Possible Fiscal Policies for Rare, Unanticipated, and Severe Viral Outbreaks

Possible Fiscal Policies for Rare, Unanticipated, and Severe Viral Outbreaks. Bill Dupor. St Louis Fed, Mar 17 2020. https://research.stlouisfed.org/publications/economic-synopses/2020/03/17/possible-fiscal-policies-for-rare-unanticipated-and-severe-viral-outbreaks

Consumer spending in restaurants, travel, leisure, hospitality, and some retail trade sectors is falling because of precautions taken by businesses, households, and governments to reduce the spread of COVID-19. Social distancing and similar actions are reducing demand in some sectors.

The proper fiscal policy response in this situation is not necessarily to try to replace or stimulate that demand, given that the fall in demand is a natural byproduct of the caution.1 Rather, the proper policy response may look different from conventional stabilization policy. This essay asks: What should guide a fiscal authority in conducting macroeconomic policy in the event of a severe viral outbreak?

Below I describe some potential fiscal policies that may be appropriate. Two economic principles and one operational principle motivate these potential recommendations.

First, incentivize behavior to align with recognized public health objectives during the outbreak.

Second, avoid concentrating the individual financial burden of the outbreak or the policy response to the outbreak.

Third, implement these fiscal policies as quickly as possible, subject to some efficiency considerations.

At this point, experts are evaluating a wide range of scenarios for the trajectory of the virus in the United States. Some of these scenarios involve a substantial toll on Americans' health. If coordinated macroeconomic policies could help to slow the rate of transmission—by an amount that would reduce overloading U.S. hospitals and help buy time to find a vaccine—so that some of the negative health effects were reduced, this would be a major return on the federal dollars invested in such a program. The pay-off would be in addition to some of the standard business cycle mitigation that motivates standard fiscal interventions.

I describe a $197.1 billion proposal with the above issues in mind. Because some observers have advocated for tax rebates in response to COVID-19, and these could prove useful, I also add this component as an option. It increases the overall size of the fiscal intervention to nearly $350 billion.2 For comparison, the 2009 Recovery Act had a budget impact of about $815 billion.3

It is well understood that fiscal policy operates with a lag. Parts of a proposal such as the one outlined below might take several weeks to a few months to undergo CBO assessment and budget projections, the federal legislative process, and coordination between state, local, and federal officials to implement those fiscal policies. If the planning process were started now, legislators would have the option to vote for or against federal authorizations depending on whether the policies were deemed necessary up to the moment before a final vote was taken.