Editor’s Note: Mark Zandi is chief economist of Moody’s Analytics. The opinions expressed in this commentary are his own.
One year after it began, the Covid-19 pandemic nightmare is nearly over. With millions of Americans getting vaccinated each day and the imminent passage of the massive American Rescue Plan, we are starting to approach herd immunity, and, in a couple of months the economy will be enjoying rip-roaring growth. Barring any other major unforeseen circumstances, we should be back to full strength within a couple of years.
This 180-degree turn in our collective financial fortune is due in significant part to the overwhelming response of the federal government to the economic pain inflicted by the pandemic.
The Federal Reserve used its arsenal of tools to keep the economy afloat. It responded within days of the first infections last March by slashing interest rates. It took only two weeks for the federal funds rate, the key short-term interest rate the Fed controls, to nearly hit zero. Next, the Fed revived its financial-crisis era quantitative easing program to buy hundreds of billions of dollars in Treasury and mortgage-backed bonds and bring down long-term interest rates. It worked. Mortgage rates, which had spiked in the panic as the pandemic struck, quickly declined.
The Fed also immediately erected a firewall between the pandemic-induced economic chaos and the financial system. It stood up an array of credit facilities – commitments by the Fed to purchase everything from commercial paper and corporate bonds to securities backed by credit cards and auto loans – to ensure that credit flowed uninterrupted to businesses, households and state and local governments. Without this, many businesses likely would have had to shutter operations, households would likely have had to stop buying cars and even groceries and municipalities would likely have curtailed essential services.
In the earlier 2008 financial crisis, the Fed was too slow to put up these facilities, and the financial system failed, requiring a government bailout. The Troubled Asset Relief Program, or TARP, took years to get the system back to health. Full recovery was delayed almost a decade. The Fed learned from that. By protecting the financial system from the pandemic’s economic fallout, the central bank ensured that this recovery will be a strong one.
The Fed also made the mistake of increasing rates in 2015 before the economy was back to full employment after the financial crisis. It won’t do that again. The Fed has pledged to hold to its zero interest rates policy until it is obvious that everyone is back to work. The signal for that will be strong wage growth, especially for workers with lesser skills and education who have had it the toughest during the pandemic.
President Trump and Congress also responded quickly when the pandemic first struck. Congress passed the initial Covid relief package shortly after first infections. By the end of Trump’s presidency, lawmakers had agreed to five relief packages, providing financial help to households, small businesses, health care providers, state and local governments and the struggling airline industry. President Biden and a new Congress are now set to pass another massive relief package, the American Rescue Plan.
Those packages add up to an astounding figure, well over $5 trillion in federal aid (equal to almost 25% of the nation’s pre-pandemic GDP) to help the hard-pressed manage their lives through the pandemic. Stimulus checks, unemployment insurance, food and rental assistance and other income support going to mostly low-income households have helped offset many people’s wage and salary losses.
For some perspective, consider that the Recovery Act, the fiscal stimulus package President Obama squeaked through Congress early in his term. That response to the financial crisis cost $800 billion, equal to just over 5% of GDP. Obama came under withering criticism for the size of the Recovery Act and was unable to convince Congress to provide much additional help. Instead, lawmakers turned to handwringing over deficits and debt and prematurely embraced fiscal austerity. The post-financial crisis recovery sputtered.
Biden helped implement the Recovery Act as Obama’s Vice President and understands this mistake. That is evident in the massive American Rescue Plan. The post-pandemic recovery will soon kick into high gear.
The Biden administration will soon begin work on the next fiscal package. It will be fashioned on the Build Back Better agenda that Biden proposed during his campaign. It addresses the nation’s longer-term economic challenges, including repairing our increasingly fragile infrastructure, climate change, racial equity, and income and wealth inequality.
These are pernicious problems that have developed over decades. Solving them will take persistent policies over decades to come. As such, they must be paid for. Deficit financing makes sense to help a struggling economy in a crisis like the pandemic, when interest rates are low. But that won’t work for long-running problems after the economy is back to full employment and interest rates have normalized.
The federal government stepped up admirably during the pandemic, quickly providing a financial backstop, particularly for the hardest hit among us. It showed that government is indispensable during a crisis. Let’s hope lawmakers can use this success to tackle our most difficult long-term problems that only government can address.