Stimulus, Safety and Shifts
Economist Douglas Holtz-Eakin Gives his Take on the U.S. Economy and the Government’s Unparalleled Response
The global coronavirus pandemic has wreaked havoc on the U.S. economy and caused disruptions of historic proportions. “We’re facing a very different crisis than the one in 2008, which was essentially man-made,” said Douglas Holtz-Eakin, Ph.D., an academic policy advisor, strategist and president of the American Action Forum, during a recent NAIOP Forums Exclusive webinar. “This is a completely different phenomenon.”
Holtz-Eakin noted the swiftness of the pandemic’s effects on the U.S. economy, citing record unemployment and the contraction of GDP by 4.8 percent in the first quarter of 2020. However, for the most part, he praised the federal response. He stated the Federal Reserve reacted appropriately to the crisis by essentially injecting cash back into the economy through its lending programs. “The Fed’s actions insulated the financial markets from the fallout of the coronavirus pandemic. Banks and other financial entities that have performed remarkably well in this environment and are well-capitalized and capable of executing their basic missions,” he said. “That wouldn’t have happened without the very, very strong, response from the Federal Reserve.”
The Federal Reserve’s actions, along with the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act helped provide a much-needed safety net. Particularly, the additional $600-a-week unemployment benefit for 13 weeks and its availability to populations who would not otherwise qualify for unemployment helped keep money surging into the economy during a period of shutdowns. “This approach was extraordinarily generous and it made a lot of sense,” he said. “They wanted the policy to be, ‘Please stay at home, do not try to go to work and earn a living, for public health reasons.’ However, this is going to be a tougher message when you want people to go back to work.”
The banks, a key delivery mechanism of the stimulus, were asked to originate nonperforming loans and hold them their balance sheets for at least two months. “That was a pretty unappealing proposition,” remarked Holtz-Eakin. However, the Federal Reserve agreed to buy the loans from the banks after they originated them. “Banks get the cash, the bad loan goes off the balance sheet and the banking system is in good shape.”
A problem that wasn’t quite so adroitly handled was the Small Business Administration (SBA) becoming completely overwhelmed. For example, in 2019 the SBA backed $28 billion in loans but then they were asked to back up to $600 billion in loans in 2020. “There isn’t any organization that can make itself 20 times bigger overnight and do it successfully.”
Additionally, the Treasury has disbursed only a fraction of the half a trillion dollars that Congress approved two months ago for loans and loan guarantees to help stabilize the economy. “This is a source of great frustration among, lawmakers and of policy analysts as to why this is happening so slowly and not getting to a larger swath of the business community.”
Holtz-Eakin said he estimates the CARES Act program makes up about 10% of GDP and this will help offset the forecasted GDP decline of about 10% in the second quarter of 2020. Therefore, he believes that now is not the time to worry about the deficit. “Every dime that we spend to preserve this economy is worth it. I would encourage any member of Congress, anyone who’s interested in this problem, that you should do whatever it takes to respond to the pandemic, not use this time to pursue other policy objectives.” Congress, at some point, will be faced with making sure that debt does not stifle the economy but that effort probably won’t take place until 2023 or 2024. “It will require as much growth as we can muster. It will require entitlement reforms and reductions in the growth rate of those big spending programs, which will disappoint people on the [political] left enormously.”
There has been debate as to whether the U.S. will experience a W-, L- or V-shaped recovery. Holtz-Eakin said the trajectory of the recovery will most likely reflect an uneven V shape. The economy will start to rebound in the third quarter of 2020 and gradually climb into 2021. However, it will take years to get back to the GDP level of January 2020.
Holtz-Eakin said he believes unemployment will stay elevated into the next year. The essential nature of many businesses has changed, and more will continue to adapt or die. “Don’t expect to see the airline industry look at all like it did at the beginning of this year. I wouldn’t expect the same for a lot of not-for-profits, performing arts centers for restaurants and movie theaters.”
The return to work will need to be predicated on safety and incentives that will help build trust. For example, in the aftermath of 9-11, the U.S. had to pivot to ensure the economy could continue running under the threat of terrorism. It cost more money, but it was worth it: The trust of the American people eventually returned. “No governor can reopen an economy,” he surmised, “Only people will be able to reopen the economy when they feel safe.”
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NAIOP’s Vice President for Knowledge and Research Jennifer LeFurgy, Ph.D., directs knowledge and research activities and serves as the Editor in Chief of Development magazine.
