By the Editor
Just a few months ago, our economy was strong, with record employment and solid economic growth. Now, our country is suddenly struggling with an unexpected health crisis. This has grown into an economic crisis with extensive shutdowns of entire industries. Many Americans and businesses are suffering terribly through no fault of their own and deserve help. Time is of the essence. Our financial capacity to deal with this crisis is limited and will continue to degrade. We don’t have the luxury of making mistakes and misallocating resources. To maximize effectiveness, we need to establish principles to guide our response. These principles should include ensuring relief is targeted for those who need it, while preserving fairness as we allocate costs and benefits. It is key that our response does not cripple our economy’s ability to recover after the crisis has passed. Finally, we need to start planning our strategy for emerging from this crisis.
Principle 1: Help for Individuals Should be Focused on Those Who Need It
As the coronavirus spread quickly through our country, massive sectors of our economy were shut down and millions of workers lost their jobs. More employees are at risk as employers face continued strain. Many people who have lost their jobs face imminent financial catastrophe and need help quickly to pay their bills and buy essentials. One of the first government responses was to distribute one-time checks to every person below a certain income threshold. This program had the advantage of speed but is inherently inefficient as most people receiving the checks are still employed.
A much more efficient policy response included in the recent CARES Act rescue legislation was the expansion of unemployment benefits by extending the eligibility period by 13 weeks and increasing the payouts by $600 per week. The CARES Act also made some expanded unemployment payments to the self-employed and freelance workers in the gig economy. This is a good idea given the recent growth in the number of people working in these types of arrangements.
Initiatives that provide medical support to needy Americans with problems related to the coronavirus are motivated by a logical objective. We will all benefit if sick people are able to get treatment and stay home if infected, irrespective of the scope of their health care coverage.
If this crisis continues to create pressure on individuals, the government response should emphasize targeted need-based programs such as continuing the temporary enhancements in unemployment benefits.
Principle 2. Support for Businesses Should Be Tailored
This crisis has hit our business community very hard. In a short period of time, we have gone from having one of the healthiest, most dynamic economies in recent history to a situation where many businesses are fighting for their survival. Broadly, we can think about designing our response for struggling companies in two categories: large businesses with over 500 employees on the one hand and small- and medium-sized enterprises (SMEs) on the other.
In general, large businesses have more resources and are better positioned to handle a disruption for several months. Some can access funding on their own and won’t need government support. Many can have their employees work from home during this crisis. For the large businesses that need support, solutions can be designed for a variety of situations. For example, many of these large businesses will only need temporary liquidity support and can secure these loans with sound collateral.
Some large businesses are severely affected and may need more than temporary liquidity. We may determine that some large businesses are critical for national security reasons and should receive more extensive government support. In these cases, capital infusions may be appropriate. Government assistance should be tailored based on the particular situation, with appropriate risk-adjusted pricing, collateral, and, in some cases, equity stakes. At this stage of the crisis, the support provided in the CARES Act and delivered via the Federal Reserve may be sufficient for these large companies as we see how the situation develops.
Perhaps more challenging is the crisis facing our SMEs (defined as businesses with less than 500 employees). These businesses are a crucial part of our economy, employing close to half of private sector workers. Most SMEs operate on thin margins and without sufficient capital and resources to weather an extended crisis like the one we are facing. Their employees face unemployment and their owners are at risk of bankruptcy. Many businesses which were closed due to this crisis will never re-open without timely help. Each one of these business failures will be a personal tragedy for their proprietors, with many facing financial ruin and the loss of their life’s work. These SMEs were innocent bystanders as government mandated their closure and they deserve assistance.
For many of these SMEs, the problem is not merely a liquidity challenge. Rather, they face a solvency crisis. As a result, they need help in the form of cash infusions, not loans. Simply put, most affected SMEs will not be in a position to repay a rescue loan even if recovery happens relatively soon. The lending plan for SMEs included in the CARES Act is a good approach for these situations because it offers loans that are forgivable if certain employment levels are maintained. This type of loan effectively functions as a grant or a capital infusion roughly equal to two months of payroll. This program also has the advantage of incentivizing SMEs to maintain employment levels, thereby providing benefits which ripple through the economy. If the crisis continues, the limited SME support in the CARES Act will not be sufficient to avoid mass SME bankruptcies and we should consider increasing this program
Principle 3: Costs and Benefits Should Be Allocated Fairly
Politicians are scrambling to find solutions to help our damaged economy and our struggling citizens. We must resist the temptation for quick fixes that unfairly allocate losses or benefits. As we formulate aid packages, we should make them as fair as possible with equal access for potential recipients, whether they are individuals or businesses. Some special provision may be made for strategically critical industries, but this type of preferential treatment should be very limited and transparent. Politicians should avoid playing favorites with the allocation of aid.
The same goes for losses. As individuals or businesses strain to meet their financial obligations, we hear proposals for mandated forgiveness of payment obligations. Some have advocated for broad-based rent holidays, even for unaffected individuals. Such proposals unfairly penalize parties who happen to be on the other side of the contractual arrangement. Also, this would be very damaging to our economy by undermining the reliability of contracts, a key component of a healthy business environment. If our society decides to provide payment relief in the form of mandated forgiveness of rent or mortgage payments, we as taxpayers should all bear the cost. It is unfair to stick the bill with a small segment of our community.
There is a wide variety of borrower-creditor relationships throughout our country. This complex situation does not lend itself to a top-down response. We should remember that we have a robust process for settling credit issues in the bankruptcy system. As a practical matter, bankruptcy is preceded by a period of negotiation where creditors have incentives to reach reasonable settlements based on each individual fact pattern. For example, creditors such as landlords have limited alternatives at this time and are motivated to reach mutually acceptable agreements with their tenants. This process of negotiation is the most efficient and equitable way to sort through a massive wave of credit problems with a wide array of unique situations. This will work much better than the government imposing a one-size-fits-all solution on so many diverse situations.
Principle 4. Our Ultimate Objective is to Re-Open the Economy
While it is important to take steps to stop the spread of the virus, it is also imperative that we re-open the economy as soon as possible. Otherwise, the terrible human toll from unemployment and bankruptcies will exceed the damage from the virus itself. Detailed analysis of medical and public health policies is beyond the scope of this article. However, certain public health strategies merit examination with the ultimate objective of developing an environment that will build the confidence we need for businesses to re-open and for Americans to return to work.
For example, we should consider plans to make testing widely available. This includes diagnostic testing so we can effectively isolate the infected and antibody testing so we can free up those with immunity. We can consider limiting isolation requirements to older or vulnerable individuals. Also, we should expedite development of therapeutics and vaccines. We should fortify our healthcare system by expanding access to personal protective equipment, hospital beds, and ventilators. We should also develop surge capacity for medical facilities and personnel. Money spent in these areas will likely result in benefits far exceeding the cost.
Government leaders should start planning for re-opening the economy in a way that prudently manages health concerns. This could be done in stages (e.g., open less crowded businesses first, tailor re-openings by geography based on the severity of infections) with appropriate mitigation measures (e.g., perform temperature checks at entrances, require masks in public locations, implement deep-cleaning regimens, institute spacing requirements at gathering places such as restaurants). We need to expect and plan for future outbreaks and develop strategies to respond in a focused manner to avoid more damaging economy-wide shutdowns.
Principle 5: Preserve the Dynamism of Our Economy
The speed of the spread of the virus has been shocking. Likewise, the government response has been rapid and sweeping. Urgency is certainly appropriate. However, it is critical that we are vigilant in preventing dangerous regulations and legislation that could damage our economy’s ability to recover and prosper. This means that rescue measures from the government should be laser-focused on matters directly related to the impact of the coronavirus.
Unfortunately, many politicians see this crisis as an opportunity to advance policies that could never be approved in the normal course. We have already seen attempts to hold rescue legislation hostage in an attempt to force through controversial proposals such as increased national minimum wage requirements, diversity quotas for corporate boards, restrictions on salary levels purported to address pay disparity, limits on greenhouse gas emissions, and the like. There is no place in our emergency response for items unrelated to the current crisis. As important, we must preserve the operational flexibility in our free market economy. For example, onerous regulations would impede our economy’s growth potential and tax increases would discourage new investment as we work to rebuild our economy in the wake of the pandemic’s impact.
We should also be careful not to overburden our economy with unnecessary government debt. The severity of the crisis merits a significant government response which must necessarily be funded by additional borrowing. However, our fiscal capabilities are limited and we need to carefully prioritize our scarce resources. Wasteful borrowing will eventually act as a substantial drag on our economy and its growth potential.
In light of these constraints, this is not the best time for a massively expensive infrastructure bill that would have limited benefits in our current situation. Some suggest could infrastructure projects could serve as fiscal stimulus as well as a source of work opportunities for the recently unemployed. Unfortunately, the vast majority of people who have recently lost their jobs are not well-suited to redeployment in the kind of work created by infrastructure projects, such as jobs in construction and engineering. Others suggest an infrastructure bill would serve as a helpful form of fiscal stimulus. Right now, our country is suffering from the sudden forced cessation of large parts of our economy. Fiscal stimulus on its own will not solve this problem. Finally, large infrastructure projects are notoriously prone to wastefulness and slow to get under way. We need solutions that will help immediately. Our fiscal resources are finite and we should carefully allocate our limited fiscal firepower to initiatives that are the most efficient and timely.
Conclusion
The current coronavirus pandemic presents a deeply challenging crisis. It is critical that we are swift and forceful in our response. At the same time, we must be thoughtful and focused. The consequences of our actions will be with us for years, perhaps decades. As we formulate our response, we should start by agreeing upon the principles which should guide us. Because our resources are limited, we need to prioritize and target the distribution of aid. We are all in this together, so costs and benefits should be allocated fairly. The ultimate goal is to make it through this crisis while simultaneously minimizing the loss of life from the virus and the damage to our economy. To strike this balance, we need to develop a holistic strategy that contemplates the re-opening of our businesses and society. When this crisis passes, we need to ensure Americans still have the opportunity to realize their aspirations and live fulfilling lives. This means we must vigilantly guard against proposals that could never be approved outside of the current crisis environment and that would undermine our ability to return to a healthy economy. We must not win the battle with the virus only to find we have lost the more important war to preserve our way of life.
The Editor