March 20, 2020 11:58AM

Boost Supply, Not Demand, During the Pandemic

By Chris Edwards

COVID-19 is battering the U.S. economy, causing many businesses to cut back and close down. Policymakers are considering a huge $1 trillion stimulus package with an array of subsidies designed to boost consumption. Pundits often say things like “70 percent of the economy is consumption” and “America has a consumer‐​driven economy.” That leads them to think that reviving growth rests on inducing people to spend.

Consumer spending is 70 percent of aggregate demand, but that is only one side of the economy. The other side is supply—the production of goods and services. The government can stimulate demand all it wants, but it won’t move the needle on GDP if production is halted because of health fears. Instead, governments need to give producers certainty that it’s doing everything it can to help people safely get back to work.

The first issue with a stimulus plan is that federal budget deficits already top 1 trillion dollars a year, and deficits will increase further even without such a package as the economy enters recession. Piling on more debt from a stimulus would risk triggering a financial crisis on top of the health care crisis. A fiscal stimulus won’t help the economy, because the Keynesian notion that consumption is the driver of growth is false. President Obama pushed through an $800 billion stimulus after the financial crisis a decade ago and the U.S. suffered the slowest recovery since World War II.

The coronavirus is creating both a supply and a demand shock to the economy. The supply shock stems from disrupted supply chains and businesses closing down for safety reasons or due to government mandates. The demand shock stems from individuals cutting back on spending as their income declines and their fears rise. At the same time, businesses are deferring investments as revenues fall. So aggregate demand and supply are both shifting downward and reducing gross domestic product.

Policymakers are proposing to stimulate demand to re‐​inflate GDP. President Trump had proposed zeroing out the federal payroll tax, but now is leaning toward a $1,000 per‐​person stimulus check. This could start a bidding war for hand‐​outs because the “money for everyone” approach has bipartisan appeal.

However, a demand‐​side stimulus would accomplish little except moving the government closer to a debt crisis.

You can read the rest of this article at The Hill.