Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

COVID-19 and US Economic Policy Responses

Posted on | March 8, 2021 | No Comments

COVID-19 was recognized in early 2020 and began to spread rapidly in March. The World Health Organization (WHO) identified the virus in January, and later in the month, the CDC confirmed the first US Coronavirus case. On March 13, President Trump declared the spreading coronavirus a national emergency as the US registered its 100th death. Many restaurants and other high contact industries began to shut down. Transportation and tourism ground to a halt. As a result, the US’ economic management processes worked to design a response. In this post, I look at how the Federal Reserve and Congress (House and Senate) addressed the economic ramifications of the emerging pandemic and produced actions that reverberated through the US, including the so-called K-shaped recovery.

Stock market since 2021

The US economy went into steep decline in the second quarter (April, May, June) while the virus spread and the Federal Reserve’s monetary policy and the CARES Act was being implemented. According to the Bureau of Economic Analysis (BEA), in the second quarter of 2020, US real Gross Domestic Product (GDP), contracted by 31.4 percent (9 percent at a quarterly rate). It was the starkest economic decline since the government started keeping records in 1947.

Starting March 3, the FOMC reduced the Fed Funds Rate 1.5 percentage points to 0-0.25%, making it official at its March 15 FOMC meeting. The Fed Funds Rate is the interest rate that banks purchase money from each other through its FEDWIRE network. This gives them the reserves that can be lent out at higher rates for car loans, home mortgages, and industrial capacity. The loans can also be invested in appreciating financial assets such as Bitcoin, currencies, equities, gold, etc. The Fed offered a narrative framework, or “forward guidance” on the interest rates, stating they will remain low until unemployment recedes and inflation increases to roughly 2% percent.

COVID Unemployment

The Fed simultaneously announced that it would begin to purchase securities “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.” After its mid-March meeting, the Fed said it would begin buying some $500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities. This is a version of the quantitative easing (QE) used, along with the $700 billion Troubled Asset Relief Program (TARP), to recover from the 2007 financial crisis.

Over the course of the year, the Fed bond portfolio increased by $2.5 trillion from $3.9 trillion to $6.6 trillion. The purchases injected money into the economy and QE kept interest rates low, helping to keep mortgages cheap and the housing industry booming. The $6.6 trillion balance is a lot, but it can also be used to draw money out of the economy to help reduce inflation. That is what distinguishes printing money from QE. Printing money puts cash into the economy without adequate means to extract it during inflationary periods. Ideally, the Fed can sell off its balances and subtract money from the economy.

Congress worked on stimulating the economy as well. The Senate drew on the House of Representative’s Middle Class Health Benefits Tax Repeal Act, originally introduced in the U.S. Congress on January 24, 2019. All spending bills must originate from the House of Representatives, so the Senate used it a “shell bill” to begin working on economic and public health relief. They filled it in with additional content to combat the virus and protect the economy. On March 27, 2020, President Trump signed the CARES (Coronavirus Aid, Relief, and Economic Security) Act into law.

At over US$2 trillion, CARES was the largest rescue package in US history. It was twice the amount of the American Recovery and Reinvestment Act of 2009 (ARRA) that totaled $831 billion and helped revive the stalled US economy after the credit crisis. The CARES Act expanded unemployment benefits, including those for freelancers and gig workers, and gave direct payments to families. It also gave cash for grounded airlines, money for states and local governments, and half a trillion dollars in loans for corporations (although banning stock buybacks).

The result was a dramatic turnaround in GDP, not always the best economic indicator, but a key historical one. The third quarter (July, August, and September) grew dramatically. According to BEA, US real GDP increased at an annual rate of 33.1 per cent (7.4 percent at a quarterly rate). Compared to the 9 percent contraction in the 2nd quarter, this was a stunning reversal, the so-called V-shaped recovery. The BEA then reported that real GDP rose again by 4% in the fourth quarter.

Instead a V-shaped recovery, talk of a K-shaped economy emerged, meaning that the economy was diverging. The economic crash hit different sectors unevenly, and the recovery even more so. The well-off and professionals, especially those that could telework, did well. At the same time, much of the rest of the economy faltered, often depending on racial, gender, industrial sector, and geographical differences.

Fueled in part by Trump’s 2017 Tax Cuts and Jobs Act, significant amounts of money moved into appreciating assets. Many well-off people just had more money to invest. But it was also consequential in that combined with the Fed’s low-interest rates, it spurred unprecedented speculation and borrowing on margin for investment purposes. With these monetary and fiscal stimulus packages, the financial markets recovered quickly and continued to rise into 2021.

A year ago, the S&P 500 fell some 20% from its highs in a record 16 days. A key measure of the top 500 listed companies and the market overall, it is also a major indicator of the economy. A year later, the S&P 500 recovered from its 2,304 low to a near-record close of 3,931 on Feb 17. Overall, the S&P 500 returned 15.15% in 2020.

The Dow Jones Industrial Average (DJIA) is another important indicator of the economy and financial markets, and one of the oldest (Shown above). It indexes the top 30 “blue chip” companies. In other words, companies with pricing power over their products such as Apple, Chevron, Coca-Cola, Disney, and Proctor & Gamble. The “Dow” crashed to 18,951 on March 23 from a high of just over 29,300 three weeks earlier. The dollar was also down, as was crude oil and many commodities, including gold. The Dow continued to rise and recovered to nearly 31,500 two months into the Biden presidency.

On March 6, 2021, the Senate passed a new $1.9 trillion coronavirus relief package. It came at a time that stock markets were at record highs, Bitcoin had ballooned to over $50,000 and concerns about inflation due to increased spending and especially diminished supply chains had emerged. But the K-shaped economy was still evident as warped imbalances of the Trump tax cut and low interest rates helped the people who didn’t really need help, while many others struggled.

The new Covid-19 response has three main areas: pandemic response ($400 billion), including 14 billion for vaccine distribution; direct relief to struggling families ($1 trillion), notably the $1,400 checks for individuals and unemployment benefits of $300/week; and support for communities (in multi-year tranches) and small businesses ($440 billion), especially tourism areas hit hard by the pandemic and transit systems.

We entered 2021 with an unbalanced economy – a roaring stock market but massive poverty. Years of supply-side economics gave us a highly technological society and appreciating financial assets. But it was based on globalized supply chains and highly dependent on Russia and Saudi Arabia to support petro-intensive lifestyles and economic practices. Tax cuts transferred much of US wealth to the higher income brackets. Trump’s US$1.3 trillion tax cuts exacerbated the imbalances as the former president racked up US$7.8 trillion in national debt from his inauguration on January 20, 2017, to the capitol riots on January 6, 2021, when the electoral college votes for President Biden were tallied and declared him the winner.

We had a medical emergency; the new COVID-19 legislation is paying the bill and hopefully taking a bit of the kick out of the K-shaped recovery. What is important in the current legislation is giving support to the sick and dispossessed, including those affected by closed businesses and the 9.5 million jobs that disappeared over the last year. Will we have inflation? The best cure for inflation is stopping the pandemic and restoring the circuits of food and other vital commodities.

Ⓒ ALL RIGHTS RESERVED



AnthonybwAnthony J. Pennings, PhD is a Professor at the Department of Technology and Society, State University of New York, Korea. Originally from New York, he started his academic career Victoria University in Wellington, New Zealand before returning to New York to teach at Marist College and spending most of his career at New York University. He has also spent time at the East-West Center in Honolulu, Hawaii. When not in the Republic of Korea, he lives in Austin, Texas.

Comments

Comments are closed.

  • Referencing this Material

    Copyrights apply to all materials on this blog but fair use conditions allow limited use of ideas and quotations. Please cite the permalinks of the articles/posts.
    Citing a post in APA style would look like:
    Pennings, A. (2015, April 17). Diffusion and the Five Characteristics of Innovation Adoption. Retrieved from http://apennings.com/characteristics-of-digital-media/diffusion-and-the-five-characteristics-of-innovation-adoption/
    MLA style citation would look like: "Diffusion and the Five Characteristics of Innovation Adoption." Anthony J. Pennings, PhD. Web. 18 June 2015. The date would be the day you accessed the information. View the Writing Criteria link at the top of this page to link to an online APA reference manual.

  • About Me

    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

    You can reach me at:

    apennings70@gmail.com
    anthony.pennings@sunykorea.ac.kr

    Follow apennings on Twitter

  • About me

  • Writings by Category

  • Flag Counter
  • Pages

  • Calendar

    April 2021
    M T W T F S S
     1234
    567891011
    12131415161718
    19202122232425
    2627282930  
  • Disclaimer

    The opinions expressed here do not necessarily reflect the views of my employers, past or present.