Democrats and Republicans seem to be reaching a growing consensus that one way the federal government can respond to the coronavirus pandemic is to send money directly to as many people as possible. This might happen through a temporary payroll tax cut or some form of direct cash payment   from the Treasury (ideas here and here). But it would be a mistake to think of it as old-school stimulus.

Cash payments in the era of COVID-19 won’t jump-start today’s economy like they did in the past. Don’t get me wrong, it is critical to put money in people’s pockets as soon as possible. But it may be best to think of these efforts as badly-needed support for the sick or suddenly-unemployed—something like social insurance--rather than classic stimulus to reboot the economy.

The old-school playbook

That thinking was right out of the standard anti-recession fiscal playbook: Government should give consumers cash, which they will spend, which will boost demand, which will keep businesses running and workers working. After all, consumption makes up about 70 percent of the US economy. Usually, getting shoppers back on track will fix much of what normally ails a slowing economy. Problem is, what we face today isn’t normal.

Here’s why: A typical recession (whatever that is) is driven by slumping consumer demand or falling business investment driven by events such as a financial collapse. In 2008-2009, for instance, debt markets seized up, home values and the stock market plummeted, and consumers were left with big housing debt, far less wealth than they thought, and little cash to spend.

This time is different

I hate to say it, but this time is different. Consumer and business spending has dried up because of fear of a disease, not a lack of liquidity or even confidence. And it is affecting both supply and demand.

Take supply first. For some goods at least, there is less to buy. In part, this is because coronavirus outbreaks around the world made it difficult for foreign producers to make finished goods for the US market or because US manufacturers couldn’t get foreign-made parts for their products.

Now, domestic production may be slowing for an even more troubling reason: US factories and offices have become dangerous places where the coronavirus infection can spread. This creates an extremely unusual problem. In some cases, governments have ordered businesses, such as bars and restaurants, to close. In others, employees are reluctant to go to work. This week, the United Auto Workers asked automakers to shutter plants for that reason, and companies agreed to temporarily limit production.

And, of course, those closures and production slowdowns are leading to layoffs which further reduce demand, and on the vicious cycle goes.

The demand problem

The fundamental demand problem is similar. Consumers have cut spending in part because they are afraid to leave their homes to shop, travel, or eat out; or even because the government has strongly encouraged them to stay home. In the case of San Francisco, people have been ordered to stay home. Going out to shop for anything but essentials is a crime.

About now you are saying, sure, but people will just buy online. But while Internet sales are growing rapidly, they made up only 11 percent of all retail sales in 2019. Many low-income households have no access to reliable Internet or credit cards, or have maxed out their cards. By far, most sales still happen when someone walks into a store or restaurant. And right now, they won’t—or can’t.

What we buy

To better understand the problem, think about what people in the US buy:

About 70 percent of consumer spending—more than $10 trillion last year –went to services. Another 10 percent was for durable goods—washing machines, refrigerators, and the like. About 20 percent was spent on non-durable goods such as food and clothing.

Now, think about what consumers are not going to be buying anytime soon: cruises, airplane flights, movie and concert tickets, restaurant meals, hotel stays or Airbnb rentals, college tuition, and a new dress to go to cousin Jane’s wedding that just got cancelled. They’ll be buying much less local transportation and are unlikely to be shopping for a new car or dishwasher. Combined, those purchases account for perhaps one-third of consumer spending and a fifth of the economy.

No conceivable government payments are going to reverse that slowdown in consumption. Only ending the pandemic will.  

Cash payment will help

Government cash payments will help many households. They will provide the funds people urgently need to pay the rent or utility bills and, perhaps most important, their health care costs. They will keep low- and moderate income households above water for a few months, which is critically important. And government payments or loans may give small business owners extra dollars to make their rent for another month.

But these payments may not have the stimulus effects they had in the past. Unfortunately, the active steps government is taking to ease the pandemic are themselves dramatically slowing the economy. And they will overwhelm any cash payments. The best thing government can do to get the economy going is to break the back of the pandemic. And that will take major public health initiatives, not cash payments.