The Economic Consequences of COVID-19: The Great Shutdown and the Rethinking of Economic Policy

Abstract This article examines the implications of the COVID-19 economic crisis for macroeconomic policy, and the roles of the State and the Fed and monetary policy in the United States economy. It argues that that the main effect will be to reinforce trends that had begun during the 2008 Great Recession in terms of the increasing relevance of counter-cyclical fiscal policies and monetary policy. The scale of fiscal policy responses needed to address the present crisis will have significant implications for the size of fiscal deficits and the federal debt, and are, therefore, likely to face political resistance and calls for fiscal austerity. Not only higher levels of deficits and debt will be necessary, but to some degree planning, not just to deal with pandemics, might become more relevant. Geopolitical concerns, aggravated by the pandemic will be another significant factor contributing to the growing role of the state. The financing needs of the fiscal interventions will in turn reinforce trends with respect to the role of the Fed as the fiscal agent of the Treasury that had been previously witnessed during the Great Depression and the 2007–9 Great Recession.