As the new coronavirus and cases of COVID-19 spread within the United States, business activity is grinding to a halt. Flights are being canceled; city streets are empty. The stock market saw its sharpest decline since the 1987 crash.
As Congress and the White House are both weighing policies to help those in industries that are acutely affected, we convened an online discussion with economists and others with particular expertise at RAND to see what they were anticipating, and, importantly, what they thought might be effective responses in terms of fiscal policy, any stimulus spending, and emergency relief to affected workers.
- Liisa Ecola is a senior policy analyst with broad interests in transportation funding, traffic safety, environmental and land use impacts, and long-term mobility trends.
- Kathryn A. Edwards is an associate economist whose research areas include the financial resources available to unemployed households and labor market issues for workers without a college degree.
- Debra Knopman is a principal researcher who previously served as vice president and director of RAND Infrastructure, Safety, and Environment.
- Krishna B. Kumar is the Distinguished Chair in International Economic Policy and a specialist in global and macroeconomics.
- Benjamin Miller is an economist who conducts economic assessments of infrastructure, regulatory and financial systems.
- Howard J. Shatz is a senior economist who specializes in international economics and development.
- Patricia K. Tong is an economist who researches how public policy affects household outcomes, particularly among low-income families, married couples, and the aging population.
- Jonathan Welburn is a researcher focusing on systemic risk, economic crises, and the propagation of risk through complex systems.
Is it too soon to predict that this will lead to a lasting recession? Or to be sizing up a possible economic stimulus?
Howard Shatz: It's hard to see how we avoid a recession. We have a global supply shock (firms not operating first in China, then elsewhere) and a global demand shock (people and businesses reducing purchases because of shutdowns and social distancing). The depth of the recession is unknown. With localized disasters (even 9/11), most economic activity gets delayed rather than canceled, so we have a bounceback. We're in uncharted territory here. A useful analogy may be what happens to the global trading system during major wars.
Benjamin Miller: It's hard to separate impacts that might occur from impacts that will occur because it's not clear how long the pandemic will last. Data to watch include monthly jobs data, measures of consumer confidence, and revenue forecasts for U.S. industries that are exposed to financial risk due to COVID-19. As these and other data get reported, we may get a clearer picture. That in turn will tell us what magnitude of counter-cyclical spending is needed—and where it is needed. Although macro fiscal policy might benefit from waiting for data, policies to mitigate the challenges to individuals and small businesses are more urgent.
Krishna Kumar: The economy was on a reasonably sound footing before this crisis struck. It is people not traveling and not going to restaurants or games that is causing a drop in demand. So shoring up health systems and containing the spread of the virus is a sine qua non before any other policies can have impact. And it's important for humanitarian reasons.
All efforts to boost testing capabilities and health care capacity can reduce the size of the shock, lessening the likelihood of recession.
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Jonathan Welburn: I certainly agree: All efforts to boost testing capabilities and health care capacity can reduce the size of the shock, lessening the likelihood of recession. That said, a prolonged crisis raises the potential for systemic risks and severe shocks to the broad economy.
Coronavirus comes at a time of high corporate debt. I would be most concerned about businesses that are 1) in the path of the virus, 2) highly leveraged, and 3) central to the economy. One can think forward to those sectors with coronavirus (and derivative shocks such as the oil price war) exposure and economic centrality. Oil and gas, automotive and retail, all stand out as worrisome examples.
Kathryn Edwards: A recession could happen quickly—especially compared to the last recession. The peak of the housing market was 2006, the recession didn't officially start until the end of 2007, and the financial crash wasn't until September of 2008. This time, I don't think we have even 6 months before the effects of COVID-19 start to hit the economy. I doubt you would find anyone who would say we even have 6 weeks. So when this thing comes, it's going to come fast, something that markets, households, and policymakers are not accustomed to.
Somewhat separate is the question of how to mitigate economic harms to people whose working lives might grind to a halt. Any thoughts on what kind of moves are appropriate for that?
Debra Knopman: It's important to consider whether some of the proposed remedies can be effectively targeted to those who need it most, and can be implemented quickly. For example, how quickly can more health care workers be trained and employed to meet the surge in demand at hospitals and elder care facilities?
Kumar: In the longer term, traditional fiscal policy and monetary policy can be effective if targeted carefully. This is where some thought needs to be put in, rather than rushing to fund everyone's pet project. In particular, a payroll tax cut is likely to be ineffective if people don't have jobs in the first place. And even during normal times the Social Security system is not in the best of fiscal health, so how would any deficit from cutting the payroll tax (the main source of Social Security funding) be handled? At the least more thought on the unintended consequences of such a policy is needed.
Miller: The challenge is this: The public health actions we need to take to prevent a pandemic-caused recession aren't great in the short run for individual workers. Canceling lots of large events and travel could cut into the income of workers who are living paycheck-to-paycheck.
If one of the goals is to promote spending … giving folks a one-time lump sum payment is much more effective than giving people smaller amounts of income over time through their paychecks.
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Patricia Tong: I also want to point out that it's not just workers diagnosed with COVID-19 or those asked to self-quarantine who could lose meaningful income. Business closures will impact broad groups of employees. Even those who can telework may have to take care of children because of school and daycare closures. We need to think about how to provide relief to these workers as well.
In terms of the type of stimulus, if one of the goals is to promote spending, then research has shown that giving folks a one-time lump sum payment is much more effective than giving people smaller amounts of income over time through their paychecks.
Edwards: We can logically infer from CDC recommendations and public health actions taken over the past two weeks who will be hit first by 1) canceling school, 2) working from home, and 3) social distancing: many of the low-wage hourly workers in service industries who are less likely to have paid time off for vacation or sick leave, and unable to work from home.
Effective stimulus in this case is tricky. I can't recall a similar economic situation in which recovery is so contingent on a non-economic factor (reduced public health risk).
I've read a few things these past few days that I found interesting. One is that a stimulus package should be directed to state and local governments who handle much of the logistics of public health crises but don't have the ability to debt finance short-term spending needs the way the federal government can. Another is that our unemployment insurance system could be a real tool here to stabilize the economy because it could be targeted by geography, industry, and affected worker household. However, it is nearly universally acknowledged to be a broken program that has suffered death by a thousand cuts. There are drawers full of proposals to reform unemployment insurance to make it more of a lifeline to businesses and households.
Liisa Ecola: I assume another factor that would limit the effectiveness of unemployment insurance or payroll tax cuts is the number of people who work for a living but are not classified as employees. I see that some of the companies whose business models depend on this type of labor supply are trying to help, but they also have a history of doing everything they can to keep their workers legally contractors. It seems like we need a broader rethink of how some safety-net measures are tied to your status as an employee.
Consumer spending is the biggest driver of the U.S. economy. What do we see happening to consumer confidence and spending?
Kumar: Without funding the public health infrastructure immediately and containing the virus, consumers are not going to run out and spend. For instance, if you give a tax cut now, the well-to-do will just save it instead of taking a vacation and spending on airlines and restaurants. This is an instance of the problem in figuring out whether consumption is the cause or the effect—are people spending because productivity is high, and they are getting paid well (presumably what was happening before the COVID-19 shock) or does consumption actually drive the growth? Initially, it's the most vulnerable (such as hourly workers) who need help such as paid sick leave and immediate cash assistance so they can afford basic consumption such as food and medicine.
Miller: So long as fiscal policy can protect workers in the short run, the main risk would be a longer-term recession. If the pandemic can be addressed quickly, then changes in household income and the prices of goods and services all blip then go back to normal. As the impacts drag out, companies without revenue streams will be forced to reduce expenses such as by cutting hours or laying off workers (since companies generally can't reduce expenses by cutting pay). If workers at large firms see permanent or long-term reductions in their current and future income, their desire to spend drops, further eroding companies' revenue. We're seeing really significant responses to this pandemic because the macroeconomic consequences of it not being brought under control could be severe.
Welburn: Are there potential shifts in consumer behavior that could smooth consumption levels in aggregate? These could be within sector—Target to Amazon—and cross-sector—from entertainment to consumables. Cinemas to streaming seems to be one example.
If a large share of households curbed spending, even if only a small amount, it could still have large consequences for the economy.
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Edwards: What matters is dollar-for-dollar consumption—how much are U.S. households consuming? In an accounting of the U.S. gross domestic product, personal consumption expenditures account for 68% of our economy. If a large share of households curbed spending, even if only a small amount, it could still have large consequences for the economy.
Shatz: Bank regulators need to have some kind of temporary forbearance on financial regulations. Businesses of all types, but especially small businesses, are going to have trouble paying their bank loans (working capital, equipment, or other purposes). Banks can help by extending payment periods, for example, but that could impair their balance sheets. So regulators can help by not being as aggressive on capital requirements, allowing payment modifications, or otherwise making it easier for businesses not to run into trouble. It could also be useful if missed or lower payments would not appear as black marks on credit scores.
Do we have a sense of what sectors of the economy might need resources most urgently?
Kumar: Sectors involved in travel and tourism, such as airlines, hospitality, and restaurants have been hit badly. Recall manufacturing and related sectors were already feeling the pinch since they are connected to China via global supply chain links. One concern here might be that “bailouts” may get caught in an ideological battle, the same way permanent versus temporary benefits are getting caught up. The trick here might be to find measures that a broad majority of lawmakers can get behind (this is a general problem with fiscal policy relative to monetary policy). Maybe deferred tax payments? Investment tax credits? Target infrastructure spending toward specific sectors?
Knopman: In general, the sectors and companies which should be targeted for assistance need to be chosen with care. Given funds are likely to be scarce since several parts of the economy would need help, attention has to be paid to: a) conditions under which corporations would receive government funds which others have suggested (e.g., cut CEO pay, no stock buy-backs, no layoffs, etc.), and b) the conditions under which corporations would be expected to pay back whatever was borrowed. The aim is to aid sound firms with the best prospects of doing well and that can help the economy in general.
I also think there's an argument to be made to get the money to states and mostly local governments in the form of interest subsidies on loans, major infusions of cash to (re)build public health departments, and to provide more food and daycare programs to enable parents to work. If the feds want to subsidize businesses, at least some of it should be directed toward measures to improve worker health and safety and environmental programs which have been severely eroded over the years.
Welburn: One of the reasons why the Big 3 automakers were bailed out was interdependence. At the time, a failure from one was likely to bring down all three due to their interdependent supply chains.
I'll also point out that when credit is constrained for firms, things can happen incredibly fast. We should understand key industries that are prone to correlated failures.
Miller: This pandemic and the public health response to it will severely impact revenues for a wide variety of industries—aviation, hospitality, restaurants, events management, and more. Ensuring these businesses can weather the storm until restrictions on public gatherings are lifted and demand for travel resumes is key to ensuring the economy bounces back quickly after the immediate health concerns have abated. That said, this support should come with careful thought about the conditions under which the federal taxpayer should be the de facto insurer, as that comes with moral hazard concerns. This may include careful thought about the strings attached to any assistance from federal taxpayers. Two good rules of thumb: First, the federal taxpayer should be the lender of last resort. Second, any federal assistance should be directly tied to addressing challenges caused by the pandemic rather than being treated as an opportunity to secure long-standing industry priorities for tax or regulatory relief.
Edwards: This is also a bit premature, but I think grants to state and local governments to extend the school year to make up for quarantine weeks could help with keeping current state and local funds directed to the health crisis. This was discussed in the last recession—give federal guarantees for parts of the state budget so they're freed up to spend the rest of their resources with more discretion.
Medicaid funding increases would achieve a similar purpose. But on that note, Medicaid expansion would also help address this crisis. The fact that 2 million fewer people have health insurance coverage this year compared to last is only gasoline on this fire.
Some policymakers seem to be suggesting major infrastructure investments as a way to make sure the economy keeps going. Is this a wise move?
Knopman: The employment effects of infrastructure spending aren't what they used to be (a la 1930s CCC and WPA programs) because use of heavy equipment has displaced labor to a considerable extent. Also, there's a time element here. How soon could projects start up? If we're aiming for social distancing in the near term, then how's that going to work on a construction site?
One could frame an infrastructure spending package quite differently and potentially get more benefit from it in the long term. With unbelievably low interest rates, now is a great time for countercyclical spending (and borrowing) by local governments. Bottom line: infrastructure spending is best viewed as a long-term investment strategy rather than a short-term lifeline for construction workers.
Miller: Infrastructure investments may be a good idea for other reasons, but if we can avoid the pandemic triggering a recession, then it's not needed just to spur the economy. That said, if a recession does occur, then counter-cyclical government spending is probably a good idea, and federal investment in long-needed infrastructure projects of national significance could be one way to do that.
Knopman: One other idea about infrastructure spending: Infrastructure maintenance under federal control—in national parks, wildlife refuges, military installations (primarily housing)—is a known problem with a huge (and prioritized) backlog. That's where direct federal funding could be targeted well and have an immediate impact.
In addition to the $8 billion in emergency funding passed earlier this month, Congress is now considering a measure to address the economic impacts, including expanding family medical leave, paid sick leave, and bolstering unemployment insurance (UI). Thoughts on the effectiveness of those forms of economic relief?
Kumar: On paper these are aimed at vulnerable populations and therefore welcome. They always pay the brunt of the impact in any recession. The question is whether the perfect will become the enemy of the good from a legislative point of view. Laws have a better chance of being passed if they are targeted and temporary.
Knopman: I'd add that the more Congress can funnel direct assistance through existing (functional) programs, the better. Starting any new government programs without the administrative infrastructure would be useless.
Edwards: I would argue that unemployment insurance is not a functional program. Claims now are below levels they were in the 1970s when the U.S. workforce was half the size. It does not get money to the majority of unemployed households and in some states, like Florida, it reaches as little as 10%. And often UI extensions during recessions are time and benefit durations for individuals already receiving UI, but don't expand the pool of recipients. But that lack of functionality has more to do with program eligibility, application, and awareness. UI's infrastructure could support targeted relief—such as cash benefits to all workers in the restaurant industry in cities where they have been mandatorily closed—which could be financed from the federal UI trust fund.
Could the economy rebound quickly? Are there other instances where there has been a major blip and then things go back to normal?
Kumar: Recessions have lasted only a few months to a couple of years (the Great Depression was truly unique). My bet is on at least a short recession/slowdown lasting for a few months. With extreme measures in place, Wuhan took two to three months to recover and it is showing in the Chinese economy. It is hard to see how we can avoid it purely at a mechanical level on the time it will take for the infections to peak and people feel safe enough to venture out.
Knopman: One thing we may learn more about in the coming weeks is whether there are other things going on in both equity and bond markets that may affect the recovery time and the quality of the recovery (job creation or job stagnation as we had in the first half dozen or more years of this last “recovery”). Something weird is going on with bond markets (including the market for municipal bonds—the real workhorses of local infrastructure spending), according to stories reported last week.
Miller: A recession, as defined by the NBER Business Cycle Dating Committee, is certainly a real possibility, and one we're trying to avoid, but it's not inevitable yet. Historically, we have overestimated the economic impact of disease outbreaks during the moment. I want to see updated disease spread numbers, jobs reports, spending reports, and other data before calling a recession inevitable.
The quicker we can halt the pandemic, the quicker we can resume normal economic activities, and the quicker the economy will return to normal.
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Halting a wide variety of economic activities to prevent the spread of the virus could have massive impacts on our economy, but a disease outbreak does not destroy physical infrastructure like a hurricane, so there does not necessarily need to be a long lag for rebuilding. The quicker we can halt the pandemic, the quicker we can resume normal economic activities, and the quicker the economy will return to normal.
Indeed, it seems like there's no picking one sector or another to rescue; they are all impacted. What sort of stimulus works in that situation?
Kumar: This is a classic aggregate shock that has to be borne by the entire economy (cannot be diversified away as in idiosyncratic shocks)—but certain sectors such as travel and tourism, hospitality, etc. are bound to be hit more and can benefit from some of the policies mentioned elsewhere such as tax deferment or credits. If government expenditure is to be effective it needs to be targeted—else it will be wasted. And helping out households in need will reach across the sectors. Monetary policy is aimed at the entire economy; any sector that wants to take advantage of lower interest rates can.
Knopman: After further reflecting on our dialogue here, I believe that direct cash payments to families and individuals in need (particularly those without health insurance or who are unemployed) and a maniacal focus on the infrastructure, staffing, training, and equipping of the public health system (from the bottom to the top) has to be the nation's top priority. In military parlance, it's called “organize, train, and equip.” Other broader infrastructure spending makes sense in terms of enabling states and local governments to take advantage of extraordinarily low interest rates, but if labor and materials costs are high because of “freeze ups” in labor and supply chains, then the infrastructure spending will be much less effective.
As school districts close, a large portion of the labor force (parents) are left without childcare and will have to work from home or take time off. Is this a large risk to the economy in terms of productivity shock? What happens when workers run out of time off? What would firms do, in a best-case scenario for the economy?
Kumar: Since the first aim is to mitigate the effects of infection these are costly but necessary steps—but yes, it will be an aggregate productivity shock, whose pain has to be shared. This is also the reason to focus on targeted policies such as temporary paid sick leave and assistance to the most vulnerable workers (including incentives to firms in the form of subsidies to provide the needed benefits).
One topic we haven't discussed a lot is how to ensure we don't let this crisis go to waste. This might be a time for firms to innovate more on technologies and processes for telecommuting, etc., and policy innovations such as using these options to give more flexibility to new parents, and a “circuit breaker” set of policy options to protect our most vulnerable that automatically kicks in when a crisis of this magnitude is at hand, so that valuable time is not wasted in providing assistance to those in greatest need. Firms that innovate on related technologies and processes could be given an innovation tax credit.
Another option might be to think through to what are the likely needs of the economy as it turns the corner (hopefully in a few months) and use the current lull to provide rapid online and other remote training. The opportunity cost of foregone earnings while acquiring education and training is the biggest cost component, and during a downturn/crisis such as the current one, that cost is likely to be low. So as counterintuitive as it might seem this is the best time to train!