In a terrific Washington Post op ed Neel Kashkari lays out Great Recession lessons that should guide us in dealing with our current pandemic-driven economic collapse.
Kashkari is president and chief executive of the Federal Reserve Bank of Minneapolis and oversaw the Troubled Asset Relief Program during the Great Recession for Presidents Bush and Obama.
Kashkari’s Great Recession lessons summary:
I oversaw TARP during the George W. Bush and Barack Obama
administrations, and my experience underscores that if there is a principle policymakers need to keep in mind going forward, it’s this: Err on the side of helping as many workers and businesses as possible rather than on prudence. This is not the time to worry about moral hazard or whether people are incentivized not to work. When the covid-19 crisis is behind us, if our biggest complaint is that some workers and small businesses got help when they didn’t really need it, that would be a wonderful outcome for our country.
Exactly! We provided too little aid and what we did provide came with way too many strings attached. Kashkari writes:
Policymakers should learn from perhaps the biggest mistake we made in 2008: We targeted our programs too narrowly, and they ended up being less effective than the country needed. Being prudent stewards of taxpayer resources is, of course, always important, but when a crisis is raging, the speed and scale of interventions are paramount. Congress and the Bush and Obama administrations enacted multiple programs to help homeowners avoid foreclosures. None of them was highly effective because they were all targeted to homeowners who needed only a little help. Americans were angry at the thought of their “irresponsible” neighbors getting a bailout. By applying numerous criteria to make sure only “deserving” families received help, we narrowed and slowed the programs dramatically, resulting in a deeper housing correction, with more foreclosures than had we flooded borrowers with assistance. The American people ultimately paid more because of our attempts to save them money.
What does this mean today? Think of firefighters putting out a fire. If their primary aim is to conserve water, they increase the odds of losing control of the fire.
The $2 trillion legislation includes many provisions to help both businesses large and small and the millions of Americans who are losing their jobs. As implementation begins, officials will be tempted to develop complex rules to decide who will qualify. For example, if each of the thousands of struggling small businesses needs to be individually vetted, the program is likely to be too slow to meaningfully help the economy. While the U.S. economy can bounce back from a crisis fairly quickly, it took more than 10 years after the 2008 crisis to rebuild the labor market. We can’t let that happen again. Let’s learn from history and douse the raging fire — before it becomes uncontrollable.
Unfortunately, our initial response in both Washington and Lansing, looks like we did not learn Kashkari’s Great Recession lessons. Although substantial, the aid has been too little and too time limited to deal with the hardships that workers and small business owners are experiencing now and for years to come. And the aid clearly comes with way too much red tape.
The economic harm of the pandemic-driven lockdown is going to last far longer than the currently available aid. And to make matters worse, even if the available aid was designed right, it is not very effective because households and small business can’t get the aid.
As we explored in a previous post what way too many Michigan workers and small businesses are going through today to get safety net benefits make clear that we need to go to no red tape cash benefits.
The main reason for how difficult it is to get much needed benefits is that the system is designed to catch those who don’t “deserve” public benefits. So we end up with an application process that takes way too long to help people who need benefits to pay the bills now. Not to mention has long and confusing applications that are difficult for many to complete so that it, almost certainly, keeps benefits from far more who are eligible than screens out those who aren’t.
Today’s economic reality should make clear to all of us that a vast majority of those struggling economically and without any safety net to deal with emergencies are hard working Michiganders. Who, like us, get up everyday and work hard to earn a living. That the prime reason for so many struggling is not irresponsible adults coddled by a too-generous public safety net, but rather an economy, even when it was booming, has too few jobs that pay family-sustaining wages and provides health coverage and paid leave.
As Kashkari wrote what we need now from policymakers in both Washington and Lansing is to “Err on the side of helping as many workers and businesses as possible rather than on prudence.”