Yves here. Operationally, this is a clean, elegant proposal for having government step in to compensate for the likely collapse in demand produced by the coronavirus pandemic. And even though this may not seem very politically feasible right now, if economies start falling off cliffs, policy red lines will start being overridden.
Notice the estimate of potential economic damage from the pandemic: a 10% annual fall in GDP. By contrast, in the crisis, the fall in GDP only in the 4th quarter of 2008 was initially reported at ~3% but finally came in a an 8.9% drop.
By Emmanuel Saez, a professor of economics at the University of California–Berkeley and Gabriel Zucman, an associate professor of economics at the University of California–Berkeley. Originally published at Dollars & Sense
The coronavirus threatens the world’s economic life. Social distancing measures, essential to fight the epidemic, are sharply reducing demand in sectors such as transportation, restaurants, hotels, and entertainment. Other industries will have difficulties producing due to supply disruptions (employees unable to come to work; outbreaks closing down firms). This direct output loss is expected to be short, probably a few months. Although the government cannot undo this direct output loss, it can alleviate economic hardship during the epidemic and prevent the direct output loss from causing lasting damage to the economy.
Absent government actions, the direct output loss will create large losses for businesses and may lead to mass layoffs. Many businesses and workers do not have enough liquidity to weather dramatic shortfalls in demand. The risk is to see many businesses liquidate, severely affecting workers’ families. The death of a business has long-term costs: the links between entrepreneurs, workers, and customers are destroyed and often need to be rebuilt from scratch; laid off workers need to find new jobs. Keeping businesses alive through this crisis and making sure workers continue to receive their paychecks is essential—even for businesses and workers that have to remain idle due to social distancing.
Providing liquidity—in the form of interest-free loans, for example—can help businesses and laid off workers weather the storm, but this policy is insufficient. Loans do not compensate businesses and workers for their losses; loans just allow them to smooth costs over a longer time horizon. In the case of the coronavirus crisis, however, it makes sense for the government to compensate businesses and workers for their losses so that each business can re-emerge almost intact after the hibernation due to social distancing ends.
In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses. The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual. To see how the notion of a buyer of last resort works, take the case of the airline industry. If demand drops by 80%, the government would compensate this missing demand, in effect buying 80% of plane tickets and maintaining sales constant. This would allow airlines to keep paying their workers and maintain their planes and equipment without risking bankruptcy.
The reason why such a policy would work in the case of the coronavirus pandemic is twofold. First, it is clear what is driving the shock: a health crisis that has nothing to do with any business’s decision and will be temporary. Second, different industries are affected differently. That’s in contrast to normal recessions, where the drop in demand is widely spread and has no clear timeline.
How much would such a buyer-of-last report program cost? An economy-wide fall in the demand for goods and services of 40% over three months leads to a 10% drop in annual GDP. The government can fully compensate private losses by transferring 10 points of GDP to the private sector, financed via an increase in public debt. The direct output loss from social distancing measures would be put on the government’s tab, i.e., socialized. The distributional consequences of this policy would be controlled by the tax system. Governments can decide later how to adjust taxes to repay the extra debt; with progressive income and wealth taxes, for instance, the cost would be borne by the wealthiest.
A buyer-of-last resort policy cannot be implemented perfectly, but governments can come close. For the self-employed and workers such as Uber drivers, the government would replace lost earnings; this would be similar to unemployment insurance. For large businesses, government compensation would be conditional on businesses not laying off any workers. It is better for businesses to keep their workers even if they are temporarily idle so that business can resume quickly—without having the rehire new workers—once demand picks up. For government sectors such as education, when schools close, teachers should continue to be paid, and so on.
Current proposals to deal with the economic consequences of the pandemic do not go far enough or are not well targeted to the ailing sectors. Business loans help businesses but do not compensate them for their losses. Postponing tax payments helps with liquidity but is not well targeted, since it also benefits individuals and businesses not directly affected by the pandemic. Direct payments to individuals (such as $1,000 checks to each household) help alleviate temporary economic hardship but this policy is poorly targeted as well: it’s too little for those who lose their jobs, and is it not needed for those who don’t. During social distancing, the goal should not be to increase aggregate demand, since people can no longer spend on many goods and services. Unemployment insurance and paid sick leave policies come closest to helping laid off workers and those unable to work, but they do not help businesses.
A buyer-of-last resort program would work if it was very limited in time, so that the cost remains manageable and business decisions are not affected. It would not fully offset the economic cost of the coronavirus. No matter what governments do, there will be real output losses. Even if airlines workers are paid, the plane rides won’t happen. For some sectors such as the food sector, supply chains distortions will happen no matter what, due, e.g., to quarantine measures. But a buyer-of-last-resort program would alleviate the hardship of workers and businesses. It would maintain the cash flow for families and businesses, so that the coronavirus shock has no secondary impacts on demand—such as laid-off workers cutting down on consumption—and a quick rebound can take place once demand comes back. Business activity is on hold today, but with an intravenous cash flow, it can be kept alive until the health crisis is over.
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I’m not buying this. Donald Trump has publicly stated that the United States will never be a socialist country. Besides, the government ought not be in the business of guaranteeing profits. Over the years publicly owned businesses have spent more than a trillion dollars buying back their own shares. This is money that would otherwise be available to ride out crises such as the coronavirus crisis we are presently experiencing. If the United States is to go the socialist route than it must go all the way, not a piecemeal approach whereby profits are privatized, while costs are socialized. This will mean the end of share buybacks, private equity and hedge funds, as well as excessive CEO compensation. It should also mean the end of billionaires.
Sorry, we’ve got part of the way now. We have socialized, government/community owned and regulated utilities, schools, police and fire depts. “All or nothing” is an invitation to neurotic governance…not that we have got a long way to go for that.
I do share your suspicion about Trump’s motives, though. His proposal to cut or eliminate FICA tax is exactly what Warren Mosler (an MMT found) proposes. My bet is, if they succeed in reducing the tax, they’ll make that an excuse to reduce benefits. Ridiculous, if you know MMT, but we need to be cunning as snakes and innocent as doves…as the good book says.
an aside: I think all of DC, including the T admin, is getting a quick course in how quickly their ‘authority’ evaporates in the public mind when they won’t or can’t step up to a serious problem in a timely manner.
Failing for weeks to get covid-19 tests out to health departments or give any sort of reasonable guidance has led governors and local state health departments and medical research universities to step in and take the lead in developing and administering tests, determine school closings, order sheltering in place in hard hit communities, etc. After 3 weeks states have stopped waiting for guidance and help from DC and smartly started acting on their own in a sensible manner.
Agreed flora, today at the presser, The T hisself looked and sounded rather quiet, calm and normal for the first time ever in my experience. I stuck around for only 15 seconds or so, but it looks like he got the memo for once.
I wouldn’t be surprised if he turned the tables on the Dems, as mentioned elsewhere on NC, and sent checks to everyone thus coasting to reelection.
I’d be OK with that, but probably the checks will just go to oil companies and airlines.
Today trump and munchin just pushed a nominally trillion dollar stimulus to counteract the virus disruption.you know damn well two years into trumps 2nd term that social security/medicare will be targeted to “pay for it”,along with a few other domestic “entitlements”.
You buy insurance BEFORE the event has occurred. How can a business, a large business get an insurance payout AFTER the event has happened when they didn’t even buy insurance in the first place ? Perhaps for the next “event”, there can be something like this – if they pay their premiums. Its just a bailout of businesses particularly large businesses dressed up. SMEs are a different matter perhaps. In another thread GF posted a set of bailout requirements Seems about right to me:
Matt Stoller has a good piece on how the corporate bailouts should be structured:
” – No bailouts for shareholders. Shareholders took the risk and upside, they should get the downside too. A bailout means the stock value goes to zero.
– No more buybacks ever, and no more dividends for five years. It’s time to stop asset-stripping, and restore the cushion inside corporations so they can invest in production.
– Strict executive compensation limits. No more get rich quick schemes and golden parachutes. We need long-term leaders focused on building institutional strength.
– No more lobbying and limits on public relations spending. The Housing and Economic Recovery Act of 2008 killed the ability of Fannie Mae and Freddie Mac to lobby, and that killed their political power. By contrast, Wall Street got bailouts with no strings attached, so they largely wrote the Dodd-Frank bill. (I was there, I saw it). Don’t repeat this.
– No more mergers and acquisitions for five years. If you get bailouts, you have to run your business as a business, not as an acquisition target. I can imagine an exception if the business fails as a stand-alone, but exceptions need to be very narrow.”
https://mattstoller.substack.com/p/how-to-structure-the-coronavirus?token=eyJ1c2VyX2lkIjo2OTcwNjcsInBvc3RfaWQiOjMxNTAzMiwiXyI6IjZRZFgyIiwiaWF0IjoxNTg0Mzkx
Yeah, try Stoller’s Goliath…well written and essential info, IMHO.
Stock buybacks, and compensating company executives with stock used to be illegal, as was usury. Those were the days, eh?
Speaking of usury…fed drops rates to zero and mortgage rates for the 30 year climb over 3.6% because of ‘demand.’ First I’ve ever heard of loans having a limited supply. I don’t think I live in the same market.
Those are excellent conditions. If only we had a government that represented the needs of the people. I’ll send some email and make some calls to Grassley and Joni Ernst and my local DemocRAT Dave Lamesack, and it will go nowhere.
@skk: I would tweak things slightly: No buybacks or dividends for corporations that have debt. Strict executive compensation limits for corporations that have debt. One of the reason our corporations are struggling so much with this downturn is that they’re all loaded up with debt, and the associated debt payments are still due whether the revenue comes in or not. It makes it much harder to withstand a major disruption like this.
And bailouts? That would be debt that corporations owe the government. So your same rules would apply.
Do we really want to allow our entire economy to fail? It’s true it is riddled with special interest and corruption – nobody denies it – but it will only take a recession of about 20% drop in GDP over 3 months to tank a much bigger amount of potential GDP. We’re definitely spinning our wheels already with our globalized neoliberal frenzy, trying to out-manufacture other businesses but refusing to invest seriously in our own and flat-out refusing to maintain our society with some semblance of decency. It’s beyond disgusting. The EU (Lagarde I think) just announced that the ECB was going to set up a special relief fund specifically for SMEs. There’s no doubt in my mind that we need to do the same. And this plan, above, sounds pretty good. It can be targeted; it can be implemented quickly, etc.It is not to fill the pockets of the corporations that have fleeced us but to protect some shred of the system we have, which we can begin to work with now, to prevent the worst from happening. The EU SMEs will receive help and they will survive far better than ours if we don’t change our dog-eat-dog attitudes (Nancy Pelosi et.al.) about being rugged, bootstrapping, ruthless capitalists. Those days are over. That century is gone. The rules were absurd and now they can begin to change.
What is needed is more radical (in the etymological sense of the term) than this. For the duration of the lockdowns :
1) suspend (not defer), all unearned income (interest on bonds and loans, rent on any asset (real estate, operational leases, etc) or derivative.
2) suspend all payment of principal (not principle as I read way to often)
3) when the lockdown is finished, move in the future all bond, loans, leases and derivatives maturities of the same duration than the lockdown itself, so that matched balance sheet stay matched.
This should be done worldwide in a coordinated way. The US should be leader on this. Fed fx swap lines should be conditional to other countries doing the same to put some sense in the head of German and Brits. China, India and Russia will happily follow.
Because most debt was to the temple/palace complex in the ancient world, jubilees were easy to implement. In the modern, securitized world, it’s not so easy. Steve Keen has a proposal to give everyone (every taxpaying entity) $50K to pay down debt first. This would be tricking to implement. There would be the inevitable austerian questions, but it might actually work to reduce that monthly “nut” people have to deal with.
Germany used “Kurzarbeit” after the GFC to subsidize businesses by letting them put workers on reduced hours, and covering the shortfall in wages. Germans love austerity, but only when someone else suffers under it.
This was announced by our NZ Government, less than 1 hour ago.
“First phase of New Zealand Govt’s Covid-19 support package worth 4% of GDP; Includes wage subsidies, benefit increases and depreciation deductions for commercial and industrial buildings”
https://www.interest.co.nz/news/104095/first-phase-govts-covid-19-support-package-worth-4-gdp-includes-wage-subsidies-benefit
“Here is a summary, in the Government’s words, of the package:
Wage subsidies
The wage subsidies will be available for businesses in all sectors and all regions that can show a 30 per cent decline in revenue for any month between January and June 2020 compared to the year before (including projected revenue). If eligible, employers would be paid $585.80 per week for full time staff, and $350 for part time. Payments are capped at $150,000 per business. They will be paid in a lump sum. The support will be available for twelve weeks with applications open today. Businesses must have taken active steps to mitigate the impact of COVID-19 (eg. engaged with their bank) and signed a declaration form to that effect. Estimated total cost: $5.1 billion
COVID-19 leave and self-isolation support
The COVID-19 leave payment scheme will provide support (through employers/to sole traders and the self employed) for those people unable to work because they are in self-isolation, are sick with COVID-19 or caring for dependents who are in either of these situations. The payments will be equal to the rate of the wage subsidy scheme but available for a maximum of eight weeks. Employers will be expected to meet all of their sick leave and other employment expectations. Estimated total cost: $126 million
Income support package
This package includes:
· A $25 per week increase for all main benefits from April 1 2020. MSD estimates that this will increase the incomes of approximately 350,000 low income families. This will also help as more people who have previously been in work are likely to need income support in the coming months, and act as a stimulus.
· The Winter Energy Payment for 2020 will be doubled to $1400 for couples and $900 for single people. It is estimated that around 850,000 recipients will benefit from this change. Once we include the partners of recipients, more than one million people are expected to benefit.
· Removing the hours test from the In Work Tax Credit to assist those who may face variable hours.
Estimated total cost: $2.8 billion
Redeployment package
$100 million has been allocated to support worker redeployment. The Tairāwhiti region will be the first to receive assistance, with the package to be agreed by COVID-19 Cabinet Committee on Wednesday.
Fewer small businesses having to pay provisional tax
From April 1 2020 the threshold for provisional tax will lift from $2,500 to $5,000. This measure will reduce cashflow pressure and compliance costs for small taxpayers by allowing roughly 95,000 businesses to defer their tax payments. Estimated total cost: $4 million.
Reinstatement of depreciation deductions for commercial and industrial buildings
A reintroduction of depreciation deductions for commercial and industrial buildings will encourage business investment in the recovery phase and support productivity. It will support business confidence, continuity and recovery. Estimated total cost: $2.1 billion
Waiving interest on some late tax payments
Interest is usually payable by taxpayers when they pay their tax late. The Commissioner of Inland Revenue will be given a time-limited discretion to remit interest if a taxpayer’s ability to make a tax payment on time has been significantly adversely affected by the COVID-19 outbreak. This measure will provide targeted relief to directly affected taxpayers facing cashflow pressures and apply for all tax payments due on or after 14 February 2020.
Immediate deductions for low value assets
Immediate expensing allows businesses to fully deduct the cost of low-cost assets when they are purchased, with the threshold for the write-off currently at $500. We are putting in place a temporary increase in the threshold to $5,000 for one year, reverting to $1,000 in the longer term (still higher than the current $500 threshold), which will reduce compliance costs for businesses. It will also have the side-benefit of stimulating business purchases. Estimated total cost: $667 million.
Support for large or complex businesses
Some businesses may fall outside the scope of the proposed business and employee support package (including working capital support), such as large or complex businesses. Officials have been asked to develop options so the Government can support larger businesses that have been materially impacted by COVID-19, where other avenues for support are not available, and the businesses are commercially viable over the longer-term. Any support would seek to mitigate the economic impact as adjustment occurs.
Working capital support for small and medium sized businesses
Officials are meeting with banks to discuss the potential for future working capital support, including in the form of loan guarantees for businesses that face temporary credit constraints.
Aviation Sector
The COVID-19 Cabinet Committee will discuss a package of measures to support the aviation sector and the protection of supply chains. This does not include any Government support for Air New Zealand. The estimated cost of this package is $600 million.
Measures already taken:
· Expanded Regional Business Partner Programme ($4m)
· MSD rapid response teams in regions hit hardest
· Removed benefit stand-down periods”
This is to give others, an idea of what another country (NZ) has done. Finally
Yup, it’s a multiple of what any other country did so far. Well done Kiwis!
Saez & Zucman make some rational, pragmatic points, even though their short piece is admittedly light on details of implementation. We are clearly in, or entering into, quite an economic pickle. There could be great value in minimizing the severity of the coming economic dislocation. But our moral sense and reflexive need for “fairness” and “equity” can completely trample rationality and pragmatism. God forbid a pragmatic policy that offends our delicate moral sensibilities.
There are no libertarians in a pandemic.
During disasters and wars the government is not playing the role of an insurance company or as a socialist. It is doing whatever it has to in order for an orderly society to function.
Our economy will be disrupted for months. But if there is a liquidity crisis across the economy, the disruption will last for years. Government action can be net positive, as long as it protects the country without benefiting the elite. The 2008 bank bailouts were bad. That was corporatism. Helping out restaurants and factories is significantly different. Even in 2008 the government needed to inject liquidity somehow, it just chose a corrupt route. This proposal does not yet feel corrupt.
Exactly — pandemic is to libertarians as foxhole is to atheists.
As to medicare-for-all versus the current situation of the Healthcare profit-seeking complex, I have occasion to watch commercials on TV from time to time, and the most disturbing ones for me are the ones for RX Savings app. These commercials acknowledge that the system is screwed up and that you can pay wildly different prices for your prescriptions, HOWEVER, by using *their app* you can win the the lowest price, defeating the big guys/establishment. in effect, It gamifies the solution to our health profit system!
It greatly disturbs me that is inferred in these advertisements that there’s no need to seek a political solution, because what would be the fun in that? By using the app, you the little guy, can beat the system. That’s much more fun than working through the political process, don’t you see? Gamification.
In the current context of the coronavirus, I welcome the chaos that weakens the existing system. Sure, a lot of people are going to die, but people die all the time. If what comes next messes up our planned deaths at the hands of our Neoliberal overlords, then those deaths will not be in vain. The pandemic gives me hope.
I hope you’re right E2U! Without an impoverished nation and an organized left, I fear that’s just whistling past the graveyard. What lasting change came out of 1918?
My less sanguine hope is that it is a wake-up call that could lead to an organized left over the next 5+ years. Like the 30s.
But from a global warming perspective, don’t we want the economy to contract, especially carbon-intensive industries like air travel?
The 2008 GFC did illustrate this, as CO2 emissions flattened off (but the world leaders immediately pushed back to trend).
“Growth of global carbon emissions halved in 2008, say Dutch researchers”
https://www.theguardian.com/environment/2009/jun/25/carbon-emissions
Then we have
“Rapid growth in CO2 emissions after the 2008–2009 global financial crisis”
https://www.nature.com/articles/nclimate1332 (paywalled).
Finding a way for CO2 emissions to drop while growing the economy is the thrust of the Green New Deal.
But is that plausible?
If the economic profession can put a price tag on “damage to the climate” as a result of economic activity and subtract this from the GDP numbers, maybe we are not truly growing in a good way at all?
Pay them to keep the planes on the ground while we replace the directors and start winding it down.
Seriously. In my fantasy world that is.
One of the best pieces I’ve seen yet on the nuts and bolts of the pandemic: Wolf Street: To Win The Corona War, Defense is the Only Offense. Succinct, well documented. And don’t miss the thoughtful comments of the author, and some (not all) others.
Late to comment here. After reading this, I was wondering about a concept that was in circulation a very long time ago – the concept of Social Credit. There is a Wikipedia article on this at-
https://en.wikipedia.org/wiki/Social_credit
And I came across how this played out in a Robert Heinlein novel as well-
https://en.wikipedia.org/wiki/For_Us,_The_Living:_A_Comedy_of_Customs#Economic_independence
I do not have the expertise to say whether this is a viable system in a redesigned economy or not but I do note that if a pandemic hit this society that it would more easily cope as everybody would still be paid – regardless. Heinlein got this idea from working for the Upton Sinclair campaign in California in the 1930s who was a firm believer in this idea.
No shortage of good ideas, some of which have been lying around for years, centuries in some cases, just waiting for a crisis grave enough to be resorted to.
In Oz alone we have the fertile economic imaginations of:
Steve Keen
https://www.patreon.com/posts/34943799
https://www.youtube.com/watch?v=HE-44ngyYoA
and Bill Mitchell
http://bilbo.economicoutlook.net/blog/?p=44484
http://bilbo.economicoutlook.net/blog/?p=44488
http://bilbo.economicoutlook.net/blog/?p=44507
All these approaches share a recognition of the potential power of a sovereign currency issuer in a time of crisis.
Let’s be absolutely clear on this: tax cuts will not work when incomes and revenues are near-zero. My clients laid off 1200 workers yesterday and tax cuts will do nothing to help either the companies or the employees get through the next two months.
The only way to save businesses and employees from bankruptcy is direct stimulus. And soon. The idea incurring massive potential federal debt at a moment like this painful, but not nearly as painful as the process of rebuilding an utterly cratered economy.
This is a major crisis – we should remember to do unto others as you would have them do unto you – need the money? Stop building the next aircraft carrier and instantly 5-6 billion for starters.
I thought the President and most of the Republican senators were just thoughtless – now it is obvious they are cruel, heartless and incredibly greedy.
Welcome to neoliberalism. They genuinely DON’T care. Having lots of money leads to a psychological disorder in most people, in which the most important things is GETTING MORE AND MORE AND MORE.
To paraphrase Lord Acton, lots of money tends to turn you into a a**hole; a few billions turns you into a complete sociopath.
Well, it there are ‘bail-outs’ on the public’s dime, I’d suggest that mega-companies which have paid no to next to no income taxes should not qualify for ‘bail-outs’ as they have not proven themselves to be minding the business of their community.
Those who mind their business alone have no business coming to the communities whose business they avoid supporting or simply don’t support for any hand-out ‘bail-outs’ by those communities.
Saez’ and Zucman’s ideas on how to go about subsidizing businesses and individuals to weather this hopefully temporary plunge in demand are attractive. Alternatives: Deep recession, Shock Doctrine, massive layoffs, and more forced transfers of assets and concentration of wealth; or massive pork and bailouts of willfully reckless behavior by the politically well connected who have done trillions of dollars in stock buybacks funded with debt that long predated the emergence of the coronavirus pandemic?
We will see.
I get jaded by this. It took the Fed about 5 seconds to figure out they are the buyer of last resort for the banksters and implemented accordingly starting almost two weeks ago.
We will flail for a while in congress with the rich people in their ear about not letting the little guys know this kind of thing is even in the world of possibilities, and we’ll have to see what meager accomodations come out the other end.
I would prefer that there be a way for the federal government give the money directly to employees and skip the middleman, in order to avoid shenanigans in the transmission of funds.
Oh well, we appear to be well on our way to a forced debt jubilee, and complete nationalization of economies, in a tortuous and unpleasant environment.
Noting will be the same again. Except greed.
I expect the death penalty for “hording” in about a year.