There is plenty to criticize in the White House’s response to the coronavirus. But Team Trump deserves kudos for at least avoiding the sins of the past in its economic response to the crisis.
The mixture of tax credits, spending and loan forgiveness in the staggering stimulus bill, plus massive Federal Reserve intervention, is the direct opposite of post-1929-crash policies enacted by Presidents Herbert Hoover and FDR that led to the Great Depression.
Different, too, from the measures imposed by President Barack Obama, which made the economic recovery following the 2008 financial crisis feel at times like no recovery at all.
First, the downsides. Little and sometimes big devils are in the details of any legislation. Obama promised lots of “shovel ready” jobs in his stimulus, and we got mostly boondoggles like Solyndra (remember that?) and years of high unemployment coupled with slow wage growth; much of the money was wasted and never made it to building those promised roads and bridges.
I’m sure there are a few Solyndras this time around, as well. The current bill touts $2 trillion in spending (Obama’s was about $830 billion). But the gross costs of loan forgiveness and various payments could bring it close to $10 trillion, per Wall Street execs briefed by the White House.
We’ll have to pay that money back. The budget deficit is already at $1 trillion and growing, and that was before the black swan of the pandemic virtually shut down the US economy. Still, at least in its broad strokes, the current response beats the one during the Depression.
Fed Chairman Jerome Powell has taken short-term interest rates down to zero; he’s printed money to infuse the banks with enough cash so they can keep operating and lend money to businesses still operating.
And the Fed has backed up the commercial-paper market, thus allowing companies to borrow short term and make payrolls.
Powell has also made it clear to the markets that the Fed will be a lender of last resort to banks, meaning people don’t have to pull their money out thinking the banks will implode with their savings accounts.
After the 1929 crash, the Fed set out to end speculation in the stock market, so it raised interest rates to prevent investors from borrowing to buy stocks. The cure was worse than the disease; a little speculation after the crash wouldn’t have been a bad thing.
Plus, the high rates hurt businesses because they raised the cost of small-business borrowing when the economy was retrenching.
Meanwhile, the Fed didn’t back the banks, which meant people had no faith their deposits were safe; bank runs became the norm, as did bank insolvencies, causing the economy to crash for more than a decade.
Hoover also raised taxes, because he was worried about the budget deficit, oblivious to the fact that deficits widen even more when economies decline. He imposed tariffs on trade that resulted in a trade war that hurt US exports.
The economy continued to decline even as Hoover began to spend money through fiscal stimulus, because no amount of government spending can make up for taxes and regulations that crush businesses and entrepreneurs.
And that was also the economic legacy of FDR: He spent a lot on welfare and jobs programs, but he also raised taxes and regulations while taking over production from private industry.
The depression he inherited became the Great Depression, because it lasted 10 years under these policies — even as other countries recovered.
Likewise, the recession Obama inherited after the financial crisis became “great,” because he followed much of the Hoover-FDR playbook: lots of government spending but also tax increases and regulations, not to mention ObamaCare and a broad anti-business approach to the economy.
He spent money without much purpose, as unemployment remained high despite his stimulus package. Obama’s saving grace was that the Fed under Ben Bernanke cut rates and liquidified the financial system enough to save banks and start an economic recovery, albeit one of the weakest ones on record.
Again, I’m sure there is lots of pork in the Trump stimulus plan that Congress will approve in the coming days. Just throwing money at an economic problem never really works.
But at least Trump understands that to dig out of the deep economic hole into which the virus has plunged the nation, we can’t attack businesses. We need to stimulate them in ways Hoover, FDR and Obama didn’t. Give him credit for that.
Charles Gasparino is a senior correspondent at Fox Business Network. Twitter: @CGasparino
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