Principles for Economic Policy in the COVID-19 Recession
By David Clingingsmith, Scott Shane, and Susan Helper
As the COVID-19 epidemic intensifies in the United States, policymakers are confronting a stark trade-off. To avoid overwhelming the health system with cases, social and economic activity that involves in-person interactions are being radically curtailed, including shelter-in-place orders in New York, Illinois, and California. These measures will undoubtedly save lives, but they will throw the economy into recession.
The duration and depth of this recession is highly uncertain at this moment. It is likely to be worse than the Great Recession and could be as long and be as deep as the Great Depression. So how do we respond?
The economic policy principles we apply should borrow from the epidemiological principles at work. Just as medical policy seeks to flatten the curve on the spread of Covid-19 so that the medical system is not overwhelmed, economic policy should seek to flatten the recession curve so economic system is not overwhelmed.
Unfortunately, these two are inextricably linked. The larger the percentage of the population requiring hospital care, the greater the burden on the health system and the longer the recession will need to be to ensure everyone who is hospitalized gets adequate care.
The key is to protect the economy as much as possible while we endure the recession, so we are positioned for a rapid recovery. There is no reason why this crisis should undermine the fundamental strengths of the US economy. After the crisis is over, we will still have a hardworking workforce and the ability to create and innovate as we did before. As Keynes wrote after the Great Crash of 1929, “This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were.”
We outline below 11 principles that policy makers should follow:
1. Protect the Most Vulnerable Americans: We must ensure the ability of all Americans to afford food, medical care, housing, and other necessities. This can take the form of direct grants to individuals, extended unemployment benefits, government hiring in schemes to ameliorate the crisis.
2. Balance Medical Needs and Economic Needs. We must keep as much of the economy open as possible. Closures should respond to the best available science. We will likely know a lot more about COVID-19 in a few weeks than we do now, and may be able to adjust closures geographically and sectorally to respond.
We also must conduct cost-benefit analysis. Just as no one would say that we should close all hospitals because a doctor in New Jersey got sick from COVID-19, we should not shut down all Amazon warehouses because a worker in a Queens warehouse fell ill. The threshold for shutting down the trucking industry should not be the same as that for nightclubs.
3. Support Base Capabilities: We must ensure that key sectors that have to close or are impaired have their capacity to produce maintained as much as possible. This can be done by the government supporting shuttered businesses with credit, serving as a buyer of last resort, directly paying leases on plant and equipment, and providing income support for those who depend on business earnings. For some sectors, such as restaurants and retail, this will not be like an ordinary recession, since all businesses, both the wildly successful and the barely viable, will be hurt almost equally.
4. Practice Forbearance: In some parts of the economy, we see forbearance at work. Federal mortgage foreclosures have been temporarily suspended. Banks are waiving overdraft fees. This is good. But in other parts of the economy, particularly labor markets, there is less forbearance. We need to incentivize employers to furlough workers — not lay them off — keeping them on staff using government dollars to pay them if necessary. We want to minimize the ripple effects of people losing jobs and curtailing spending in response.
5. Accept Incentive Problems. Any government action will have incentive problems that we will have to live with temporarily. Direct grants may sometimes go to those who don’t need them and some firms we support may be barely viable. We need to adopt a principle of “least bad option.” Perverse incentives and gaming of the system will happen. While we can quickly design policies to avoid the worst of these problems, we can’t avoid them all. We should nevertheless be on guard for those who take excess advantage of those programs or profit excessively from the misfortune of others. The Federal government can minimize this tendency by passing laws with draconian punishment for the violation of the policies.
6. Act Quickly and Flexibly. Quick action is necessary to minimize problems. We don’t have time to create a bureaucracy before acting. Send $1,000 to all Americans next week to ensure that everyone has money for food and shelter and is not worried about survival. If the recipient has not lost his or her job or is wealthy and has savings, the government can mandate that the money be returned when 2020 taxes are filed. The government will trust, but verify. Like income tax itself, payers will be expected report honestly and the IRS will audit for compliance.
7. Make Help Conditional: Big business should not just get a pass for being unprepared or for optimizing business arrangements that enhanced their profits, but opened them up to risk of loss. If businesses want money, then the government gets an equity stake in return. The government can then sell those stakes when the crisis is over. This will encourage large firms to set aside bigger reserves for crises in the future.
The terms the government sets should be based on the company’s social value. Perhaps the government would purchase equity in, and try to keep alive as a going concern with its current management in place, a manufacturer that converted to produce medical supplies but guessed wrong on the timing. In contrast it might buy at one cent on the dollar a bankrupt cruise line. No one (not the airlines or the cruise lines) gets a handout, they get the investor of last resort, the government.
8. Create a Central Command: There are pieces of this response that require military-style mobilization. We must increase the capacity to produce medical equipment, supplies, and personnel very rapidly. Temporary increases in capacity of the health system, even if they are expensive, will shorten the overall duration of the crisis. We need to form a temporary national authority to speed an increase in provision of resources to the health sector, much as we have done with war industries in the past.
9. Do Not Hide Information: Governments around the world have ignored warnings of experts and tried to suppress bad news. It doesn’t work. Truth will eventually come out. When it does, precious time will have been lost, people will panic and the cycle will be worse. In contrast to a war against human enemies, the virus won’t change its strategy if it knows our plans. So there is no reason to hide information.
10. Borrow Money Big Time: The United States government can now borrow at near zero interest rates, so we can spread the burden of paying for this protective action into the future. During World War Two, we borrowed the equivalent of $11 trillion in today’s dollars. If we have to borrow $11 trillion to respond to this crisis, we should borrow it.
11: Learn to Learn: We will learn a great deal about the vulnerabilities of our economic system to rare but inevitable disasters such as the COVID-19 pandemic. As we recover, we must not lose sight of these lessons and use them to build robustness into our institutions so we are better placed to weather the next disaster.
David Clingingsmith is Associate Professor of Economics; Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies; and Susan Helper is the Frank Tracy Carlton Professor of Economics and former Chief Economist at the U.S. Department of Commerce — all at the Weatherhead School of Management at Case Western Reserve University.
