It has been said that consumption and investment is the cornerstone of any economic recovery. But just how do we get there when it seems as if the entire world is in a state of disarray?
In an article for American Progress, titled, The Economic Impact of Coronavirus in the U.S. and Possible Economic Policy Responses, Andres Vinelli, Christian E. Weller, and Divya Vijay laid out some pretty sound principles:
Do no harm
The Trump administration must find one voice and stop adding to the confusion. Moreover, the administration must to stop attacking the very programs Americans need right now: paid leave, public health insurance, SNAP, and other social programs. In its early 2020 budget proposal, the Trump administration sought to cut Centers for Disease Control and Prevention (CDC) funding by 16 percent; cut $85 million from the Emerging and Zoonotic Infectious Diseases program; and had the U.S. Department of Health and Human Services (HHS) cut $25 million from the Office of Public Health Preparedness and Response along with another $18 million from the department’s Hospital Preparedness Program. The latest budget proposal, modified to address the coronavirus outbreak, asks for $1.25 billion in new emergency funds for preparation and response efforts and to divert another $1.25 billion from other federal programs. It is imperative to change the message from cutting funding for public health, planning, and preparedness and instead articulate clear and decisive support of public efforts to contain the outbreak, minimize harms, and ensure investments in public health and emergency preparedness.
Put more, not fewer, resources in public health efforts
Potentially massive externalities related to epidemics alter conventional economic thinking. For example, many medical services that providers would normally charge for should be highly subsidized and delivered free (or close to free) and at a minimum of inconvenience to users. The Trump administration should consider immediate efforts to subsidize detection, treatment, and eventually immunization. Reimbursements could be a way of accomplishing this. Specifically, in terms of lowering barriers to testing, the government should make it clear that testing will be free (or at least not too expensive) and that people should not fear hospitalization (as undocumented people sometimes do).
The federal government needs to identify crucial medical supplies to deal with the outbreak and make sure that production will meet demand. Production and stockpiling of facemasks and protective gear for medical workers, and saline bags to treat patients, must be organized with government financial support. In addition, since many of the active ingredients in generic pharmaceuticals are made throughout the world—in places such as India, China, and the Czech Republic—the federal government needs to coordinate with domestic drug manufacturers to make sure the supply of many lifesaving drugs is not disrupted.
Policymakers should consider providing relief to hospitals and health care providers. It is unrealistic to think that health care providers won’t face financial strain in the event of a major outbreak or pandemic. Moreover, pandemics affect everyone, and many of the patients in need of acute care may be uninsured. Failure to treat these patients would produce large, negative health and economic externalities. Thus, pandemic preparedness cannot be approached by relying on standard health care business models. The spending necessary to expand capacity during such a public health crisis should come from the federal government, principally through the U.S. Department of Homeland Security, and, ideally, informed by a robust interagency working group with HHS, CDC, and other relevant executive agencies.
Assure businesses that they will be fine if their sector is hit by the virus and remediate harm when necessary
Beyond the health sector, other industries necessary for the well-being of U.S. citizens may also need direct federal support. For example, a common response to natural disasters is panic buying in food stores, reflecting fear that supplies may not last. If the effects of the outbreak on food processors and retailers are severe, that sort of heightened anxiety will reappear—and perhaps for good reason. The government needs to consult with major food retailers and their suppliers to plan for possible disruptions in deliveries all along the food supply network and provide direct financial support to ensure that food supply does not become a serious problem.
Congress and the administration should consider measures that would provide immediate and direct relief where it is needed most. For example, in areas where the local, state, or federal government has mandated quarantines, the federal government could provide low-interest loans to small businesses for their associated costs and loss of profits. This will ensure that small businesses stay in business and that they do not have to let employees go or cut their pay. If the Trump administration can do three rounds of farm bailouts due to the trade wars, the government can certainly offer some better-designed insurance program to sectors and firms affected by the fallout from the virus.
Targeted relief to sectors heavily affected in a direct way serves both to ensure minimum service levels, minimize supply chain disruptions, and avoid credit events that could spread across the economy.
Calm financial markets
The spread of COVID-19 has begun to affect financial markets, but it is uncertain how severely the coronavirus will strain the broader financial system moving forward. As financial markets become more volatile, and more economically vulnerable actors suffer increased difficulties to meet financial contracts, it will be important to act swiftly in order to avoid any disruptions in the chain of payments and too much risk-averse behavior.
The Federal Reserve cut its benchmark interest rate by half (.5) a percentage point on March 3 in a move that was widely seen as a reaction to the coronavirus. Other central banks have already lowered interest rates or are considering doing so. The Federal Reserve should adopt an accommodative monetary policy stance and should consider using all tools at its disposal, including its emergency lending authorities. But as interest rates are close to zero in many large markets, there is limited scope for further decreases, so more creative instruments such as quantitative easing may be warranted. Inflating financial asset prices (such as the stock market) should not be a main goal in this context.
The federal government and regulators should monitor financial markets closely and prepare for possible market stress; credit events; or sudden drops in credit supply or in liquidity in markets such as overnight repurchase agreements (repos) and intervene where it is sensible to do so.
Moreover, financial regulators should carefully monitor the ongoing impact of COVID-19 on broader financial stability. If, for example, community banks in hard hit areas are unable to meet commercially viable business loans because they are capital constrained, a program to temporarily purchase preferred stock in these banks would allow them to meet local needs and keep good businesses operating.
The Financial Stability Oversight Council (FSOC)—a postcrisis body of financial regulators—should immediately convene a meeting to discuss the risks COVID-19 may pose to the financial system. The FSOC should task its research arm—the Office of Financial Research (OFR)—to assist with this monitoring and analysis. If the COVID-19 outbreak leads to severe stress at financial institutions and markets, financial regulators should stand ready to use the emergency authorities under their respective jurisdictions. It is important to note that the officials currently leading the financial regulatory agencies were not in office during the 2007-2008 financial crisis and may not be intimately familiar with the mechanics and protocols associated with their respective emergency authorities. To that end, the FSOC could organize a wargaming exercise to ensure financial regulators are not caught off guard if the health of the financial system does deteriorate.
It is important to emphasize that financial regulators should refrain from relaxing critical regulatory and supervisory safeguards during this period. Weakening financial stability rules for large banking institutions would undermine the core resiliency of the financial system and increase risk to the real economy.
Finally, as the coronavirus advances, it will be optimal to aim for international cooperation on economic policy matters, including financial policy. Coordinated responses will lower the likelihood of beggar-thy-neighbor policies and accusations of currency manipulation. International cooperation and coordination should also help address supply chain issues, especially in crucial supplies such as medicines.
Ease the risks for households and vulnerable populations
It will be important to reduce the impact that this outbreak with have on the financial stability and prosperity of households, particularly those who are already vulnerable. Many workers do not have health insurance, and roughly 27 percent of private-sector workers did not have access to paid sick days in 2019. Given that this is unlikely to be the last health crisis Americans will experience, the United States should adopt a guaranteed paid sick leave policy as soon as possible, just as virtually every other developed country has done. In the event of a major health crisis that involves extended sick leave, the federal government could support employers with the cost of providing paid sick time or help workers by expanding benefits through the unemployment insurance system. This would ensure that employees can recover from COVID-19 or care for a sick family member without losing their job or pay while also benefitting the businesses where they are employed.
Being uninsured or underinsured, combined with limited or no paid sick time, makes people particularly financially vulnerable. For instance, lower-wage frontline workers who work in jobs where they interact with other people—such as health aides, personal care workers, cooks and servers, and retail sales people—were less likely to have health insurance and more likely to incur medical debt due to an unexpected health event than other workers in 2018. Almost one-fourth of these workers, 23.4 percent, did not have health insurance then, compared to 10.5 percent of other workers and 4.7 percent of health care workers, such as doctors, nurses, and technicians. (see Table 1) Even though the share of lower-wage frontline workers that had unexpected health expenses in 2018 was less than that of other groups of workers (see Table 1), more than half of those frontline workers with unexpected health expenses ended up with medical debt compared to only 23.1 percent for other health care workers and 38.7 percent of all other workers. (see Table 2) Health care emergencies can quickly translate into financial burdens when people lack health insurance and the ability to take time off. The 14 states that have yet to adopt the Affordable Care Act’s Medicaid expansion should do so immediately, which would result in more than 2 million low-income people gaining comprehensive health care coverage.
Congress and the administration should also mitigate the economic harm to households. This will also have the important effect of supporting consumption—the most important pillar of the economy.
Congress could take several steps to help vulnerable households. These would include ensuring free—or affordable to the patient—access to testing and treatment for the coronavirus and protecting patients from surprise bills. Other ideas for temporary assistance could include getting cash into the hands of average people. This could be done through a payroll tax holiday or through direct cash payments. Providing financial assistance to vulnerable individuals in times of hardship ensures that they can afford the basic everyday necessities; retain a measure of control over their own lives; and avoid the dire consequences of financial disaster. Putting cash in the pockets of households increases consumption and can motivate businesses to invest more. Increased consumption and business investment have a direct positive effect on economic activity and can ignite a virtuous circle of economic growth. Consumption and investment are the cornerstone of a full economic recovery.”
The spread of the Corona virus can only be described as what Nassim Nicholas Taleb, the author of several books, including AntiFragile, The Black Swan, Fooled By Randomness, and Skin In The Game, would call a “black swan”. How we deal with it, and the outcome of that remains to be seen.
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