The economic shock of the coronavirus shutdown risks pushing the U.S. economy into a prolonged depression. While a deep recession is inevitable, a quick rebound at the end of the quarantine is possible—with the right public policies. Government must focus on ensuring that families and businesses remain solvent and available to reset the economy when the crisis abates.
One way to work through the economic consequences of the economic lockdown is to imagine most workers and businesses taking an extended vacation. In theory, this should reduce output in the short run and draw down savings and business inventories. However, because the economic structure would not be permanently changed, the end of the “vacation” should cause the economy to revert to its prerecession performance. Production and demand should roughly return to earlier levels, and the same number of workers should be needed in the same businesses and industries.
The problem today is that workers and businesses have not budgeted for this extended, unpaid, and unplanned vacation. So the precise public-policy challenge—in addition to addressing the health crisis itself—is keeping families and businesses financially afloat in the meantime. If families lose their homes or cannot feed themselves, or businesses go bankrupt, the personal and economic consequences can be catastrophic and long-term. The goal should not be broad-based Keynesian stimulus. Keynesian demand management is a flawed concept with a terrible track record, and even standard Keynesian theory does not apply when families are stuck home with few places to spend their stimulus checks, anyway.
This is why the current push to send nearly all families checks of $1,000 to $2,000 would be a poor use of $300 billion. The vast majority of families who are still employed and receiving paychecks don’t need federal subsidies, and they won’t get much opportunity to spend at the restaurant, bar, salon, or movie theater that needs the most help. On the flip side, a payment that covers one or two weeks of bills is insufficient for those workers who’ve been furloughed and laid off already. The solution to soaring unemployment (and furloughs) is not a universal tax rebate for the employed and unemployed alike. And while advocates describe a rebate policy as a stopgap until more targeted assistance can become available, past tax rebates have required 62 days to process.
Forget the tax rebates. Washington should target generous aid to individuals who lose their paycheck—and to the businesses bleeding revenues and shedding payroll. Step one is to prevent layoffs and furloughs in the first place. Senate Republicans’ proposal smartly offers $350 billion in loans to distressed small businesses that will be converted to grants in proportion to the percentage of employees they retain. Essentially, Washington would pay much of the salaries of the retained employees through June 30, as well as fill other business revenue gaps. The $350 billion cap is insufficient to finance this program (the necessary cost may exceed $1 trillion), but it’s a good start. This policy also dovetails with the “phase two” legislative provision, in which Washington will subsidize broadly defined family leave for up to ten weeks. Additionally, the Republican proposal allows employers to delay paying their half of the Social Security payroll tax until the end of the year, delay quarterly tax payments, and more easily deduct losses.
One point of contention concerns the Republican proposal of $500 billion in loans and loan guarantees for “emergency relief and taxpayer protections.” The Treasury secretary would have broad discretion over the disbursement of these loans and loan guarantees to businesses, cities, and states—though the distribution must include $58 billion for passenger and cargo airlines, and $17 billion for businesses deemed vital to national security. Democrats calling this an unnecessary corporate “slush fund” are missing the obvious point that certain industries (travel, hospitality) are teetering on collapse and need these loans. Basic accountability controls are acceptable, though they should be designed carefully, so as not to slow down the disbursement of these emergency funds.
Despite these employee-retention and business-survival policies, millions of workers have already been laid off and furloughed. The unemployment-insurance system already provides a targeted aid structure that should be drastically expanded. States must prepare to process an avalanche of unemployment claims quickly. They should focus on beginning unemployment checks immediately—and without a requirement that applicants be seeking a new job actively, until after the quarantine is lifted. Benefit levels should rise to at least 80 percent of previous wages (with more generous benefit caps). Contractors, self-employed workers, “gig workers,” and recent college graduates should be brought into the system as well. Work-sharing provisions that reduce layoffs should also earn benefits.
This targeting is not perfect. At this point, it’s better for government to err on the side of inclusivity than exclusivity, even if that means that some people take advantage of weak guardrails in the broadened unemployment-insurance program. This expansion will be extraordinarily expensive for states. Washington should cover the increased state costs (current legislation provides $250 billion) and also prepare to bail out states whose tax revenues are about to collapse.
Expanded unemployment benefits are not the only tool to assist jobless and furloughed families, who will continue to struggle to pay rent, mortgage loans, auto loans, student loans, and utilities. To the extent possible, Washington should encourage lenders to adjust for missed loan payments by extending the monthly payment schedule on the back end (with government loans to tide the lenders over), and also provide landlords and utilities with access to sufficient credit to avoid evictions or shutdowns for missed payments. Delaying the April 15 tax filing deadline was an obvious move, as is the proposal to waive fees for limited withdrawals from personal retirement funds—though the Senate bill’s $100,000 withdrawal cap is excessive and may needlessly deplete retirement funds (a $25,000 cap may be more responsible for now).
Congressional negotiations have reportedly been bogged down in part by partisan attempts to insert provisions concerning such issues as permanent collective bargaining reforms, abstinence funding, energy and environmental reforms, universal student-loan forgiveness, and election security. With families struggling and the economy collapsing, hijacking a relief bill for unrelated pet priorities is unconscionable.
Overall, fiscal conservatives and libertarians should support a broad relief bill. First, because the government has mandated the shutdown of businesses and jobs, which is essentially a “taking” that entitles the victims to compensation. Second, because the cost of allowing families and businesses to go insolvent will potentially cause an economic depression (and humanitarian crisis) that would cost the government, economy, and society much more than these interventionist policies. Once Congress has provided these benefits and stabilized the economy, it should turn toward long-term budget reform, to address soaring structural budget deficits. Financing these crises is much easier without baseline budget deficits exceeding $1 trillion per year.
We must acknowledge the unsustainability of shutting down much of the United States economy, and financing family and business incomes through unprecedented government borrowing. Just a few months of an economic lockdown will cost the government and the economy trillions of dollars. At some point, Washington’s borrowing capacity will become constrained, possibly leading to the Federal Reserve monetizing more of the additional borrowing. Business bankruptcies will continue to escalate, and a prolonged depression may become a real possibility. Depleted inventories and constrained supply lines could lead to production shortages of basic goods. It is incumbent on public officials to devise a strategy that will allow schools and businesses to reopen before this crisis extends into the summer.
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