation. But then it dawned on me that this was a silly way to think of it. When you’re going to war you don’t say “how much will these tanks cost?” You say, “we are going to build as many tanks as it takes to win, regardless of the financial cost.” We should be approaching this environment the same way. Whatever it takes. We need to declare war on COVID-19.
I hope we’re all overreacting. I hope this isn’t nearly as scary as we think. But we’re facing a hugely asymmetric risk here where people will literally die if we don’t win this war swiftly. The fiscal response to this environment needs to be tremendous. The rough fiscal estimates, based on rough assumptions using Okun’s Law and an estimated rise in unemployment of 2% with muted inflation calls for an increase of $800B in the deficit. Yes, we should be willing to temporarily run a $2T deficit. TEMPORARILY. That will reduce the likelihood of a sharp jump in unemployment and decline in GDP, but more importantly, it could save lives.¹
Make no mistake. I think this is a temporary event. This isn’t going to wipe out the human race. This isn’t going to cause a permanent depression. It’s likely that the economy will snap back strongly when this is over. But it will also cause a potentially very painful contraction in specific components of the economy in the next 6-12 months. But it’s not the monetary pain we should be concerned with. It’s the human toll that we need to be combating. And because of that we should be totally unafraid of the financial cost of what is needed to destroy this new type of enemy.
¹ – The fact that inflation is already low and likely to go even lower is just more evidence that supports a huge fiscal response to this pandemic.