The American economy has perhaps four to six weeks before retail shutdowns, millions working from home, and quarantines initiate a severe recession. Even a week is costly, to workers and to employers, many with only a thin cushion of capital on which to rely when revenues fall short. The longer today’s pressures last, the more likely it is that they will force layoffs and other more lasting cutbacks by businesses, many of which will face bankruptcy. Recent monetary easing might help contain the severity of the coming recession, as might fiscal-stimulus measures, such as the contemplated payroll tax cut. Washington and the states have an opportunity to do more by targeting the way today’s emergency measures would create recessionary conditions.
Typically, recessions occur when excesses in one or more sectors precipitate a sharp cutback. In 2008, the problems began in housing, which had become overbuilt because, among other things, financial institutions had lent to buyers with dubious credit. When this unsustainable situation became apparent, construction activity collapsed, as did mortgage lending, while real estate prices collapsed. The loss of jobs, declines in wealth, and the surge in bankruptcies led to more widespread cutbacks in consumer and business spending and brought on the Great Recession.
Earlier in this century, excesses in the technology sector and misplaced enthusiasm about Internet possibilities led financial institutions to extend credit to questionable ventures, while investors took equity stakes in them, creating the “dot-com bubble.” When these ventures failed, investors lost wealth, lenders lost assets, and people lost jobs. Consumer spending fell accordingly, credit became scarce, and investors became less adventuresome with what assets they had left. The resulting layoffs prompted additional spending declines, and the economy suffered a recession.
At present, the United States and the world face something very different from what economists understand as a recession: a supply shortfall. Quarantines have kept people from productive work, first in China and now globally. Work from home cannot fill the gap, especially where factories and many service industries are concerned. Consequent production shortfalls have denied other producers the parts and materials they need to meet their output schedules. Consumers eager to buy face a paucity of retail options as public-health measures have closed restaurants, events, and retail facilities. Demand remains strong—it’s the lack of supply that now constrains economic activity.
Different as today’s situation is, however, it will, if it persists, inevitably morph into a familiar, demand-driven recession. Business may keep idle workers on the payroll for a while, either in response to government mandates or loyalty, but firms, which must pay taxes, rent, and interest on their debts, are limited in how long they can meet such expenses while facing revenue shortfalls from the shutdowns and supply constraints. Soon, managers will turn to more lasting layoffs and staff reductions, and many firms will face bankruptcy. Other businesses will shelve expansion plans, leaving more sectors of the economy facing a shortfall in demand for their products. The number of firms facing such constraints will surely grow while the economic pause persists—and the greater that number grows, the deeper the world economy will fall into recession.
Monetary easing, such as the Federal Reserve has recently implemented, and the kinds of fiscal measures contemplated by the administration could blunt such recessionary effects. It’s doubtful, however, that these measures could fully counteract the entire downward push once the process gains momentum. Better, before that momentum builds, to take additional, less-common policy measures that might short-circuit the transition from today’s supply-short pause to a demand-short recession.
Easy loans to small businesses would certainly help. Since small businesses have the thinnest capital cushion on which to draw for operating expenses when revenues fall short, they will likely start the layoffs that lead to recession. If the Small Business Administration (SBA) were equipped to make low-interest or zero-interest loans to help small businesses sustain payrolls and stave off bankruptcy during the present pause, it could delay or stop the slide into recession. Under standard disaster relief, the SBA has made provisions for loans of up to $2 million, but this disaster is different from others and will require larger amounts, extended over longer terms. States and cities could bolster such an effort with similar programs of their own. Washington should change the rules to allow states and cities to raise money with tax-free bonds for this purpose.
The greater financial resources of larger firms make them better able to sustain payroll and other expenses than smaller businesses, but they can’t survive such a situation indefinitely, either. The economy might benefit if they were offered special loans, either from the federal government or organized between the Fed and the banking community, to help them weather this enforced period of revenue loss. Though the Fed has never made such arrangements for commercial and industrial endeavors, it has done so for banks and other financial firms, and so has already gone a long way to establishing the facilities to orchestrate such an arrangement.
Washington and the states might also consider prepaying on existing contracts one or two years in advance. The firms involved could use the cash flow to cover expenses during this uncertain period. The prepayment would deny them revenues in the more distant future, when they would have to deliver on the government contracts, but presumably the pause will have ended by then and they would have revenue flows from private sources. The cash flow in the present emergency would help keep them afloat.
The nation’s retailers might get similar help from arrangements that allow consumers to prepay future purchases at a local shop or favorite restaurant. These might give these usually small businesses the financial wherewithal to avoid layoffs or bankruptcy during a time of curtailed revenues. To encourage consumers to put the money up front, this kind of special gift card might sell at a discount. During normal times, individual firms manage these sorts of gift card arrangements for themselves. Businesses in the present emergency do not have the luxury of the typically gradual sales of such things. Local chambers of commerce or even city governments might establish clearinghouses to put buyers and sellers of such gift cards together.
These are just a few suggestions of what might be done in this unique emergency to defray the business strain and keep circumstances from precipitating a general recession. In normal times, such admittedly odd arrangements would not be necessary—but these are not normal times. We need innovative policy responses to head off recession. While medical and public-health professionals strive heroically in this emergency to flatten the curve that tracks new infections, our policymakers should seek to flatten the curve that tracks economic recession.