A year after its onset, the nightmare of the Covid-19 pandemic is almost over. With millions of Americans vaccinated every day and the imminent passage of the massif American rescue plan, we are departure approaching collective immunity and, in a few months, the economy will experience tremendous growth. Barring other major unforeseen circumstances, we should regain our full strength within a few years.
This 180-degree turn in our collective financial fortunes is due in large part to the overwhelming response of the federal government to the economic suffering inflicted by the pandemic.
The Federal Reserve has used its arsenal of tools to keep the economy afloat. He replied a few days after the first infections last March by lowering interest rates. It only took two weeks for the Fed Funds rate, the key short-term interest rate controlled by the Fed, almost hit zero. Then the Fed relaunched its era of financial crisis quantitative easing program to buy hundreds of billions of dollars in treasury bills and mortgage-backed bonds and lower long-term interest rates. It worked. Mortgage rates, which had exploded in panic when the pandemic hit, quickly declined.
The Fed also immediately erected a firewall between the economic chaos induced by the pandemic and the financial system. He drew up a range of credit facilities – from the Fed’s commitments to buy everything from commercial paper and corporate bonds to credit card-backed securities and auto loans – to ensure that credit flows uninterruptedly to businesses, households and governments. States and local. Without it, many businesses would likely have had to shut down, households would likely have had to stop buying cars, and even grocery stores and municipalities would likely have cut back on essential services.
During the financial crisis of early 2008, the Fed took too long to implement these facilities and the financial system failed, necessitating a government bailout. The Relief program for assets in difficulty, or TARP, has taken years to restore the health of the system. Full recovery has been delayed by almost a decade. The Fed learned from this. By protecting the financial system from the economic fallout of the pandemic, the central bank has ensured that this recovery is strong.
The Fed also made the mistake of rate increase in 2015 before the economy returned to full employment after the financial crisis. It won’t start again. The Fed has promised to stick to its zero interest rate policy until it is clear that everyone is back to work. The signal for this will be strong wage growth, especially for the less skilled and less educated workers who have been the toughest during the pandemic.
President Trump and Congress also reacted swiftly when the pandemic first struck. Congress past Covid’s initial relief package shortly after the first infections. By the end of Trump’s presidency, lawmakers had agreed to five relief package, providing financial assistance to struggling households, small businesses, healthcare providers, state and local governments, and the airline industry. President Biden and a new Congress are now set to adopt another massive relief package, the US bailout.
These packages add to an astonishing figure, well above $ 5 trillion in federal aid (equivalent to nearly 25% of the country’s pre-pandemic GDP) to help people in difficulty manage their lives during the pandemic. Stimulus checks, unemployment insurance, food and rental assistance, and other income support aimed primarily at low-income households have helped offset the lost wages and salaries of many people.
For some perspective, consider that the Recovery law, the fiscal stimulus package that President Obama squeaked in front of Congress at the start of his term. This response to the financial crisis cost $ 800 billion, or just over 5% of GDP. Obama has been criticized for the size of the Recovery Act and has not been able to convince Congress to provide much more help. Instead, lawmakers turned to correcting deficits and debt and prematurely enacted fiscal austerity. The post-financial crisis recovery has stalled.
Biden helped implement the Recovery Act as Obama’s vice president and understands this mistake. This is evident in the massive US bailout. The post-pandemic recovery will soon shift into high gear.
The Biden administration will soon begin work on the next budget package. It will be shaped on the Rebuild better agenda proposed by Biden during his campaign. It addresses the country’s long-term economic challenges, including fixing our increasingly fragile infrastructure, climate change, racial equity, and income and wealth inequality.
These are pernicious problems that have developed over the decades. Resolving them will require persistent policies over the decades to come. As such, they must be paid. 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-standing problems once the economy returns to full employment and interest rates normalize.
The federal government responded admirably during the pandemic, quickly providing financial support, especially for those hardest hit among us. He showed that government is essential during a crisis. Hopefully lawmakers can use this success to tackle our most difficult long-term problems that only government can solve.