The Coronavirus Could Wreck the Economy. These Steps Would Help Limit the Damage

March 02, 2020

Jared Bernstein

The Washington Post, March 2, 2020

See article on original site

Though we don’t yet know the extent of its threat, a widespread coronavirus epidemic in the United States is increasingly possible. In addition to the downright scary health consequences, we think the virus will quickly do serious damage to the U.S. economy, reducing growth in at least the first half of this year, pushing up unemployment and possibly ending the historically long expansion. And we’re far from alone.

The economic challenges posed by the virus are unique in that they are already hitting supply and demand. The former refers to the inability of workers to go to work, because of quarantines either at their jobs or their kids’ schools, along with disruptions to the global flow of goods to retailers and factories. The latter refers to reduced spending at restaurants, movie theaters, stores, etc. Consider, for example, the many trips, vacations and conferences already being canceled. Add to that the chance that millions of workers without paid leave could lose paychecks, and you begin to get a sense of the sudden shock to commerce.

The combined effect of decreased demand and disrupted supply can lead to a serious recession. While we can hope the effects of the epidemic will be short-lived and the economy will quickly bounce back, we cannot take this for granted. Therefore, policymakers must move quickly to prepare effective economic countermeasures.

Among our most prominent concerns are the millions of employees who may be told not to come to work but who lack paid leave. While more than 70 percent of private-sector workers have some degree of paid sick leave, for workers in the bottom 25 percent of the wage scale, that share falls to 47 percent. Based on their low, often nonexistent, savings, such workers have little to fall back on if they’re not getting paid.

There are various ways to quickly provide the support these households need.

Unemployment insurance is often the first line of defense in a downturn, and we should be sure that state systems are ready to respond quickly. Two important considerations: Some big state trust funds (New York, California and Texas) are running low, and state agencies need to know that employees who are available for work but locked out because of a quarantine are eligible for unemployment insurance.

One fast way to administer help is for the government to send checks to low- and middle-income households, a measure that was last used in 2008, when the George W. Bush administration sent out about $100 billion in 2008 to about 70 million households, which got an average check of about $1,100 in today’s dollars. Research found these checks to be particularly useful to low-income households.

This intervention must be structured to reach low-income households without federal income-tax liabilities. (To be clear, these households do pay other federal taxes, most notably payroll taxes.) This is a huge limitation of the federal tax cuts under consideration by the Trump administration.

Something we really don’t want is for sick workers who don’t have paid leave to go to work, a known problem well before the coronavirus. Providing a generous tax break to employers (e.g. $800 per worker) to grant at least seven sick days a year to workers not covered would be a substantial incentive. In the same vein, we may also want to encourage employers to allow telecommuting, where possible. A modest credit for allowing telecommuting (e.g. $400) could increase the use of this option. An advantage of both these credits is that any changes are likely to be permanent.

At various times in the recent past, we’ve quickly put more money into workers’ paychecks by temporarily lowering their FICA (payroll) tax. This, too, requires legislation, a key part of which is to ensure that the Social Security Trust Fund is repaid through general revenue, as occurred the last time we tapped this source of quick relief.

All of the above are countercyclical fiscal measures: government spending to offset the shock. Monetary policy is also germane in this context, and the Federal Reserve has already signaled a willingness to cut the benchmark interest rate it controls to cheapen credit. There is, however, a good chance that rate cuts will be of limited help. First, credit is already cheap. But more important, if people are afraid of getting sick in public places, they won’t take trips or go out to eat no matter how low interest rates fall. Nor will rate cuts reopen workplaces, factories and schools that are closed because of the virus.

Turning to other ways in which the virus threatens family incomes, we need to be sure that people don’t avoid testing and treatment because of insurance and “surprise billing” concerns. The Affordable Care Act covers government-recommended vaccines, but that option is many months away. The broader public interest makes this a critical moment for the government to pick up the tab for coronavirus-related treatment. Congress should act quickly to require that insurers cover testing and treatment for the coronavirus in the same way they are required to cover various forms of preventive care at no charge to patients.

We can also improve on the process of developing a vaccine. As Health and Human Services Secretary Alex Azar testified recently, we don’t know whether a vaccine will be affordable because the holder of the patent will be able to charge whatever it wants.

This is unacceptable. It’s fine and necessary for the government to provide resources to private companies to speed up development and testing of the vaccine, but there need to be two conditions. First, all the findings have to be made public as quickly as is practical. We want researchers worldwide to be able to benefit from any new findings to get to an effective vaccine as quickly as possible. The model here is the Bermuda Principles for the Human Genome Project, where results were posted nightly.

Second, any patents resulting from this work will be in the public domain. This means a successful vaccine will be available as a cheap generic from day one. The companies don’t need to be compensated for their research because they’ve already been paid.

We may, of course, catch a break and not need to invoke these sorts of measures. But that benign outcome is looking increasingly unlikely. If our fears prove correct, no matter what we do, the economy will take a hit. But if we act aggressively now to get such measures in place, we can at least avoid a lot of unnecessary economic hardship.

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