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Home > Merk Research > Merk Insights > March 19, 2020

Let's spend $1 trillion to get people back to work

William Poole

March 19, 2020

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On Tuesday, the Trump administration proposed fiscal support for our covid-impacted economy. Earlier in the day, market averages were down somewhat from their opening levels; they responded to the President to finish the day up about 5%.

Overnight, portfolio managers and traders reconsidered that response; they then drove stock futures lower. That was a sensible response. Spending a trillion dollars or more is not what the economy needs. Using round numbers, median household income last year was about $80,000. Even if two earners collect $1,000 each from the new fiscal initiative, the effect will be the equivalent of a bit over one-week’s income. The United States does not need income maintenance or support. We need to get people back to work.

A trillion-dollar federal program ought to be directed to obtaining more test kits, more testing stations, anti-viral agents and vaccines. To understand what can be done solely based on more test kits and imposed societal discipline, review what South Korea is doing.

With a massive increase in testing, authorities can issue “tested” cards. The pubic health experts can tell us how to set up the system. Perhaps a red card with picture for a test good through March. Then, a pink card with picture good through mid-April. An orange card with picture good through end of April. And so forth. A tested worker could display the card on an identity badge clipped to shirt. Then, the card can be checked when a person gets into line at the airport. No, bars will not let you enter without an up-to-date card. I’ll not attempt to design the details but will insist that a trillion dollars will go a long way to establish a system to get people back to work.

Perhaps “only” $500 billion would be needed for the tested identity card system. Let’s reserve $250 million as a reward for the first firm to produce a satisfactory vaccine, subject to the requirement that the vaccine patents, if any, would be licensed with no fee. Perhaps $50 million could go as a reward to the scientists who first create the vaccine.

In short, we do not need income support. We need to get the income production machine working again. We should use the magic of market incentives to help make that happen. Seems a no-brainer to me.

What about the proposal offered by two former Fed chairs, Ben Bernanke and Janet Yellen, that the Fed buy investment-grade corporate bonds? Terrible idea, I think. If there is to be a distinction between monetary and fiscal policy, then the Fed must not buy corporate bonds. Congress must decide which bonds to buy and which not.

For the Fed to create a facility to buy the bonds with newly created central-bank money opens it to all the pressures of the corporatist state. What is an “investment-grade” bond? If a rating agency downgrades a bond to below investment grade, should the Fed immediately sell the bond? Hit the company when it is down? If the Fed buys only AAA bonds, does that not direct funds to firms that already have access to the market? Will a facility once established actually expire? The Fed might give it a sunset date; how many laws are there now that once, or still, have sunset dates?

President Trump has demonstrated an interest in Fed policy. Do Bernanke and Yellen want to provide him with a new opportunity to direct the business of the Fed? Why shouldn’t the President of the United States “help” the Fed to select which bonds to buy?

William Poole
Dr. Poole is Distinguished Scholar in Residence at the University of Delaware and Senior Economic Adviser to Merk Investments. Dr. Poole retired as President and CEO of the Federal Reserve Bank of St. Louis in March 2008.

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