Policy Responses to the Economic Consequences of Coronavirus
Harvard Kennedy School, and The Fletcher School, Tufts University
Coronavirus presents economic challenges as well as adverse consequences for public health. Interruptions to regular business activity through people sheltering at home, limiting both the supply of workers and the demand for goods and services, coupled with panic in financial markets, almost certainly portend a recession. Workers paid by the hour for service jobs, such as waiters and waitresses, and those who cannot work because they are quarantined will be particularly hard hit, raising the issue that the poor may disproportionately share this burden. Concerns over the response of governments to what has become a global health and economic crisis raise the question: what policies can best soften the economic challenges presented by the coronavirus?
In the face of a potentially precipitous decline in economic activity it is necessary to act quickly, not least to stem a vicious cycle whereby a downturn generates panic, which exacerbates the downturn.
- The precipitous nature of a crisis like coronavirus demands an immediate response. The coronavirus, and the incidence of COVID-19, have spread rapidly. The United States saw a rise from no confirmed cases in mid-February to over 1,250 by March 11, more than 3,000 on March 15 and over 5,000 by March 17 (this is a good source for updates). It is too soon to gauge the extent to which economic effects might be following a similar steep path, although stay-at-home rules are severely limiting economic activity, stock market indices decreased by 30 percent between mid-February and mid-March and panic buying has caused shortages of some staples and of products that can be used to battle the disease like hand sanitizers and protective face masks. In the face of a potentially precipitous decline in economic activity it is necessary to act quickly, not least to stem a vicious cycle whereby a downturn generates panic, which exacerbates the downturn.
- The response to this crisis should also reflect the ways in which it differs from the onset of a standard economic downturn. There are two important considerations when addressing this crisis. First, the economic effects will be felt very differently across different groups in the economy. Those who are salaried, can take paid sick leave, and can work remotely will be least affected. The adverse impact will be larger for people who are paid on an hourly basis, who cannot work remotely, and who see their hours cut. This will be especially true for people whose work depends, either directly or indirectly, upon things like tourism, entertainment (including sports and cultural events), restaurants and convention services, and in-person retail sales. The companies that employ these people will also be imperiled by the pandemic. Second, there will be a tension between the economic benefits of promoting certain types of consumption and the public health concerns that these types of activities might help spread the contagion of the disease. For example, a typical response to an economic downturn is to spur consumption, but during this pandemic social distancing requires people to avoid frequenting stores, restaurants and cinemas, among other places. Trade-offs will inevitably have to be made in the short run between having a healthy economy and a healthy population. Over a longer horizon, of course, successfully battling the pandemic will support an economic recovery (although the duration of the threat of coronavirus is still uncertain).
- One response proposed by the Trump Administration is a suspension of the payment of payroll taxes, but this has shortcomings with respect to the immediate size of the effect and its distributional nature. Payroll taxes are directly deducted from weekly, semi-monthly, or monthly pay. The amount of stimulus from a payroll tax will vary widely across different income groups; for example, a high-income couple will receive over $5,000 from a one-year long payroll tax cut but a single parent earing $25,000 per year would get only $500. Lower income families and individuals typically spend a higher proportion of their income, so the larger amount going to the higher income family would not translate in the same way towards an economic stimulus as a similar sum going to a low-income family. Also, those who are unemployed would obviously get no benefit from suspending the payroll tax, nor would many gig workers, nor retirees who do not receive a paycheck. Finally, this type of plan would not meet the immediacy need discussed above. While extending unemployment insurance benefits and relaxing work requirements for social safety net programs helps to reach people who are not employed or lose their jobs, these measures also face shortcomings because the effects would represent a slow-release stimulus.
- Direct cash payments would be better at softening the economic impacts for the most vulnerable Americans. It is important to address the communities most heavily impacted by the virus and its economic consequences, while acknowledging that for many workers, the prospect of taking leave is not economically viable. Economists, including Former Chairman of the Council of Economic Advisors Jason Furman (disclaimer: he is an Econofact Board member), have called for direct cash payments of $1,000 to each American adult with an additional $500 payment per dependent. This policy would be costly, amid persistent concerns about a burgeoning national debt, but borrowing costs for the government have plummeted — with interest rates dropping as a result of concerns about the coronavirus. And, furthermore, a failure to act aggressively at this time could have consequences that represent a much larger economic (and human) cost. Mailing out checks is not without precedent, and played an important role in the recovery from the 2008 financial crisis. Lump-sum payments have one other key advantage — speed.
- Support businesses with paid sick leave. Payments to businesses for paid sick leave would go far in both easing the economic burden and mitigating the spread of disease. If someone felt sick, possibly due to the coronavirus, she would not have to choose between risking infecting others on the one hand and not being able to pay rent or buy food or being laid off on the other. Such a proposal would do more to help Americans directly affected by the economic ramifications of the virus and could also promote public health if workers, especially those with little savings, feel less need to work while experiencing symptoms. Many companies do not offer paid sick leave and government support and encouragement of broader provision of this benefit could be vitally important at this time.
- Increase the federal matching rate for Medicaid. A current House bill includes an increase in the federal contribution to Medicaid. This reduces the financial burden for states, which generally have to balance their budgets, so that they can avoid making fiscally constrained decisions at a time that Medicaid and other public services such as education are coming under greater strain from the coronavirus. This policy would also have positive public health benefits if the increased funding helped promote people to obtain medical care that they might have otherwise avoided because of financial considerations.
- Bail out hard hit industries. Another measure to support the economy is to bail out industries that have been particularly hard hit by the coronavirus crisis, such as the airline industry, cruise industry, tourism industry, and the energy industry (which has been hit by a collapse in demand but also by a glut of oil being released on the market by Saudi Arabia and Russia). There is some precedent for doing this; the airline and banking industries were bailed out following the global financial crisis, for example. But these kinds of bailouts can introduce moral hazard; investors make bets and often make quite a lot of money on them, so arguably should not also be paid when those bets were bad ones. Furthermore, government funding to industries sometimes gets funneled in unintended ways, for example banks paying out dividends to shareholders with bailout money after the global financial crisis. Therefore, it is reasonable to include conditions on these bailouts, like limiting (or forbidding) dividend payments and maintaining reasonable levels of employment.
- Automatic Stabilizers, like unemployment insurance and Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) help mitigate downturns; but the administration has been cutting these programs. Targeted existing programs like unemployment insurance and SNAP can serve as automatic stabilizers for the nations’ poorest, because they expand when the economy slows without requiring any legislative action (and, conversely they automatically shrink as the economy improves). These social programs can protect vulnerable families by making it easier for them to continue to meet basic needs while, at the same time, acting as a fiscal stimulus — increasing government spending when other spending is in retreat — and, in so doing, prevent further job loss. But the Trump administration had been cutting these programs and there are concerns about the robustness of the safety net during a recession. For example, new rules that had been set to go into effect in April would have made it harder for people to receive SNAP benefits if they cannot find work and would have made States’ efforts to obtain waivers to this rule more difficult, but on Friday, March 13, the U.S. District Court for the District of Columbia granted a preliminary injunction to stop this rule from going into effect.
- The Federal Reserve has taken measures to loosen monetary policy, shore up financial markets, and to support banks. The Fed cut its target interest rate to near zero in two emergency moves and provided liquidity to the credit markets to shore up the market for U.S. Treasury securities (see here). On March 17, the Fed also announced it will purchase commercial paper, a move that will help ease funding stress in that market which provides short-term lending to businesses that enables them to, for example, make payrolls in a timely manner. All of these measures will support banks, but it does not necessarily get cash in the hands of households and small businesses that badly need it. The Fed cut the discount rate by 150 basis points in an attempt to remove the stigma of banks using the discount window. This could be the first step in setting up a dual interest rate, much like the ECB did with its TLTRO III program to subsidize bank lending to small- and medium-sized businesses (SMEs) that need a bridge loan to get through a few months of disrupted revenues. Even with a lower discount window interest rate, banks may not be willing to lend to businesses that have seen their revenues come to a dramatic halt with the public health closures and restrictions that have occurred. These companies could really benefit from a targeted lending scheme or loan loss guarantees from the government.
What this Means:
As politicians and government officials around the world struggle to manage the crisis, immediate economic relief will be vital in slowing the spread of disease and cushioning the economic blow. Addressing this crisis demands immediate fiscal stimulus in addition to renewed focus on international cooperation on health. It has also exposed vulnerabilities in U.S. labor markets associated with worsening inequality, which may well dictate the efficacy of a response. Economic proposals need to take into account health risks posed by the virus while also addressing the size and distribution of the economic and financial burdens it will impose.