Give People Money; Supply-side Measures Won't Work
It is becoming clear that implementing a payroll tax cut to fix the economic issues associated with the Coronavirus is a terrible idea. Yet somehow I'm not surprised that this is what is being considered. History offers plenty of evidence of how Washington always seems to arrive on the most ineffective policy solution when drafting fiscal policies dedicated to stimulating the economy. But thanks to a vigilant Treasury Department, there are hints that we may actually get it right this time. President Trump's comments on payroll taxes notwithstanding, there seems to be support within the Trump Administration for simply giving people money.
Readers of The Demand Side know better than most that today's economic problems have little if anything to do with taxes. Even if taxes were the issue, simply reducing the payroll tax rate (what the White House has proposed) would be a rather blunt solution. The issue today -- the issue most concerning to policymakers and what may very well cripple growth, employment, consumer sentiment, and household wealth for millions of American families -- is a falloff in demand.
Now in a normal world, there are many ways to fix such a problem. Congress could pass a long-overdue infrastructure program to help rebuild the country; we could invest in alternative energy, helping us catch up to the rest of the developed world in alternative power; or we could initiate a broad federal employment program dedicated to solving the myriad issues of the day. However, given the limited policy options available during a national quarantine, sending money directly to consumers is likely our best bet.
The White House's initial solution of a payroll tax cut would do nothing to fix the issue of falling demand (if only White House staffers paid more attention in Econ 101). People are not going to restaurants, families are not traveling for spring vacations, and more concerning, many have been forced to take unpaid leave because they are employed in positions where telework isn't feasible.
We have to stimulate demand, and we have to do it in a healthy and safe way. Thankfully the US is predominantly a service economy where most workers can work from home, providing a backstop of sorts, but we still have a large percentage of our workforce -- construction workers, carpenters, chefs, etc. -- that simply can't work from home. For these people, we need to ensure they remain financially secure while their out of work, otherwise our economy will suffer tremendously.
We also need to keep in mind that this is about more than economics, it’s about people. For sure, a payroll tax cut will help many companies financially, and some employers may use the extra cash to help their workers during this crisis, but we can't extrapolate that assumption as a policy response for the entire economy -- and Treasury Secretary Steven Mnuchin knows this. He has been the one person in the Administration leading the charge in promoting the idea of sending money directly to consumers. He also recognizes that we are running out of time; financial markets are pummeling retirement income, and if he can't get the President to find some way of assuaging Wall Street that the Administration has the situation under control, it won’t be long before we enter a Greater Recession.
Assuming President Trump can get behind a temporary basic income, which seems more likely by the day, the thought of simply giving people money, without stipulating work requirements, has always been met with resistance on Capitol Hill. But today our leaders are presented with a challenge like no other. We have a virus that shows no signs of slowing down and an economy on the brink of collapse. We need not waste time debating the meritocratic elements of sending people checks simply because some in Congress have ideological issues with decoupling work and income. Congress needs to pass a bill allocating money directly to consumers, because as Secretary Mnuchin correctly stated yesterday, "Americans need cash now."