The plunge in global markets on Monday will no doubt add a sense of urgency to the high-level meetings at the White House Monday afternoon aimed at formulating coronavirus economic policy responses.
There are several steps the Trump administration can take to combat the economic drag from the coronavirus. These would likely prevent a recession from taking hold—or at least ensure that any downturn would be mild and short-lived. They would also likely alleviate some of the market panic by demonstrating that the federal government is taking its responsibility to stabilize the economy seriously.
1. Federally Funded Sick Leave. While most U.S. workers have paid sick leave provided by their employers, close to one-third do not. Many of those without sick-leave are lower-income hourly or tipped workers. They are less likely to have access to ‘rainy-day’ funds to get them through a period of weeks without income.
This creates a dangerous incentive for workers who may have coronavirus but are not cripplingly ill to continue to show up to work, risking infecting coworkers, customers, and people they encounter on their commute. For the sake of containing the virus, we need to compensate these workers for performing the public service of staying home if they are sick.
The loss of income for these workers also threatens to have a destabilizing ripple effect on the economy by diminishing consumer spending. Obviously, workers who are not receiving incomes will need to reduce their spending. But many workers who are healthy will also reduce their discretionary spending in order to build a financial cushion in case they get sick. In an economy that is highly dependent on consumer spending, this could have serious deleterious consequences.
Democrat leaders Nancy Pelosi and Chuck Schumer seem to be calling for mandatory employer-provided paid sick leave, something the American left has long demanded. This would be a mistake, especially right now. Many of the businesses that do not currently provide paid sick leave are small enough that having to pay employees who are unexpectedly not working would be unsustainable. That is even more so when public fears over the coronavirus are slowing sales at restaurants, retail shops, and other public places.
Fortunately, there’s a better alternative—federally funded sick leave. The U.S. government should announce that it stands ready to send checks to employees with coronavirus. (If it is easier to administer, it can send the checks to employers who keep paying their workers.) This has the added advantage of putting the burden of paying the bills on the institution with the lowest costs of funds, the federal government. With Treasury yields all now solidly below one percent, the government can easily afford to add to the deficit to pay for sick leave.
2. Parents Too. This sick leave should also be available to workers with children in areas where schools have been closed. It would be counter-productive to close schools but expect parents to find alternative daycare centers for their school-aged children. If schools pose a danger of spreading the virus, daycare centers will also. So we need to compensate parents for the income we want them to forego by not working. This is not a handout—it is buying compliance from individuals in a way that delivers the rest of us public health benefits.
3. Supersize Unemployment Benefits. In ordinary circumstances, we do not want unemployment benefits to pay too much or last too long because that risks disincentivizing the unemployed from seeking work. When layoffs occur because the underlying economy is shifting away from employment in one industry, we want employees to seek employment in other industries.
This does not apply to Americans who may find themselves out of work temporarily because people have greatly reduced their spending on recreation, travel, tourism, and eating out. There’s no need to worry about keeping the “reservation wage” too high—at least in the short-term. So go ahead and expand unemployment benefits—increase the amount available and the length—especially in industries and areas hardest hit.
This will have the added benefit of discouraging panic savings, at least a bit, because people will be more confident that they will be able to maintain their consumption if they lose their jobs. And when they do lose their jobs, it will prevent consumer spending from plummeting—acting as an automatic stabilizer for the economy.
This should be federally funded. State budgets are likely to be strained by falling employment, slower economic growth, and demands for public services. The federal government’s ability to borrow at ultra-low rates makes it the ideal source of funding here.
4. Small Business Tax Holiday. Small businesses should be allowed to defer tax payments for the duration of the public health crisis. This will provide them with a source of liquidity if sales crash due to a public panic.
5. Payroll Tax Cuts. Temporarily ease the tax burden on workers and businesses by suspending part of the payroll tax. That will immediately raise the take-home pay of workers, adding support to consumer spending and allowing households to pay debts or save to bolster their balance sheets. Think of it as temporarily substituting the lower borrowing costs of the federal government for the higher borrowing costs of the household sector.
6. Basic Income Guarantee and Income Support Deposits. With any luck, we will not have a U.S. version of Wuhan, a city that basically is forced to shut down entirely because of an outbreak. But if we do, the government should stand ready to support the incomes of the people of any severely geographically affected area with cash payments akin to disaster relief provided for victims of floods or hurricanes.
The federal government should also inject funds directly into the bank account of every American household in order to make sure families have a “rainy day” fund. That will provide a sense of financial security and support continued household spending.
7. Expand Small Business Loan Support. The government should provide generous, low-interest loans to small business, and provide them with loan guarantees payment support on existing loans. Even big businesses in sectors hardest hit—such as airlines—should be able to tap temporary government-sponsored lending facilities. We already do this for banks and other financial institutions. Faced with the threat of the coronavirus, it makes sense to extend the idea of the government being the lender of last resort to the non-financial business sector.
8. Free Testing and Affordable Treatment. Testing for the uninsured should be paid for by the federal government—as should treatment for the confirmed cases that require hospitalization or expensive prescription drugs. We want to encourage widespread testing. We do not want American families worried about facing financial ruin if a loved one needs to be hospitalized for coronavirus.
And when a vaccine is developed, make sure it is available free to every American.
9. Keep America Great. President Donald Trump’s 2016 campaign was controversial because he insisted on talking about threats to America and the failures of American policymakers that other politicians and the media ignored, such as immigration and bad trade deals. That is also why it was successful. Trump told us he could see the threats the rest of us could see and would take action to fix things.
That’s what the American economy and financial markets need today. We elected a president who would set things right. We elected a man of action. It would be a tragedy if the president’s advisers convinced him to mimic predecessors who denied the devastation delivered upon America’s industrial heartland and laughed at the idea that America needed to be made great again.
In a crisis, when people seem to be panicking, the government needs to step in as a source of stability. The U.S. government, almost uniquely in the world, sees its own cost of funding fall in crises, as Treasury yields have once again been demonstrating. It does not have to worry about a deteriorating balance sheet or diminished cash flows because when danger arises, investors worldwide demand our government’s bonds.
“Governments can be a ballast of cool stability while individuals are justifiably terrified. In other words, governments can be counter-cyclical in the broadest sense of the term,” Joe Weisenthal at Bloomberg wrote in a newsletter Monday.
We can’t keep America great by ignoring the threat of coronavirus. But if Presidet Trump acts with his characteristic boldness and decisiveness, coronavirus cannot keep us from being great.
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