You are here

U.S. Economy Suffers Biggest Quarterly Decline Ever, Under Coronavirus Lockdowns

Citations

American Greatness cites CEI senior fellows John Berlau and Iain Murray:

The U.S. House of Representatives and Senate are considering bills for additional coronavirus relief on top of the nearly $3 trillion spent so far.

Such a further increase in government spending would be a big mistake, says John Berlau, a senior fellow at the Competitive Enterprise Institute.

“It’s not surprising the economy is contracting, when governments have forced whole sectors to shut down and consumers are cautiously avoiding a variety of commercial activities they believe could endanger their health,” said Berlau. “But massive new spending is not the answer, and it would cause more economic harm.”

Benjamin Zycher, a resident scholar at the American Enterprise Institute, says the federal government’s initial actions directed toward sustaining consumer demand were justified, though Fed policy has been ill-advised in recent years.

“The fiscal response thus far has been O.K. overall,” said Zycher. “There was a real need to maintain consumption as much as possible, but I think that the zero-interest rate Fed policy is deeply unwise, and the growing effort to impose constraints on the slope of the yield curve is perverse.”

The economic contraction is a short-term shock best dealt with by allowing the private sector to fix what the government broke, says Brian Domitrovic, Ph.D., the Richard S. Strong Scholar at the Laffer Center.

“GDP can go up just as fast as it can go down,” said Domitrovic. “It was [government] force, along with a mass of private decisions to stay away from economic activity, that caused the drop. Absent the disease condition, GDP should snap back wholly. With persistent conditions, the snap-back should approach the original line on account of new practices developed to deal with it.”

It’s important to remember that the U.S. economy was doing very well before the coronavirus shutdowns, says Ed Hudgins, a senior fellow at The Heartland Institute.

“This is a recession different from all others, not only because the cause was the government reaction to COVID-19 but also because it was preceded by an economy stronger than any in many decades,” Hudgins said. “Sadly, the government-mandated shutdowns have put many smaller enterprises out of business permanently.”

Financing additional spending with more federal debt would only worsen the situation, says Don Devine, a senior scholar at the Fund for American Studies who served as President Reagan’s director of the U.S. Office of Personnel Management.

“In the long run, debt will slow everything down or worse,” said Devine. “The government has made its bed and will have to live with it.”

“Another aid package that is not tightly focused could be a ticking inflationary time bomb,” said Hudgins.

Instead of spending more borrowed money as Congress is considering, the federal government should turn to policies that have consistently proven to unleash economic growth, especially deregulation, says Iain Murray, senior fellow and vice president for strategy at the Competitive Enterprise Institute.

“This is as much a supply shock as a demand shock,” said Murray. “To get the supply side moving, we need supply side policies, to wit: deregulation and tax cuts on employers. Congress only seems to be talking about demand side help. There needs to be a deregulation title in any Phase IV relief bill. Some states and the [Trump] administration have done a good job on getting rid of never-needed regulations, but they need to go further. And the last thing we need is more job-killing regulation like expanding California’s AB5, which has made working from home difficult at exactly the wrong time.”

Regulatory reform would have a powerful effect in stimulating economic growth, says Berlau.

“What we need is a deregulatory stimulus: wholesale repeal of laws and regulations that keep businesses from adapting to serve customers given the realities of Covid-19,” said Berlau.

Click here to read more