Whither, limited government?
Unprecedented U.S. policy stimulus to combat the effects of the coronavirus pandemic — and resulting lockdowns decimating jobs and growth — are ricocheting across the economy in multiple and long-lasting ways.
Among the best minds in business and government, there’s currently a lack of consensus over how large a tab the government will have to run (now over $2 trillion and climbing), what impact skyrocketing levels of debt will have on interest rates and inflation, or how long it will take to unwind restrictive stay-at-home orders that brought the economy to a grinding halt.
The outlook is complicated by the growing risk of a new wave of infections that could trigger another round of lockdowns. Moreover, the same government that deliberately engineered a recession to combat a public health crisis is having an inordinately difficult time figuring out how to spur a recovery
However, even with public stimulus bolstering consumers and businesses, a recession characterized by historic depth and speed of collapse is in the looming. It’s created a growing realization that the COVID-19 crisis has unleashed an era of activist (and big-spending) government — something former President Bill Clinton once declared “over,” and one that’s likely to remain a central feature of economic policy for years to come.
“It is already becoming clear that the exit from this heavy government intervention in the economy and daily life will be far from straightforward, as the progress of the disease will dictate which elements can be reversed or sporadically re-imposed,” ING’s economists wrote recently.
Increasingly polarizing fights to ease public restrictions have provoked a conflict between public health dictates meant to prevent a potentially debilitating surge in coronavirus cases, and long-held American traditions about liberty and self-determination.
According to ING, “while there will be calls for governments to step back, the rationale for more assertive state intervention will persist. In the face of mortal threats, people will be more willing to accept constraints on their liberties and tracking of their behavior.”
Hard-hit sectors like airlines, tourism and retail are facing “a near total loss of revenue for a long period, nationalization or state support may be needed. In others, such as health care and pharmaceuticals, intervention will be justified on public health and national security grounds,” the bank added.
‘...Years to come’
During the financial crisis, when the government bailed out Wall Street firms and put Fannie Mae and Freddie Mac into conservatorship, there were dire warnings about the symbiosis between the public and private sector, and where it might lead.
This time around, however, the economic fallout and stimulus from both the U.S. government and the Federal Reserve vastly eclipses 2008.
The end result is what Allianz Chief Economic Adviser Mohamed El-Erian told Yahoo Finance recently was shaping up to be a “massive entanglement” of public and private interests that was a “giant spaghetti bowl” that would take time to untangle.
In a bitter irony, the current political moment has become a textbook study in modern monetary theory, a concept that only a few short months ago was widely disparaged among mainstream economists and market practitioners.
Fast forward to 2020, and the discussion has been galvanized by income replacement checks, loan programs for businesses and a central bank that’s buying exchange-traded funds and high-yield debt to stabilize markets.
“Some of these things will roll off...but no matter what the lingering effect of all the federal government and the Fed has done is going to be with us for years,” Christian Lundblad, research director at University of North Carolina’s Kenan Institute, said in response to a question from Yahoo Finance.
After the great recession, “we were sort of getting back to where we should have been from a GDP standpoint...that was a reflection of the magnitude of the disruption,” Lundblad said. However, the COVID-19 crisis “is orders of magnitude bigger. We’re going to be living with the consequences of this for some time.”
Greg Brown, the Kenan Institute’s executive director, added that it would be reasonable to assume it will take “decades” for monetary policy to return to pre-pandemic levels. The extraordinary rescue measures undertaken by the Fed have sent its balance sheet surging to near $7 trillion, up nearly $3 trillion since the start of 2020.
In a markedly sober analysis of the crisis response, Fed Chair Jerome Powell said last week that a deep and lasting downturn could undermine long-term growth, even after the recession passes.
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” Powell said. “This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
Yet the coronavirus rescue has also crystallized bitter partisan divisions that are likely to complicate the recovery, and may determine the extent to which the government will remain involved once the crisis is over.
The $3 trillion stimulus bill passed on Friday by the Democratic-led House faces stiff opposition from the GOP-run Senate — a combustible situation that Greg Valliere, chief U.S. policy strategist at AGF investments, called “totally off the rails” given the unfolding disaster.
“Everyone has their agenda. We'll get something, but it's going to be a messy slog for the next couple of months,” Valliere said.
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Javier David is an editor for Yahoo Finance. Follow him on Twitter: @TeflonGeek