Nearly eight months after it was declared a pandemic, COVID-19 rages on, and there is no global consensus on the right policy mix for addressing the public health crisis. But on how to deal with the economic fallout, the winning strategy is clear: Spend early and spend big. And no major economy has done that better than the United States.
Washington’s secret weapon has been the support for consumers. In late March, Congress overcame partisan differences to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act, rushing out $2.1 trillion of public money, or more than 10 percent of GDP, to support households, small businesses, and larger corporations. At the same time, the Federal Reserve put in place a series of emergency lending programs to keep the money flowing.
The funds were deployed hastily, which of course entailed risks that not all of the spending would be optimal. But the economic results show that the effort was well worth the risks, particularly for U.S. households. Nearly alone among the major Western economies, American household incomes actually went up during the COVID-19 recession, by an unprecedented 10 percent between the first and second quarters of 2020.
Because consumption was suppressed during lockdown, consumers used the extra income to build up their household savings. Those savings are well positioned to drive the economic recovery once the virus is contained. In fact, that’s already starting to happen: Consumption in sectors less affected by the pandemic, such as durable goods, is now well above pre-pandemic levels. At this pace, and especially if Washington passes a further stimulus package and a vaccine is deployed, U.S. GDP is on track to recover before the end of 2021.
Contrast the swift bipartisan effort and its immediate macroeconomic benefits in the United States with the timid, multi-year fiscal expansion preferred on the other side of the Atlantic. The EU has not even deployed its fiscal stimulus package, Next Generation EU, yet. NGEU isn’t set to start until January. At around 250 billion euros per year, the extra money amounts to less than 2 percent of GDP: an order of magnitude lower than the U.S. package.
More importantly, that money is not going straight to households’ pockets. No checks will be mailed to low- and middle-income households as in the United States. Typically, European countries’ furlough and paycheck protection programs have come with a haircut in employee wages, suppressing rather than increasing personal income. And NGEU will make little difference: its funds are being allocated to long-term projects like infrastructure spending and the green transition. This is good for secular growth but ignores the acute nature of this recession.
The result is that Europe will exit the COVID-19 pandemic with weaker household balance sheets, foretelling a slower and longer recovery. As EU policymakers should have learned from the eurozone crisis, you cannot have a strong recovery with weak consumers.
But what about the cost to the taxpayers? Fiscal conservatives argue that eurozone countries have only just emerged from a decade of self-imposed austerity and would rather not have to go through that again to bring public balances in check. Such thinking is prevalent in Northern European countries, and they are not alone: Even New Zealand, which had a comically low debt-to-GDP ratio of 20 percent last year, recently had a bruising and unnecessary political debate about government spending spiralling out of control. But such concerns ignore both the cyclical nature of the crisis and the price signals from financial markets.
First, the COVID-19 recession is not a long-run productivity crisis of the kind faced by the eurozone in the 2010s. It is a specific, supply-side shock that has caused economies to temporarily operate below their maximum capacity. Policymakers’ top priority should be to ensure that the transient shock does not mutate into a prolonged demand-side recession caused by lower incomes.
Second, the argument for frugality ignores what financial markets are saying about the economy’s desire to allocate savings. Benchmark eurozone bonds continue to trade at negative yields; in effect, governments are being paid to borrow. When the European Commission recently raised money to pay for unemployment insurance, the issuance was 13 times oversubscribed. In other words, savers (and central banks) around the world are making it easier for governments to borrow money; it would be foolish for treasury departments not to take advantage at a time of such great need.
By overcompensating households for the loss of income resulting from COVID-19, the United States has taken a clear policy lead, one which may be further boosted by another stimulus bill. The good news is that the U.S. consumer accounts for over 20 percent of global GDP and looks likely to again serve as the world’s growth engine. The bad news is that only a few countries are imitating its example.
