* Hoo boy…
Federal Reserve Bank of St. Louis President James Bullard predicted the U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product.
Bullard called for a powerful fiscal response to replace the $2.5 trillion in lost income that quarter to ensure a strong eventual U.S. recovery, adding the Fed would be poised to do more to ensure markets function during a period of high volatility.
“Everything is on the table” for the Fed as far as additional lending programs, Bullard said in a telephone interview Sunday from St. Louis. “There is more that we can do if necessary” with existing emergency authority. “There is probably much more in the months ahead depending on where Congress wants to go.”
Unemployment peaked at 24.9 percent during the Great Depression.
* Also from the St. Louis Fed…
During a severe viral outbreak, state governments are likely to be squeezed financially from separate directions: increased Medicaid payments, new costs associated with virus containment, and falling state tax revenue. Projecting the budget impact of declining taxes is a straightforward exercise. In 2018, state governments collected about $1 trillion in total taxes.13 The $480 billion in general sales taxes and gross receipt taxes collected by state governments is of particular importance.
Reduced purchases of some goods and services during a severe outbreak (e.g., meals out and hotel stays) would mean lower tax revenue. A 30 percent decline in this revenue source for six months would create a $72 billion budget shortfall. A $72 billion state fiscal support program from the federal government would cover this sales tax shortfall.
In addition to the federal-to-state fiscal support I describe here, there would likely be other reasons related to COVID-19 for the federal government to aid state and local governments, such as medical costs and virus containment. Financing these costs in the form of additional grants to states could be considered in a separate Congressional act.
Nearly all states face balanced budget requirements for ongoing expenses. Failure to support states fiscally would put these governments in the difficult position of either raising taxes or cutting back on expenditures. Burdening citizens with additional taxes during a virus outbreak would be ill-advised. And, generally speaking, if state government expenditures made sense from a cost-benefit perspective before a viral outbreak, that cost-benefit calculation would likely hold during the outbreak. Thus, it might also be ill-advised to cut back on that spending just to satisfy a balanced budget requirement.
That was almost a week ago, so it could be worse now.