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Jerome Powell: The US Economy Is Drowning. Congress Needs To Spend More Or Risk Permanent Damage

"This reversal of economic fortune has caused a level of pain that is hard to capture in words."

Jerome Powell largely stuck to the dour script in prepared remarks delivered during a hotly-anticipated webinar on Wednesday.

The Fed chair described an economy reeling from an unprecedented shock, the likes of which most living human beings have never witnessed.

“People have put their lives and livelihoods on hold, making enormous sacrifices to protect not just their own health and that of their loved ones, but also their neighbors and the broader community”, he said, adding that “while we are all affected, the burden has fallen most heavily on those least able to bear it”.

As ever, critics will (justifiably) charge that the Fed’s own policies have exacerbated inequality, thereby making situations like the current debacle worse by leaving middle- and lower-income Americans even more vulnerable.

For example, it is not a coincidence that some measures of inequality increased at the onset of the Fed’s response to the GFC. The visual below is a poignant example.

Measures aimed at shoring up market confidence will tend to perpetuate that trend and others like it. As the Fed bolsters asset prices, the wealth of those in whose hands those assets are concentrated will grow disproportionately. The benefits of rising stock and bond prices are not linear – they accrue exponentially. That means the rich will get richer, yes, but it also means the very rich will see their lead on the “merely” rich balloon too.

In any event, Powell and the Fed have no choice but to pull out all the stops. Charges of “moral hazard” and concerns about forestalling the purge of misallocated capital (thereby perpetuating “zombie” dynamics) notwithstanding, it’s clearly not advisable for the central bank to stand aside and let the entire economy implode. Only a fanatic would suggest as much.

“A Fed survey being released tomorrow reflects findings similar to many others: Among people who were working in February, almost 40% of those in households making less than $40,000 a year had lost a job in March”, Powell said Wednesday, underscoring the plight of middle- and lower-income Americans. “This reversal of economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future”.

Indeed. Crucially, the Fed chair emphasized that more fiscal help is likely necessary, irrespective of jitters about the national debt or the deficit.

“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery”, he remarked, adding that “this tradeoff is one for our elected representatives, who wield powers of taxation and spending”.

On Tuesday, budget hawks pretended to be aghast at a record monthly deficit of $737.9 billion for April. Spending was nearly $1 trillion. Typically, the month shows a surplus from tax payments, which were obviously deferred this year.

House Democrats are looking to push a $3 trillion package of measures through Congress in order to provide extra relief and bolster the economy once the shutters are lifted and business resumes across the country.

Nancy Pelosi is angling to secure funding for state and local governments, as well as more money for direct cash payments, expanded unemployment insurance and food assistance. There’s a summary embedded below.

The Senate won’t pass it as written, but the point is to send a message to public: Democrats want to do more than simply provide “bridge liquidity” – they want to inject actual stimulus.

Trump claims to be in “no rush” on a fourth relief bill and Mitch McConnell lampooned Democrats’ proposal on Tuesday, calling it a “big laundry list of pet priorities” – as though there’s something that’s funny about the situation.

From a political strategy perspective, the GOP may want to take a step back and consider whether the composition of the “base” has changed under Trump. Republicans are going to need the president’s fervent supporters in November, and it goes without saying (or at least it should) that many of the president’s fans are not what one might describe as “affluent”.

One person who thinks the economic situation could deteriorate meaningfully if Congress fails to take the appropriate action is Jay Powell. I’ll leave you with his assessment, as delivered on Wednesday.

The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes. But the coronavirus crisis raises longer-term concerns as well. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt. The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes. These businesses are a principal source of job creation—something we will sorely need as people seek to return to work. A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.

Heroes Act summary

Heroes Act Summary

17 comments on “Jerome Powell: The US Economy Is Drowning. Congress Needs To Spend More Or Risk Permanent Damage

  1. Massive deficit spending may be our only option, but it’s still really difficult to process a phrase like “a record monthly deficit of $737.9 billionl.” #MAGA

  2. From a political strategy perspective, the GOP may want to take a step back and consider whether the composition of the “base” has changed under Trump. Republicans are going to need the president’s fervent supporters in November, and it goes without saying (or at least it should) that many of the president’s fans are not what one might describe as “affluent”.

    Yep. Trump is a POPULIST.

    • I think that term ‘Populist’ has been misconstrued to the point that it has little true meaning. If the number of votes indicated number of supporters Hillary was a populist and Trump is an elitist. Does the English language matter anymore?

      • The number of votes? Sorry, I don’t get your argument.

      • “Popular” v. “populist.” Hillary was the more popular candidate, Trump was the more populist candidate.

        Populism: n. a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups.

  3. The lack of further, meaningful fiscal repsonse in a timely enough manner could be the policy error.

    The Fed did their job, avereting a collapse of the financial system. Arguments about moral hazard, etc. don’t matter right now. They did the right thing.

    Likewise, the arguments about unemployment paying $600 more a month than work don’t matter right now. These are retro arguments. Lack of motivatoin to pass legislation that has “food” and “people need to eat” and “this is going to be really bad for kids unless we act” all over the summary blows me away. So what, it gives money to Illinois, California, and NY. It doesn’t matter right now. There could still be a collapse. They have to shovel dirt into the hole now.

    • The other thing is, it’s not fair for people to say “Dear Fed, you’re exacerbating inequality, leave it to Congress to fix this”, and then turn around and say to Congress “The deficit is too big”. I mean, somebody has to fix it. Or else we just careen into a deep, dark depression.

      • Or not. . .the middle class is an historical anomaly. The 1% have a ministry of propaganda in the form of Fox News and the benefits of Citizens United to ensure their megaphone is the most powerful. And absolutely no commitment to even Pareto Optimal wealth distribution. Add a little outside interference from nations/states/non-state actors more than happy to undermine American hegemony and sapping the political will necessary to make the sacrifices necessary to repair the economic devastation wrought by Covid 19 is not an unlikely outcome.

        Personally, I believe that the half measures, misinformation and therefore wholly inadequate response to the pandemic will permit it persist and again flourish with devastating human and economic consequences. That response may well serve as a better predictor of how well we resolve the economic problems than some idea that “they have to fix this” and so they will (and it is not as if solutions aren’t time sensitive). States fail, economies fail and often the solutions to those problems were readily available –what was lacking was the political will to implement them.

        • Tending to agree here (RStanz) …. Want to add that there has been a crisis of leadership in the Political system (in US) that came to a head with the failure of McCain/ Feingold years ago…. Life is full of Hobson’s choices and each of those choices leads to more of the same until true changes in direction re direct the narrative or restructure the playing field.. Interest groups compete for dominance and the strong prevail . You get Charlatans like Trump historically which plummets the World into crisis mode a requirement for true change…Exasperating the problem is always the (well intentioned group) that have a fix for everything so they piecemeal the process in an attempt to stay one step ahead of the disaster (always just one step). History washes the deck off and over time and the World goes on.. We are at such a juncture and the world will go on.
          Powell this time around is likely to be criticized for the usual communication error , but really he is saying it just as it is …Interesting to see what his fate has in store for us all as the market will veto his attempt at reality..

        • . . .the middle class is an historical anomaly.

          True dat. And not many people realize it.

      • That is what happened in 2008-09, the US lacks follow through- this happens in foreign policy as well. Look at Afghanistan after the Russian invasion. We built up the mujahadeen to vanquish the Russians. Then we walked away leaving the country in ruins and chaos, and the mujahadeen turned on us and became the basis of the Taliban- the foreign fighters there formed the basis of Al Queda.

    • We 1000% need to be looking at UBI as well as addressing critical supply chain issues immediately. Ordering people to work isn’t updating the supply chain nor does it make it likely to survive future infection waves… much less the one that has not ended yet.

  4. I appreciate the service provided by the members and veterans of our armed forces, but I can’t help thinking that there is an element of the con game that makes these folks into the “marks,” especially when I hear top brass discuss the idea of “acceptable” losses. Now trump sounds just like that … “there will be many deaths … but we need to reopen, blah blah.” Remember the biggest losses with the Spanish flu were in the second wave. What’s more important, the NFL and NBA or the lives of another 100,000? The NCAA pres just said no college sports unless the campuses are all open. Well, today we hear the whole Cal State system will remain online only in the coming year. Count on it, others will follow because states are cutting the crap out of univ budgets. Online can be made cheaper than on campus so selling online degrees is going to become the new wave. No more March Madness, just year round madness.

  5. Problem is it is pretty hard to invoice someone 35,000 per year tuition for online learning.

  6. Then Powell went into the temple courts and drove out all who were buying and selling there. He overturned the tables of the money changers and the seats of those selling doves.

    And He declared to them, “It is written: ‘My house will be called a house of prayer.’ But you are making it ‘a den of robbers.’”

  7. The ending Powell quote here is perhaps the best bottom-up summary of the economic stakes that I have heard from any government official. This from the monetary policy guy. Unfortunately, it seems those with fiscal authority just aren’t able to escape the short-term focus on quarterly asset prices of their corporate overlords to see the forest through the trees. Or perhaps they are so far off the sociopathic spectrum they simply do not care. Either way, same outcome.

  8. Is it true that every 100bps on the unemployment rate increases the death rate by 0.1%. Lets see 20*0.1 =???

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