Economic actions to fight the coronavirus

The expected economic damage from the coronavirus is starting to become apparent.  Many sectors of the economy have shut down or will do so soon.  Within 48 hours of Governor Cooper’s announcement that closed bars and restaurants in North Carolina, 18,000 people filed for unemployment benefits.  This is more than the number that filed in all of February.  These numbers will only accelerate in the coming weeks.  

The need for economic action is now, but what actions will best serve our citizens?  Many in Washington are calling for a replay of the actions that were effective in past recessions, including cuts in payroll taxes, direct payments of $1000 to all citizens, bailouts to specific companies, and lower interest rates.  

The generals of our economy are fighting the last war.  Although everyone no doubt will like having Washington send them an extra $1000 to $2000, most of those checks will be saved, not spent because most of the service economy is shut down.  Payroll tax cuts will help those with jobs to a small extent but will do nothing for those out of the labor force.  A further problem with these approaches is that they are not targeted toward those who will have the greatest need, especially those unable to work and without savings to tide them over.  Owners of small and medium size businesses are at risk as well.  

From an economic perspective, I see three challenges that can be addressed through wise policies: public health, income maintenance and financial stability.  On the public health front, Congress needs to make sure that Dr. Anthony Fauci and his colleagues get whatever they say they need, including test kits and vaccine research support.  The bill passed last week is a good start.  

Income maintenance can be achieved through a variety of actions, but the primary focus should be on expanding the eligibility and generosity of unemployment benefits and making paid sick leave more widely available.  The average unemployment benefits check in North Carolina is $250 per week and they run out after 20 weeks.  Thanks to actions taken by the NC General Assembly to reduce benefit generosity in 2013, the state system has $4 billion in the bank.  It is time to put that surplus to work.  

The Federal Reserve will need to think outside the box on financial stability.  Job one will be to maintain liquidity in financial markets, just as it did in the Great Recession.  But the virus poses an additional challenge.  Businesses such as airlines and hotels were healthy a month ago and will be healthy again in six to 12 months.  Owners of hair salons and local restaurants operate on thin margins and many have little in the way of savings to fall back on.  What can we do to keep them going in the interim?  

Some politicians are calling for direct payments to the companies.  A better idea would be to loan Delta Airlines and Marriott Hotels the funds needed to pay off loans and roll over bonds over the coming months, with the Fed or Treasury accepting planes and buildings as collateral.  The Fed ended up in the mortgage market in the Great Recession; it may need to provide bridge funding to some cruise ships and casinos this time around.  Special programs for small to medium size businesses will be needed as well.