The U.S. Needs Way More Than a Bailout to Recover From Covid-19



The U.S. Needs Way More Than a Bailout to Recover From Covid-19
Shore up the markets, sure, but don’t stop there. It’s time for Congress and the White House to do things that have been unthinkable since JFK’s moonshot. It’s time to go big.
Businessweek, April 30, 2020




The economic crisis created by Covid-19 is unlike any other in modern American history. Thousands are dead, and the economic fallout has been devastating. More people lost their jobs over four weeks in March and April than did so during the entire 2008-09 financial crisis. In fact, since mid-March, all of the employment gains since the last crisis ended have been lost. Of the 156 million people the U.S. Bureau of Labor Statistics measured as working full time then, more than 26 million—about 16.7%—were no longer receiving a paycheck as of April 23. If you add in gig workers and those who were unable to file unemployment claims because state offices were too overwhelmed, the tally was more than 20%. At this pace, we will eclipse the peak of unemployment during the Great Depression, 25%, in a matter of weeks.

This sudden collapse in economic activity, hitting every sector except for food, health care, and Netflix, is why Congress moved quickly to pass the $2 trillion CARES Act on March 27. In late April, lawmakers added $320 billion to replenish the U.S. Small Business Administration’s Paycheck Protection Program. That sounds like a lot, until you learn that the first allotment, $349 billion, lasted barely a week. CARES2, another trillion-dollar stimulus, is already under congressional consideration. CARES3 won’t be too far behind.

When the stock market crashed in 1929, the Federal Reserve was a young institution with limited authority. Reviving the economy was the job of the White House and Congress. Programs such as the Works Progress Administration, in which the federal government hired workers to build more than half a million miles of streets and 10,000 bridges, along with airports, dams, highways, and sanitation systems, helped alleviate mass unemployment. However, the lasting economic gains came not from temporary work programs, but rather from the Reconstruction Finance Corp., a public-private entity better known as the RFC.

Louis Hyman, an economic historian and director of the Institute for Workplace Studies at Cornell, recently described RFC in the Atlantic as “an independent agency within the federal government that set up lending systems to channel private capital into publicly desirable investments. It innovated new systems of insurance to guarantee those loans, and delivered profits to businesses in peril during the Depression.” Most impressive, as Hyman has noted, these programs cost taxpayers nothing.

The RFC was an enormous economic multiplier. Start with the Depression-era breakdown of the banking system. That institutional collapse wasn’t caused by a lack of capital; larger national banks such as National City Bank and Bank of America had idle cash. But low potential returns, combined with post-traumatic stress lingering from the stock crash, made bankers so risk-averse they wouldn’t even lend to each other.

The RFC’s solution in 1934 was for private bank employees to work with its subsidiary, the Federal Housing Administration, to create insurance for pools of mortgages. This led to a resurgence of financing for home purchases. Another RFC subsidiary, the Rural Electrification Administration, worked with farm cooperatives and banks to issue low-interest 20-year loans to run thousands of miles of electrical wires to rural farms and ranches—something the private sector had said would be too expensive.

During the years before World War II, the RFC created the Defense Plant Corp., offering loans and tax benefits for the manufacture of tanks, planes, and other weapons used by the Allies to fight the Nazis. The DPC helped add 50% to the country’s manufacturing capacity by the war’s end, according to Hyman. In 1940 it was responsible for 25% of the nation’s entire gross domestic product. Hyman noted that it remade the U.S. aerospace and electronics industries, turning them into some of the largest sectors in the economy.

Half a century later, most Americans have forgotten all that these public-private partnerships accomplished—to such an extent that there is political hay to be made by demonizing government programs of any kind. We’ve lived off their fruits while failing to establish new programs. This void has led to a list of structural issues: underemployment, an increasing wage gap, a lack of household savings, and a looming retirement crisis.






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