Fiscal program accommodates needed GDP contraction

The program is unlikely to deliver much “stimulus” to the economy, as conventionally understood.  Rather, it will facilitate social distancing and economic contraction over the next few months, while leaving the economy in a stronger position to recover after the public health emergency has passed.

It will not itself contribute to any building of pent-up demand, although pent-up demand does seem likely to develop over time, now that the central case for the economy is a steep and sustained decline in spending, including that for durables, capital goods, and housing.

Somewhat separately, the popular description of the Fed’s role here as providing “helicopter money” or triggering a “fiscal-monetary nuclear bomb” is overwrought and technically wrong.  The Fed’s contribution is to cut rates to zero, eventually move to explicit yield curve control, keep the flow of credit moving, and absorb some of the defaults that will be triggered by the recession.  They are not going to be relaxing the federal government budget constraint, which is not binding anway.

What the Fed is up to here is no small task, and it probably does more to limit the extreme left tail risk than any other initiative, including federal spending.  But it is not helpful to mischaracterize it, as many seem inclined to do.  From the perspective of providing direct stimulus to demand, the Fed is largely knocked out here.