Lessons from the 2020 Coronavirus Crash for the United States
2020 will forever be remembered as the year during which millions, if not billions of people were directed to quarantine as a result of the COVID-19 pandemic. However, this current recession that the world is still trying to recover from will not by any means be forgotten either. 2020 not only saw the largest single-day and single-week drops in the Dow 30 since 1987 on March 16 but also saw almost 16 million people lose their jobs because of the pandemic between just the months of February and October! So far, Congress and the Federal Reserve have compensated by “setting near-zero interest rates… [and] starting a massive $700 billion quantitative easing program,” (Liesman 2020). and issuing multiple trillion-dollar stimulus packages. Despite these efforts, there are mistakes for both the government and individuals to learn from.
Individuals and Businesses
Almost every major recession has been caused by a slip in the market. Whether it was the 2008 recession, the Great Depression in 1929, or the Stagflation crisis in the 1970s, most economists would agree that each one of these recessions was a result of some sort of bubble in the market or a rise in unemployment. However, the Coronavirus Crash was started not by any kind of bubble, but rather a pandemic. This is certainly proof that a recession can be created by a great number of factors and not just economic factors. This will likely mean that individuals and businesses are going to be inclined toward saving their money and not spending as much. This is also an indicator that people will learn to diversify their portfolio to accommodate more securities that provide a hedge against recessions. You may have noticed that “gold and bitcoin have emerged as the top performers against the S&P 500 this year.” (Evans 2020).
Gold and bitcoin do well during recessions because when the dollar’s value is not as appealing, these two have the ability to serve as alternate currencies. These two securities will likely continue to perform well after this recession ends. People will want to be safe and have an asset in their portfolio that hedges against any future recessions regardless of how the dollar is performing, which is why assets like gold and bitcoin will continue to rise in value for years to come.
The Federal Reserve and Interest Rates
As far as the government goes when it comes to preparation, there are a couple of things that come to mind. Firstly, many people were upset by how long it took Congress to pass a stimulus bill. Unlike the Federal Reserve where monetary policy can be very efficiently monitored and updated to meet the current because of its small number of board members, Congress takes longer to pass legislation such as stimulus packages because they meet in sessions and cannot just make the decision to give out stimulus checks whenever they want. It doesn’t help that it takes 50 members to pass a stimulus package either. In order to combat the long, exhausting process of waiting for the next congressional session, proposing a bill, convincing the other party to vote for your bill, and starting over, the government should keep aside funds for a stimulus package when people desperately need it. While the government does have access to funds like FEMA or the Disaster Relief Fund, the CARES act uses money that will be created by the sale of government securities. Whenever the government immediately needs a large sum of money, they have institutions like banks and government organizations buy government securities. These securities are usually bonds issued by the government that when bought, use that money to support the government. The institutions and people that buy these securities are compensated with interest from the government. However, this interest compiles government debt, and it takes time to issue more bonds and sell them for huge stimulus packages like the CARES act.
Secondly, as much as the Federal Reserve has done to fight the recession, it wasn’t that significant when you look at the big picture. You might point to how they cut the Federal Interest Rate, but this was really not that big of a deal when considering that the rate was already so low, to begin with. To clarify what this rate is, the Federal Interest Rate is a benchmark set by the Federal Reserve that governs the interest rates of banks. “The theory is that by cutting rates, borrowing costs decrease, and this prompts businesses to take out loans to hire more people and expand production. The logic works in reverse when the economy is hot.” (Baldwin 2020). By not spiking the Federal Interest Rate when the economy was doing well and still expanding prior to the Coronavirus Crash, the Fed really shot themselves in the foot since they didn’t have any more room to cut rates when the economy really needed it during this recession. Over the past four years, interest rates have all stayed below three percent, and the Fed has even gone as far as actually cutting interest rates during the third and fourth quarters of 2019, before the COVID-19 recession even began. Between February and now, the Federal Interest Rate has only been able to be cut by one and a half percentage points (tradingeconomics.com 2020).
Notice how the interest rate was already being cut prior to the emergence of the coronavirus in late 2019. This left virtually no room for the interest rate to be cut further. While the drop during the recession virtually seems quite drastic, it is only a 1.5 percent decrease. When the economy is hopefully once again expanding and reaching new heights, the Fed is probably going to look back at 2020 and learn from their mistakes by ramping up interest rates while they have got the chance.
States and the Use of Federalism
Finally, one of the most important lessons from this recession is that not all states were equally prepared for a recession in 2020. The recession has shown that states needed assistance as much if not more than individuals and businesses. States have varying budgets & resources which makes recessions harsher for some states. A study by the Center on Budget and Policy Priorities had shown that the “most prepared states for a recession, considering the strength of budget reserves, unemployment insurance systems, Medicaid programs, and higher education systems, are Alaska, Idaho, Nebraska, Nevada, New Mexico, and Texas.” (Leachman, Sullivan 2020). Unsurprisingly, some of these made the list of top ten states in terms of job growth in 2020 according to World Population Review.
It’s not hard to understand why, either! This year, millions of people lost their jobs, but the people who lost their jobs in states where unemployment insurance is more readily available transitioned to new jobs more easily. The same can be said about budget reserves that are incredibly useful for funding small businesses and other financial operations that operate within states. And in a pandemic, implementing a strong medical insurance system is crucial, which explains how big of an impact Medicaid had on job growth in 2020 as well. This is why it is crucial that the federal government also makes sure to help state governments. This can be done by signing relief bills for states to use toward keeping financial operations steady and making their residents’ lives easier.
Conclusion
Besides everything that has been previously mentioned, there isn’t much more the United States could have done economically to combat this current recession besides acting quicker and realizing the potential severity of this pandemic earlier. Learning from the mistakes of fighting past recessions is crucial in fighting future ones, and the Coronavirus Crash had its fair share of lessons. It is crucial for the government to start providing budget relief to states and being cautious with cutting interest rates prematurely. For individuals and private entities, investing in more assets that hedge against economic downturns should now be a priority for future recessions, given the fact that recessions can now be caused by a wide variety of factors that aren’t limited to economic ones.
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