Several hundred billion dollars a month in economic stimulus may still be needed to make life more tolerable for American workers and businesses as COVID-19 cases in the US continue to surge, according to Nobel Prize-winning economist Paul Krugman.
In a televised interview with CNBC, Krugman pointed out that the US is still 11 million jobs down from before the pandemic and many people are still without wages. He also made it clear that state and local governments are in extreme financial distress, and hundreds of thousands of businesses are on the verge of collapse.
While it may be difficult to determine the exact price of the ideal stimulus package for the US, Krugman, a professor at the City University of New York’s Graduate Center, emphasized that a “really, really big one” is needed to keep the economy afloat.
In March of 2020, Congress passed a $2.2 trillion fiscal stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. However, the bulk of its benefits have ended or will soon expire. Congress has been unable to reach a deal for another pandemic relief package due to disagreements between Democrat and Republican lawmakers.
Republicans are backing a smaller $500 billion relief bill that focuses more on payment to individuals and giving loans to small businesses. The Democrats, on the other hand, have proposed an additional $2.2 trillion package that includes aid to state and local governments and an extension of the $600 weekly subsidy for the unemployed.
Senate Majority Leader Mitch McConnell, who recently won his reelection bid, said passing an economic stimulus deal before the end of the year would be his top priority. Krugman, however, doesn’t think McConnell would agree to a large stimulus package since Republicans tend to view these benefits as “rewarding people for not working.”
Like Krugman, many officials of the Federal Reserve System think more assistance might be needed, especially if the US experiences another round of lockdowns similar to what is already happening in Europe.
At a press conference held following a meeting of Fed policymakers, Fed chairperson Jerome Powell called on Congress and President Donald Trump to do more to support the economy, saying the government is in danger of making the same mistakes it made during the 2008 financial crisis.
Economists say the Fed, unlike Congress, has already provided nearly all of the help it can for the economy, which is why its officials are pushing for Congress to pass another stimulus package.
Over the past several months, the Fed has been buying mortgage and Treasury bonds to hold down long-term borrowing rates to encourage spending. It has also kept its key short-term interest rate – which affects many corporate and individual loans – close to zero. In September of 2020, policymakers said the rate would likely remain at the current levels through 2023, and perhaps even longer.
Some Fed watchers, meanwhile, say policymakers are now exploring the idea of increasing the power of the Fed’s bond-buying efforts. However, an announcement regarding this matter isn’t likely to happen until after a future meeting.
The Fed boosted its bond purchases when the pandemic first hit hard in March of 2020 to ease disruptions in the Treasury bond market. The central bank later changed the reasoning behind its bond purchases, saying they would help support the economy. This was the same reason it provided to justify the bond purchases that were made following the 2008 financial crisis.
Though critics have often said the Fed’s aggressive bond-buying would destabilize financial markets and trigger runaway inflation, this has yet to happen. Given how another major economic setback seems likely, many economists believe the Fed will likely increase its bond purchases. It may also shift the mix of those securities to include longer-term securities, or perhaps a bit of both.