Stimulus required to deal with virus surge

The acceleration of the COVID-19 pandemic in New Mexico, like most other states, has triggered the re-imposition of restrictions, shutting down nonessential businesses and the issuance of shelter-in-place orders. The last lockdown resulted in unemployment increased to 12.7 percent. A sharp increase in unemployment could be the result again this time.

What is needed is aggressive action to mitigate the negative economic consequences of the current lockdown. The problem is that there are few options available. The normal response to be expected from the Federal Reserve would be to inject liquidity into the economy to promote business investment.

This is exactly what the Fed did in response to the first surge of the pandemic, nearly doubling its assets from $3.7 trillion to $7.2 trillion. Historically, the Fed has restricted market operations to U.S. short term Treasuries, but the current intervention is much broader, including mortgage markets, commercial paper, corporate bonds and municipal bonds, among other markets.

Fed lending has also expanded dramatically. Besides traditional lending to banks, the Fed has begun lending directly to corporations, not-for-profits and credit card debt holders. The idea with the latter program is that the credit card debt holders will channel funds borrowed from the Fed to households, consumers and small business that use credit cards.

The fact is that the economy is awash with liquidity. Indeed, the problem is not a need for liquidity but figuring out how to move the liquidity out the door. Take, for example, the Fed’s Main Street Lending Program.

The Fed has tried to move this money out the door by liberalizing eligibility criteria. Currently, business with revenues as low as $100,000 can qualify. Nevertheless, the Fed has only managed to lend $4 billion of the $75 billion authorized by Congress.

Here in New Mexico, the legislature has authorized the New Mexico Financial Authority to use up to $400 million from the fund the Authority manages to lend to New Mexico business suffering from cash-flow problems arising from public health orders. Only $29 million has been lent so far.

Why so many problems making loans? It’s a lack of demand. Good businesspeople don’t borrow if they can’t repay. High unemployment coupled with the natural reluctance of people to spend in times of stress means that many businesses don’t have demand for their products to justify borrowing.

Making up for this lack of demand doesn’t require liquidity; it requires spending—the type of spending that only the federal government, with its essentially unlimited borrowing capacity can undertake.

The CARES Act needs to be renewed, especially the provisions that provide direct subsidies to business and households. The Payroll Protection Program needs to be renewed, and businesses that have already received benefits should be allowed to reapply. Direct payments to households need to be re-enacted as well as enhanced unemployment insurance payments.

The Federal Reserve has done all it can. Fiscal stimulus is needed. The problem, of course, is deadlock in Congress. Passage of a new stimulus bill requires across-the-aisle cooperation, which does not appear likely. The consequence is likely to be a prolonged recession.

Christopher A. Erickson is the Carruthers professor of economic development at NMSU. He has taught money and banking for more than 35 years. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.