Is economic stimulus the right response to the crisis?

Apr 10, 2020

When economic calamity hits, the governmental response is often to try to stimulate spending by people and businesses, in order to get money moving through the economy and create new jobs to meet the new demand. But Chicago Booth’s Joseph S. Vavra says that our policy goals now are different than they usually are in a recession, and policy makers should be considering how to tailor their response to this crisis to suit the unusual circumstances.

Video Transcript

I think a lot of the policy discussion has still, in some sense, viewed the coronavirus situation and the approach to stimulus through the lens of a normal recession. Even the framing of these policy interventions as stimulus I think is somewhat misleading in terms of what our policy goals should be.

Right now, our goal really is not to encourage spending. That’s kind of a standard policy tool for fighting recessions when they come along is that we want to, in various different ways, go out and we want to encourage people to go out and shop and we want to increase aggregate demand and this will provide some jolt to the economy and reduce the depth of the recession.

But we do not want people to be going out and shopping right now. We want people sitting at home for public health reasons, and we want to be engaging in policies that allow people to do that. We do not want to be encouraging shopping right now.

The goal right now also is not encouraging jobs. So when you see current discussion now about a new round of stimulus and, potentially, infrastructure investment—now interest rates are low, so it’s a good time to invest in infrastructure, and we should be encouraging jobs there—I think all of those things are fine once the economy is in a recovery phase, and once we want to be boosting demand and be boosting jobs and output. Right now we want people to be sitting at home.

The more that we can do to get people to sit at home and reduce the spread of the virus and reduce the health consequences, that’s what’s going to be best for the economy, and that’s what we want to be encouraging.

I think one thing that’s also important to be thinking about, that I don’t have a great answer to in terms of strong interactions with political incentives, especially in the current administration, is that there’s a large swath of undocumented workers in the US economy, and the stimulus policies that we already implemented, sending out these rebate checks, I think for obvious political reasons, these undocumented workers were not included in these stimulus payments.

But at the end of the day, however you feel about illegal immigration, these workers are here now. As a public health matter, we do not want these people going to work and spreading this virus. And so we want this population to also be able to stay at home and manage this shock. And if we set up the system to manage this economic event in such a way where we exclude some fairly sizeable chunk of the population from these liquidity considerations and from thinking about these economic consequences, however you feel about the political and economic ramifications of that, it seems like it will almost certainly have large public health ramifications and contribute to the ultimate spread of the virus if you can’t come up with some solution.