Congress and the Fed Are Saving Lives

Bill Dudley

(Bloomberg Opinion) -- Authorities’ efforts to stem the spread of the coronavirus have plunged the U.S. economy into a sharp contraction, leading some to argue that the cure may be worse than the disease. This misguided thinking ignores a crucial consideration: As Congress and the Federal Reserve have demonstrated, we can improve the trade-off by lowering the cost of saving lives.

No doubt, measures to contain the pandemic will sharply curtail economic activity in the weeks and months ahead. The 3.28 million initial unemployment claims filings for the most recent week were nearly five times the prior record. In many ways, this is a choice. Social distancing and sheltering in place are essential to slowing the spread, and economic contraction is the inevitable consequence. 

At this point, it’s also hard to say how much sacrifice will be required.  We don’t know with any certainty how broadly the pandemic will spread, or how long it will take to curb the number of new cases so that hospitals can manage the onslaught without having to pick who lives and dies.  Social distancing might need to last a few more weeks or many more months. The virus might retreat in summer and resurge in fall and winter.  We’re making a trade-off between lives and the economy, but the precise terms of that trade-off won’t be known for many months.   

That said, we have the power to improve the terms of the trade-off. This is precisely what Congress is doing by enacting the largest fiscal stimulus ever, aimed in part at replacing the income that people and businesses have lost. And it’s why the Fed has responded so swiftly with extraordinarily measures, including cutting interest rates to zero, buying unlimited quantities of mortgage and government bonds, and introducing a broad range of emergency lending facilities that go far beyond what was done during the last financial crisis. 

These actions have two important benefits. First, by calming markets, supporting household income and ensuring businesses have the cash they need to operate, they limit economic damage and reduce the risks of a prolonged depression. If deficits in income and revenue were not addressed, the initial decline in activity would be followed by subsequent rounds of retrenchment as firms failed and households ran out of funds to meet their obligations.

Second, they change the trade-off. That is, by strengthening the social safety net and providing support to businesses, they reduce the cost that measures to stem the pandemic impose on the economy. This, in turn, should make people more willing to accept social distancing and sheltering in place. It should help the whole country do what’s necessary to save lives. 

For all the uncertainty, there are some things we know. Relaxing restrictions too soon would have grave consequences. It would facilitate the spread of the virus. It would further tax the resources of the healthcare system. It would cause more people to get sick, and more of those to die. Which is why Congress and the Fed must keep doing whatever it takes to reduce the economic consequences of doing what’s right.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.

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