Monday’s very favorable news from Pfizer Inc. – that its COVID-19 vaccine candidate was found to be more than 90% effective at preventing disease in early clinical trial results — raises hopes for a day, and soon, the pandemic will be behind us. It is also just one of the many vaccines that are under development. With such good news, it may be tempting for Congress to conclude that a major fiscal relief effort is no longer needed. That would be a mistake.
Putting the latest news in context, Pfizer’s CEO noted that this was the most significant medical advance in the last hundred years. This is consistent with the vaccine’s ability to curb a virus that has not only claimed too many lives but also risks long-term health damage to a growing number of people that manage to survive Covid-19. A vaccine is also critical in countering the economic and political damage that liberal democracies in particular face as they fight the virus while balancing public health and personal freedom.
The stunning news of over 90% effectiveness amplifies the positive potential. It allows for quicker government approvals and, by also enhancing the prospects of adoption by the population, brings forward the timeline for the much-hoped-for herd immunity.
With all this, and with market validation through a breathtaking jump in the Dow Jones Industrial Average and Russell indexes in particular, it would be tempting to conclude that the U.S. no longer needs exceptional policy support in the form of a new fiscal package. Why incur another increase in government indebtedness when the markets and economy can do the heavy lifting on their own in a more effective and sustainable manner? Such a view, while understandable, is problematic on five counts:
First, it ignores the damage that will still result in the run-up to the wide rollout of the vaccine. Even if vaccine production and distribution proceed smoothly, it will take time. From bankruptcies to unemployment, the risk is that temporary short-term economic and financial challenges will become longer-term problems. This is particularly true for small- and certain medium-sized companies that do not have easy access to capital markets and, therefore, do not benefit from wide-open and cheap bridge funding.
Second, it reveals a misunderstanding about debt and finance. Debt sustainability is not a single number — the level of debt — but also involves affordability in terms of cost and income generation potential. Incurring debt now to keep vulnerable segments of the economy viable and maintain long-term productivity is a good debt-financed investment, especially at current low interest rates.
Third, it risks widening the gap between the haves and have-nots. Inequality — of income, wealth and opportunity — is already a problem. Without timely fiscal support, it will get worse in the journey to community immunity.
Fourth, it is short-sighted. The fiscal package should not just be about relief, as important as this is. It also should be about ensuring a better glide path to an economy that can quickly overcome the damage already incurred as a result of COVID-19. This requires starting now on measures such as infrastructure modernization, climate-friendly economic rebuilding initiatives, labor market retooling and retraining, and efforts to bolster household financial security.
Finally, if fiscal policy continues to lag, the Federal Reserve will feel highly compelled to do more. Inevitably, it will again use tools that are poorly suited for the task at hand, adding to concerns about collateral damage and unintended consequences.
Rather than think of the good vaccine news and fiscal effort as substitutes, Congress should think about them as complementary. Indeed, there is ample to reason to believe that the combined effect of a working vaccine down the road and fiscal stimulus now would be more than the simple sum of the parts. There is an opportunity, with both, to lay the groundwork for an even stronger and more sustainable recovery.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include “The Only Game in Town” and “When Markets Collide.”
