As the coronavirus crisis deepens, two former heads of the central bank recommended Congress prepare to seriously loosen its purse strings.
WASHINGTON (CN) — The Covid-19 pandemic has created unprecedented challenges to the U.S. economy and public health, and two former chairs of the Federal Reserve told lawmakers Friday the recovery will be uneven and slow if the federal government cannot get infections under control.
It has been five months since the new coronavirus took hold in the U.S. and it has now infected over 3.6 million Americans and killed nearly 140,000.
Despite months of shutdowns from coast to coast and promising signs of a gradually flattening curve, infections are spiking again. The biggest spikes are largely in places where officials rolled back social distancing restrictions early, like Florida, Texas and Arizona.
All of this is coupled with a clock that is quickly running down on the start of an uncharted school year and comes amid messaging from the White House that is almost always at odds with the health and safety recommendations of experts and scientists on the frontlines of the pandemic.
Further, unemployment is hovering at a whopping 11.9% — representing some 32 million Americans who are out of work and in two weeks’ time will see the $600 weekly unemployment benefits created by the CARES Act expire unless they are renewed by Congress.
At this formidable juncture, the House Select Subcommittee on the Coronavirus Crisis called on two former chairs of the Federal Reserve, Ben Bernanke and Janet Yellen, to offer guidance through the uncertain steps ahead.
Bernanke was chairman of the Fed during the 2008 recession, which threw the U.S. for a years-long loop despite a hefty and hotly contested $800 billion recovery package Congress approved at the time.
Unlike that crisis 12 years ago, the pandemic has dealt its heaviest blows not to the housing market or financial sectors but to service, retail, leisure and hospitality industries where, Bernanke and Yellen noted, the lion’s share of workers are low paid, women or people of color.
Income inequality is increasing across the board as a result, which generally speaking tends not to bode well for the long term, the former central bank chairs agreed.
The $2.2 trillion CARES Act was a temporary salve to weary workers and business owners during the spring. But as summer gives way to fall and a cohesive national strategy to reduce infections is at best unclear or at worst completely lacking, Bernanke and Yellen recommended in the meantime that lawmakers prepare to seriously loosen their purse strings.
“This pandemic has put state budgets deeply in the red,” Yellen said Friday. “To avoid major cuts, federal support should be substantial and conditions on aid should not be overly restrictive.”
The $150 billion allotted to states and localities through the first round of relief is simply not enough to shield them from major job losses or drastic dips in tax revenue that might be triggered by another wave of outbreaks, according to Yellen and Bernanke.
Running off that cliff while states have already lost about $500 billion in revenue since the pandemic began must be avoided, the ex-Fed chairs told the committee. The same goes for assistance to the unemployed.
“Frankly, it would be a catastrophe to not extend unemployment insurance,” said Yellen, who served as chair of the central bank under President Barack Obama.
For lawmakers skittish about pouring trillions more into the economy in the weeks ahead, Yellen suggested unemployment insurance be tied to the national unemployment rate. Should the economy improve, the benefits would drop and vice versa.
Deficit hawks who have suggested putting a $1 trillion cap on the next round of relief should take heart, Bernanke said.
“The reason for a cap would be a concern about the deficit, which I understand, but right now real interest rates are negative, interest burden is very low and there’s a big appetite for debt. It’s an opportunity to take advantage of borrowing more in order to recover,” he said. “Whatever it takes is probably what we need to be thinking now.”
Bernanke also supported the $3 trillion Heroes Act, which was passed by the House but has languished in the Senate since May.
Yellen predicted Friday that if infection rates steady or decline, it could still take at least three years to bring down unemployment levels “anywhere close” to what they were before the pandemic.
Bernanke said with federal support flowing to states and cities, unemployment could potentially dip to 9 or 10% by the end of the year.
Republican lawmakers like the committee’s ranking member, Steve Scalise of Louisiana, lauded the Trump administration’s response to the pandemic and called for broader reopening of schools and workplaces.
“The pause was necessary but came at a staggering cost. America has to decide if those economic losses will be short term or long term and irrevocable,” Scalise said.
Democrats like Jamie Raskin of Maryland were uninterested Friday in what he argued was a false choice between preserving the public health or strengthening the economy.
“People suggest how there is a debate between whether you must think of health or economy first in terms of recovery,” Raskin said, adding that President Donald Trump pushed “gullible GOP governors and mayors” to open quickly only for the sake of political points.
Raskin asked Yellen if it would be better to “just take public health problems seriously,” if what Republicans are after is a widescale reopening of the U.S. economy.
“We saw that in Europe. They had extreme lockdowns but then, things got under control. They had enough testing, contact tracing and masks,” Yellen said. “It’s very expensive to have to shut down again.”