Category: Coronavirus Recession

Good U.S. fiscal policy could have made us stronger before the coronavirus recession and can make us stronger afterward

Posted on by Maria Monroe

When U.S. policymakers seek to restore the U.S. economy in the wake of the coronavirus recession, what will constitute success? Returning the economy to its prepandemic state is not sufficient. It’s not even desirable. Yes, unemployment was low, and job growth was strong. But that economy was also characterized by pervasive economic inequality, low productivity, and inflated asset prices. That economy was being kept afloat mainly by the Federal Reserve’s policy of maintaining a historically low rate of interest.

The Fed was forced into keeping interest rates low by years of misguided fiscal policy. When it was convenient, the need to control budget deficits was made the highest priority and used as an argument against the kind of investments that build a strong economy. Yet the deficit became irrelevant when tax cuts, especially tax cuts for the wealthy, were on the table. As policymakers seek ways to recover from the coronavirus recession, we will need to do more than just provide healthcare and replace lost incomes until the economy is “back.” The focus of fiscal policy during this recovery should be to invest—and invest a lot—in human capital, infrastructure, and scientific research.

When the coronavirus hit the U.S. economy hard in March, conventional wisdom had it that the economy was as strong as it had been in generations, with low unemployment and a thriving stock market, and that it took a global pandemic to bring it down. Some leaders, and too often the media, use the stock market as a proxy for the strength of the economy. But that is a symptom of what was wrong with our economy and economic policymaking before the new coronavirus hit our shores, spreading the COVID-19 disease in its wake—and what we need to avoid in policymaking going forward.

The new U.S. economy that policymakers should aim for also should feature low unemployment, achieved through higher productivity created by public and private investments powering broad-based growth. The new economy should create well-paying jobs with strong benefits for the many, not the few. The gap in benefits such as paid sick days and family leave is clearly evident amid this continuing public health crisis. The new economy should be stronger and more resilient than anything we saw in the decades leading up to this crisis, providing policymakers understand their past mistakes and do things differently going forward.

What, specifically, do policymakers need to do to achieve this new economy? First, some context.

The Federal Reserve lowered interest rates at the onset of the Great Recession and has kept rates near zero for most of the time since. In fact, the Fed discount rate has not been this low for a sustained period in about 70 years. This is partly due to market trends and partly a result of explicit monetary policy. Keeping in mind that interest rates are essentially the price of borrowing money, downward pressure on rates was a result of slow productivity growth, which reduces the demand among businesses for credit so they can invest, and an aging population, which increases the supply of saving. These two factors have a number of important implications, including:

  • The Fed’s traditional weapon for combatting recessions—lowering interest rates by several points—is depleted. Practically speaking, you can’t lower interest rates much below zero.
  • The return to risk-free saving was reduced. This affected individual savers seeking to secure their retirement savings, as well as institutional investor funds that support guaranteed pension benefits and other forms of annuities. These investors were forced to take greater risks to get positive financial returns or save even more, both of which pose challenges to the economy.
  • Lower interest rates reduced borrowing costs for corporations, and they took on excessive debt, including to enrich their shareholders by buying back corporate stock. Stock prices (and other asset values) were overvalued using conventional measures such as the Buffet Ratio, and thus were highly vulnerable to shocks.

While financial markets exerted downward pressure on interest rates, the Fed was forced, before the coronavirus recession, to accommodate that downward pressure to keep the economic recovery on course. And the reason was wrongheaded U.S. fiscal policy. Better fiscal policy, emphasizing federal investment over tax cuts, would have led to higher productivity and a stronger economy. This would have made it possible for the Fed to conduct better monetary policy, meaning the Fed could achieve full employment and stable inflation—the U.S. central bank’s “dual mandate”—without the inherent financial market valuation issues and instability associated with artificially low interest rates.

Since the 1980s, the narrative that has governed U. S. fiscal policy has been that budget deficits are bad for the economy, and they are caused by excessive spending. Tax cuts are always good for the economy. And what about the deficits they create? Deficits caused by tax cuts are okay, and anyway, tax cuts pay for themselves—or so goes the supply-side argument. As we know, the latter argument has been disproven time and time again.

Indeed, examining the composition of federal spending and the composition of federal revenues relative to Gross Domestic Product over the past few decades provides a high-level, evidence-based perspective on this mistaken supply-side narrative. The data clearly reject that narrative that increased government spending is the primary reason for rising government deficits in recent years. Total spending, at about 20 percent of GDP in 2019, is close to its 50-year average. (See Figure 1.)

Figure 1

In contrast, total federal revenue relative to GDP, at 16.5 percent in 2019, is historically low. The previous time the economy was comparable to what we experienced in 2019, at the end of the 1990s, revenues were 20 percent of GDP. (See Figure 2.)

Figure 2

A closer look at the composition of spending in Figure 1 cuts further against the mistaken narrative about rising government spending. The component of spending associated with direct government intervention in the real economy—nondefense discretionary spending—has fallen as a share of GDP in recent decades. The fastest growing categories of outlays are for programs such as Social Security, Medicare, and Medicaid, all of which are generally financed by payroll taxes on the same low- and moderate-wage earners who are the primary beneficiaries.

The increase in payroll taxes used to fund these programs is evident in Figure 2. Thus, another crucial takeaway from this high-level perspective is that the overall decline in total revenues relative to GDP is because corporate, estate, gift, and income taxes have fallen even more than payroll taxes have increased. Deficits are primarily the result of the wealthy and corporations paying less in taxes, not due to workers receiving social insurance benefits for which they are not paying.

Most analysis of fiscal policy focuses on the economic effect of deficits, without regard for why the deficits were created. The trends in the composition of U.S. spending and revenue shown above suggest that all deficits are not created equal. A deficit created by increased nondefense discretionary spending focused on investments in human capital, scientific research, and infrastructure has positive effects on aggregate demand and boosts productivity. Such policies have the potential to reverse the downward pressure on interest rates.

A deficit generated by reducing taxes on capital incomes, in contrast, has only short-run effects on aggregate demand, mostly through increased asset prices. Indeed, the effect of such fiscal policies is to reinforce a low-interest-rate equilibrium because the after-tax return from owning stock is higher. Yet experience with those sorts of policies over the past two decades shows they do not lead to the sorts of investments that will make the U.S. economy grow and help alleviate the downward pressure on interest rates.

Most of the policy discussion about taxes in the United States involves the negative consequences of taxing some positive outcomes, but policymakers need to remember that those positive outcomes are sometimes, in large part, the payoff on public investments. Our federal tax system is increasingly allowing those who have benefitted the most from public investments in science and technology to pay less in taxes. Simply restoring the tax system to where it was a little more than two decades ago, as proposed by Owen Zidar of Princeton University and Eric Zwick of the University of Chicago, would allow us to make the sorts of investments we need to make without deficits.

The recent history of U.S. fiscal and monetary policies suggests that bad fiscal policy and constrained monetary policy increasingly reinforced each other in recent decades. This mutual reinforcement contributed to a slowdown in overall U.S. economic growth before the coronavirus recession alongside rising income and wealth inequality and financial instability. Fiscal policymakers have abdicated their responsibility to make the investments in people, technology, and infrastructure that private investors cannot and will not make.

So, what now? When we restore the economy from the ravages caused by the coronavirus recession, we should be guided by the lessons we’ve learned in recent decades and build an economy characterized by strong, stable, and broad-based growth. If U.S. policymakers had been investing properly, for example, then right now there would be federally funded infrastructure projects in place for workers to get back to once the threat of COVID-19 diminishes. Instead, many of the infrastructure investments we might commit to now will take months or years to get underway. They’re still worth doing, but earlier investments could have supported a more speedy economic recovery now.

Today, policymakers need to focus on spending to support healthcare, maintain incomes, and keep businesses alive—and, as businesses start operating again, restore aggregate demand. But to get to the kind of strong, stable, and broad-based economic growth our nation needs, the federal government needs to invest. We need to invest in human capital—in quality childcare and early childhood education, in Kindergarten through 12th grade education, in vocational and higher education, and in programs to alleviate hunger and poverty.

We need to invest in infrastructure—in maintaining, repairing, and building our roads and bridges and mass transit systems, in enhancing the quality and security of our water systems, in preparing for and alleviating the baleful consequences of climate change, and, at long last, building rural broadband—the lack of which is freezing millions of rural Americans out of the modern economy.

And policymakers need to invest in fundamental scientific research, the lifeblood of our innovation economy and health advances. We need to invest in the National Institutes of Health, the National Science Foundation, and the other agencies supporting the basic research that has made possible everything from our smartphones to MRIs, from global positioning systems to the vaccine research we rely on today to fight the new coronavirus and COVID-19.

Tax cuts are decidedly not the answer. They double down on inequality. Most of the time, they favor the wealthy over everybody else. And the payroll tax cut now under discussion within the Trump administration and among conservative policymakers and pundits would likely just undermine Social Security finances without providing the direct infusion of funds workers and businesses need to survive the sharp economic downturn and then recover.

Although better U.S. fiscal policy is the key to better monetary policy, there are some monetary policy principles the Fed can and should embrace as it battles the coronavirus recession. Economic shocks generally involve both financial effects and real effects in the economy, with the wealthy experiencing declines in their net worth but the less wealthy experiencing job losses. In the past, the Fed has focused on propping up the financial system—for example, bailing out mortgage lenders but not mortgage borrowers during the Great Recession.

The Fed needs to expand its policy purview if the fiscal authorities won’t act in the interests of all the people. The U.S. central bank needs to make sure the next round of quantitative easing—Fed speak for the central bank’s purchase of financial securities in the marketplace to boost liquidity in the economy—or other extraordinary monetary policy action do not simply rescue the corporations whose past decisions created financial vulnerabilities.

U.S. policymakers need to enact and implement the fiscal and monetary policies tools needed to fight the coronavirus recession and prepare for a more equitable and thus more sustained economic recovery. They can and must build an economy that, unlike the one we just left behind, is built on strong, stable, and broad-based economic growth.

Where should the marginal dollar go in U.S. fiscal policy—to testing or to the safety net—amid a pandemic-induced economic downturn?

Posted on by Maria Monroe

In our recent working paper, “An SEIR Infectious Disease Model with Testing and Conditional Quarantine,” the two of us and Simon Mongey, an assistant professor of economics at the University of Chicago, explored the role of widespread coronavirus testing programs and argued that testing greatly alters the trade-off between economic output and deaths faced by a country dealing with a pandemic. We are not epidemiologists, so our calibrations were more illustrative than quantitative. But the main point is quite robust: Targeted quarantine and widespread testing can be combined to both lower deaths and increase economic output.

Testing enables a government to tailor quarantine policies, reduce subsequent infections, and put those who test negative back to work sooner. We came to this conclusion by simulating an infectious disease epidemiology model known as SEIR, which stands for Susceptible-Exposed-Infectious-Recovered, with both testing of asymptomatic individuals, as well as conditional quarantine. Conditional or targeted quarantine policies simply allow the government to prescribe quarantine based on the results of the tests.

In particular, in our model, we allow those who test negative to be released from quarantine and return to work. We also assume that our testing program is very effective (no false negatives), and that the government continues to follow individuals’ health after their initial tests. This assumption is a stand-in for the bundles of tests being conducted on individuals and/or the health and contact tracing applications used in China, Singapore, and other countries.

As a consequence, our model demonstrates that our suggested strategy—and many other strategies being discussed in the current policy debate—would require millions of tests per day. While such demands for large-scale testing seemed infeasible in the middle of March 2020, when we completed our working paper, there now appears to be a consensus among epidemiologists that testing capacity must increase at least threefold in the United States before public health officials can begin to relax measures to “flatten the curve” of infections and deaths from COVID-19, the disease spread by the new coronavirus.

The United States currently does not have the capacity to process millions of individual tests per day, and testing capacity has leveled off in recent days at roughly 150,000 samples per day. Reaching significantly higher levels of testing will likely require creative solutions such as pooling multiple tests and, perhaps more importantly, direct government investment in testing. As we write this column, current federal test funding is being negotiated in Congress, although future funding burdens are likely to fall to the states.

Two clear economic questions arise from epidemiologists’ consensus view that many more tests are needed. How does the marginal government dollar spent on testing compare to the marginal government dollar spent on safety net programs in the midst of a sharp economic downturn? And where does society receive the biggest bang-for-the-buck?

We do not have the answer to these questions. And, to our knowledge, there are no existing studies that examine the optimal mix of standard fiscal tools in combination with direct spending on testing. Yet answers to these questions are critical as policymakers near a third round of fiscal stimulus in April and contemplate a fourth round later this spring or early summer amid the continuing debate over direct federal funding of state testing.

Given the cross-state nature of this pandemic, as well as potential state budget shortfalls due to the swift and deep economic downturn, federal spending on testing may be necessary to control cross-state COVID-19 transmissions and relax cross-state travel restrictions. There is clearly a trade-off between directly investing in testing and potentially shortening the duration of the coronavirus pandemic vis-a-vis spending more on safety net policies to help households weather reduced economic activity.

Our research suggests that investing in large-scale testing programs may reduce deaths and increase economic output by allowing for more tailored quarantine policies. But given the sharp decline in incomes following the widespread loss of jobs and the subsequent knock-on effects working through defaults in credit markets, significant funds must remain devoted to safety net policies.

Answers to the two questions posed in this column will require a combination of so-called frontier epidemiological models, which allow for both testing and conditional quarantine nested in economic frameworks that allow for the governments to optimize over standard fiscal tools, such as business taxes and subsidies, labor taxes, unemployment insurance, and other safety net programs. While this is an arduous task, we believe the payoff to society of developing frameworks capable of answering this question now, and in the future, is beyond measure.

—David Berger is an associate professor of economics at Duke University. Kyle Herkenhoff is a senior economist at the Federal Reserve Bank of New York, and his views expressed in this column are his own and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

Early lessons learned from the U.S. Small Business Administration’s first round of lending from its Paycheck Protection Program

Posted on by Maria Monroe
The Paycheck Protection Program provides businesses with assistance during the coronavirus pandemic.

Overview

Underscoring the direness of the coronavirus recession, Congress just reached an agreement to provide another $380 billion in rescue funding for small businesses, just one month after the passage of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act. The small business loans authorized in the CARES Act and expanded this week are known as the Small Business Administration’s Paycheck Protection Program. These funds were among the first sources of rescue funding to be vacuumed up by desperate borrowers, whose businesses have been shuttered or severely hamstrung by the pandemic.

Despite hiccups in getting the program running, the $349 billion funding first deployed by the SBA on April 3 evaporated in just two weeks—a significant policy accomplishment but also a testament to the pent-up demand for help. What early lessons can we learn from the rollout of this first round of lending? There are several, but first, policymakers and economists alike need to understand the already existing skeins of economic inequality that, in large part, biased how these funds would be disbursed.

Previous research from the Washington Center for Equitable Growth documents how small business formation has declined over the past four decades in lockstep with an increase in economic inequality and discusses how these two phenomena may be interrelated. Equitable Growth also documented how policymakers in the CARES Act and via Federal Reserve lending facilities reinforced existing advantages for large businesses and how that might exacerbate inequality, including gaps in wealth by race, ethnicity, and gender.

The result: Large businesses, and the most advantaged small businesses, may come out the other side of the coronavirus recession intact—or even stronger than before—while others are forced to either close or significantly downsize.

The long-term implications for business dynamism and inequality in the United States as a result of the coronavirus recession and the resulting policy responses may not be known for years. But there are ways to glean early lessons from the first round of small business funding, specifically by looking at:

  • Data on loan sizes and distribution in the Paycheck Protection Program
  • Data on sectoral distribution of the Paycheck Protection Program funding
  • Anecdotal stories about gaining access to the Paycheck Protection Program

Let’s examine each of these more closely.

Download File
Early lessons learned from the U.S. Small Business Administration’s first round of lending from its Paycheck Protection Program

Data on loan sizes and distribution in the Paycheck Protection Program

The data we have on the first round of funding show that 1.66 million loans were made under the Paycheck Protection Program, compared to 30 million small businesses nationwide, 6 million of which are firms with employees (versus sole proprietorships). This means Congress reached just one half of 1 percent of eligible businesses, or around 28 percent of all firms with employees.

While the Small Business Administration touted that nearly three-quarters of the loans made under the Paycheck Protection Program were for amounts of less than $150,000, the full picture is a bit more complicated. A breakdown of the data show that just 4 percent of the loans made accounted for nearly 45 percent of the total pot of money made available under the program. Just a few loans at the top accounted for a sizeable share of the funding, with 0.03 percent of the loans made having been for more than $5 million, representing a whopping 9 percent of all funding. This lopsided distribution means that certain larger qualifying small businesses managed to secure an outsized portion of the total funding.

Data on sectoral distribution of the Paycheck Protection Program funding

Data released by the Small Business Administration also paints a curious picture in terms of which sectors benefitted from the loan program. The construction industry, for example, received more than 13 percent of total loan amounts despite representing only 4 percent of nonfarm payroll job losses in March 2020—the first month in which job losses amid the coronavirus pandemic became apparent. Meanwhile, retail and hospitality, mainly food and drinking establishments, represented 65 percent of job losses last month but only received only around 9 percent of available small business loan amounts.

While we do not have clear data on why this is the case, one hypothesis is that individual construction loans may be larger, on average, than individual retail and hospitality loans, given the capital-intensive nature of the construction business. But because these loans are for payroll protection and are capped at $10 million, this likely isn’t the case. Indeed, the construction industry received both an outsized percentage of the total amount loaned out and the total number of individual loans—meaning that the industry dominated both in the rescue aid delivered and the number of firms assisted.

A more compelling hypothesis is that the construction industry is more likely to be deemed “essential” than other business sectors. One construction industry state-by-state tracker showed that the industry is permitted to stay open, with some public health guidelines in place, in all but a few states. In contrast, restaurants in every single state are subject to strict public health restrictions, including a prohibition on dine-in services. This suggests that small firms whose business models remain the least disrupted are the most likely to receive loans—a perverse outcome for a program designed to help the most vulnerable firms.

This deeply unequal distribution of the Paycheck Protection Program funds is perhaps a reflection on some of the punitive and complex aspects of the program itself, including restrictions on use of funds and the requirement to quickly rehire employees. In other words, the businesses that were most confident in their survival, where COVID-19 (the disease caused by the new coronavirus) has imposed the least damage on revenue, were also the most able to access loans.

Other estimates from Bloomberg showed that small business funding as a proportion of eligible payroll fared much better in the middle of the country versus the coasts. While there’s not enough information yet to suggest why this was the case, Bloomberg hypothesized that businesses in regions hit hard by the virus, such as those in and around New York City, Seattle, and San Francisco, may have had less bandwidth to submit loan applications than those elsewhere in the country.

In addition to circumstances that would make it hard to apply for funding, program rules requiring relatively quick rehiring of employees as a condition of loan forgiveness may have been too limiting for businesses in areas with protracted lockdowns, whose chance of repayment is less likely. Finally, businesses in the middle of the country may have had more access to community-based lenders, who may have been able to process applications requiring idiosyncratic underwriting faster than large banks.

All of these trends could end up having a significant impact on the shape of the recovery as, say, construction businesses in North Dakota receive help while a small restaurant in the service-industry-heavy Nevada misses out.

Anecdotal stories about gaining access to the Paycheck Protection Program

Beyond the limited data, journalists have uncovered a number of stories related to which firms both loaned out and borrowed the money. Reporting indicates that small lending institutions did a better job of deploying funding quickly, perhaps because of closer relationships with community businesses, less internal bureaucracy, or a willingness to act more quickly and on less information. Some small businesses are going so far as to sue large banking institutions, alleging that those banks prioritized high-value loans first rather than taking them on a first-come, first-served basis.

Other reporting has documented how seemingly unlikely firms received small business loans. One Bloomberg report, for example, documented how hedge funds—or big pools of money whose purpose is to speculate in financial markets—qualified for the Paycheck Protection Program.

Other stories uncovered how the publicly traded fast-casual chain Shake Shack Inc. received a $10 million loan and then pledged to return it after a public backlash—but not before the company found other sources of funding, including drawing down on a $50 million line of credit from Wells Fargo & Co. and raising $150 million in equity markets.

A Securities and Exchange Act filing by Shake Shack offers a window into how large chain restaurants may fare during and after the coronavirus recession. The company said that the pandemic and ensuing economic downturn may actually be positive for the firm, noting that it “believes additional and improved development opportunities may be available over time due to the impact of COVID-19 on the overall retail and real estate environment.” This could be for a number of reasons, but presumably, the company thinks that the economic environment going forward may allow it to increase its market share over the long term or even benefit from cheaper commercial real estate prices as the economy heads into a prolonged recession.

Journalists have highlighted other instances of publicly traded restaurant groups receiving small business funding. In those cases, the businesses have not undertaken efforts to return the money. This includes Ruth’s Hospitality Group, Inc, the owner of the Ruth’s Chris steakhouse chain, which had $86 million of cash in reserves, paid its chief executive officer $6.1 million last year, and bought back more than 1.1 million shares of its own stock at an aggregate cost of $25.8 million in 2019.

But a large chain restaurant’s positive news is another business’s extinction event. Indeed, the National Restaurant Association predicts that 75 percent of independent restaurants may permanently shutter because of the coronavirus.

While neither policymakers nor economists have enough data yet to reach firm conclusions, these anecdotes suggest that the small business lending program may not be meeting all of policymakers’ original goals. In fact, one New York Post story said that Wall Street executives were actually scared that bailout funds skewed too heavily toward the top, and that imbalance may inspire a political backlash.

Conclusion

Luckily, the disproportionate harm caused to small businesses by the coronavirus recession is not inevitable. Policymakers have wide latitude to shape how our economy looks coming out of the economic downturn and into the recovery. This second round of funding by the Small Business Administration through the Paycheck Protection Program is an important next step, and hopefully businesses in the hardest-hit sectors, in previously neglected states, and among those smallest of small businesses seeking small-value loans will be assisted.

Banking industry insiders are predicting that the next round of small business funding could evaporate in just two days. Congress should consider massively scaling these investments, ideally making the funds guaranteed for all eligible small businesses. If this program is to reach all those that need it, it seems that at least $1 trillion in funding is required. As reports come in about certain sophisticated firms benefitting from the first round of small business funding, it would represent a big missed opportunity if Congress stopped its work after the $380 billion is allocated beginning this week.

Beyond the too-small funding amount, the biggest disappointment of the small business loan program so far is the lack of data collection on applications received and loans funded. Without a view into this, policymakers, law enforcement, advocates, and researchers will find it hard to determine patterns of who did and who did not receive rescue money.

Finally, even as Congress works remotely, oversight will be essential. Legislators, the Inspector General for the CARES Act, and the special congressional panel assembled to oversee bailout funds should conduct rigorous oversight of the Paycheck Protection Program. In the case of the special congressional oversight panel authorized under Title IV of the CARES Act, Congress may need to expand the statute to provide more oversight authority, as currently the panel can only evaluate how the Federal Reserve will purchase packages of these loans from lenders. Key questions should be raised, among them whether and how lenders prioritized potential borrowers, and whether the lenders privileged applications from small businesses that owe the lender other debts.

Many challenges remain to ensuring the survival of U.S. small businesses. Congress must be diligent and see this aid through. The survival of many small firms depends on it.

Three important questions to answer about global financial stabilization policies amid the coronavirus recession

Posted on by Maria Monroe

On March 24, my colleagues Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley asked me to present to a teleconference of about 100 economists and other experts on the coronavirus recession from an international perspective—particularly the situation in the European economies and emerging economies. Below is a summary of my remarks, updated to account for more recent events since that convening late last month.

I will start by summarizing the way I’ve been thinking about the coronavirus pandemic from the public health side and the resulting economic implications. As is now well-known, flattening the curve of the infection rate of COVID-19, the disease resulting from the new coronavirus pandemic, requires public health steps, including suppression and mitigation measures that allow societies to cope with the influx of infected patients. The immediate consequence is that a great number of people are forced to stay away from work, which has a tremendous cost on all economies.

Nevertheless, there are things policymakers can do to try to mitigate this sharp adverse economic impact and also prepare for when the pandemic recedes and economies begin to recover. The point I want to make here is that the pandemic is global, and the recession is also global. There are slight differences across countries in terms of timing, but those are differences of only a few weeks or a few months and don’t matter much from a macroeconomic perspective. In other words, this coronavirus recession is highly synchronized around the world even though different countries are instituting different public health and economic measures.

Looking specifically at the European economies and emerging economies, they are all experiencing a tremendous amount of strain. Let me start with the eurozone governments, which, by and large, have implemented or announced fairly large fiscal programs to provide support to businesses in the form of credit guarantees or direct employment assistance for workers, including short-time work hours and the extension of unemployment benefits. For households, there are some suspensions of mortgage payments, utilities payments, and tax payments. These measures are pretty comprehensive and are very big in terms of size.

Of course, some countries in the eurozone are in a relatively weak fiscal position, with Italy probably drawing the most attention right now. The spread on Italian 10-year government bonds relative to German government bonds with the same tenor started widening fairly rapidly at the onset of the health crisis in Italy and also due to the initial blunder by the President of the European Central Bank Christine Lagarde, who, early on, said of the ECB, “we are not here to close spreads.”

Fortunately, the European Central Bank’s actions quickly dispelled the notion that it would sit on the sidelines. The first line of response came in late March, when the ECB implemented its very aggressive new Pandemic Emergency Purchase Programme, which is targeted toward financing additional fiscal expenditures that countries may have to incur as a result of the pandemic. The program is quite sizable, about 750 billion euros, which represents about 6.5 percent of the eurozone Gross Domestic Product at this point. That announcement certainly had a dramatic effect on the spreads, reducing stress in eurobond markets, for now.

But this first step doesn’t solve all the issues or concerns going forward, given the structure of Italian debt. Some solvency concerns could emerge if somehow the European Central Bank and other European countries are not able to join in the efforts to ensure fiscal sustainability across the entire eurozone. First, the existing constraints on how much the ECB can invest in a single country, or how much of a particular issuance it can purchase, have been lifted temporarily. This gives the central bank the room it needs to purchase Italian debt in massive amounts if it needs to.

But solvency concerns are not completely alleviated. The European Central Bank cannot purchase the debt of a country when it is unsustainable. These more medium- to long-term issues still lurk in the background. To address this, various proposals have been put on the table. They all aim to provide some sort of joint funding for European countries in need. Right now, this is Italy, given the severity of the health crisis there and the precariousness of its public finances. These proposals aim to get as much fiscal support as possible to Italy.

There are three main proposals on the table, listed below in increasing order of complexity and political resistance:

  • A COVID-19 credit line, which would use the European Stability Mechanism to provide funding with long duration and light conditionality
  • A long-term coordinated joint bond issuance, which would bypass the European Stability Mechanism and thus avoid conditionality, and come with a European Central Bank backstop, possibly with joint guarantees
  • A coronabond, which would use the European Stability Mechanism to issue large amounts of long-term bonds deployed according to needs for COVID-19-related expenditures

This last idea of a coronabond faces the steepest institutional and political obstacles but remains an important idea. It is also quickly gaining ground. There is, I think, growing support for something like this—and even on the German side, where, of course, there is still tremendous opposition, there are growing signs of support. There is a sense that this is a key moment for the European project, and that if European countries are not able to pull resources together at a time like this, where it’s clearly something that has nothing to do with fiscal moral hazard or fiscal incentives, then the European project will be dealt a very severe and potentially fatal blow.

My worry is that European policymakers will come up with something that might be mostly symbolic and not have the firepower that is needed to really address the underlying fiscal issues. That would leave the European Central Bank as the sole institution in charge of handling the crisis across the eurozone, trying to backstop individual governments.

Let me turn next to emerging economies because I think that’s something that we need to keep in mind as well. These economies are experiencing enormous capital outflows from their financial markets back to advanced economies. In fact, these outflows are unprecedented in terms of their size. A lot of things are unprecedented these days, and this is one of them. The cumulative portfolio outflows dwarf anything that has happened before, even during the global financial crisis in 2008.

Moreover, it is synchronized across all of these countries and is associated with a very rapid appreciation of the U.S. dollar. In many countries, these sovereign borrowers have reduced their dollar borrowing, but at the same time, their corporate sectors increased their dollar-denominated debt, so it is unclear overall whether national balance sheets are becoming less or more dollar-dependent.

This leaves these emerging economies with large foreign-exchange vulnerabilities, which also threatens to shut down global supply chains because of cascading calls for dollars. Add to this the fact that most of these countries do not have as much expansionary fiscal capability as many of the advanced economies, which means there is definitely a need for sizable external financial assistance.

As I said at the start of my remarks, we’re in the common global battle here, in terms of fighting the coronavirus pandemic and also fighting the global coronavirus recession. It’s important that we don’t forget the developing-nation side of the world. Otherwise, we’ll be looking at a situation where the pandemic crisis rages out of control and the economic crisis becomes a total calamity right outside the advanced world, and comes back to contaminate us.

The U.S. Federal Reserve already has taken an important first step by extending swap lines between the Fed and a number of central banks around the world. But there is a subset of emerging economies without such access to these swap lines. The right institution here is probably the International Monetary Fund. It needs to step into the void. But the IMF clearly doesn’t have the firepower to do this alone at present. It needs its financial resources increased, so that it can issue “coronavirus pandemic loans” to developing nations in need with little or no conditionality but with complete transparency about the use of these new emergency funds.

There is a danger that the governments of the advanced economies will not devote enough bandwidth to the rapidly deteriorating public health and economic crises abroad because of the serious health and economic crises they are already facing at home. The problem is, just like the pandemic and recession are global, so the recovery must be.

—Pierre-Olivier Gourinchas is the S.K. and Angela Chan Professor of Management at the University of California, Berkeley, where he also directs the Clausen Center for International Business and Policy and is affiliated with the Haas School of Business.

The coronavirus pandemic highlights the importance of disaggregating U.S. data by race and ethnicity

Posted on by Maria Monroe
A U.S. postal worker continues on her route in New York City during the coronavirus pandemic, April 6th.

“We are all in this together” has been the refrain over the past four weeks, but it is far from the reality. Some of us still have jobs, while millions do not. Others are working on the front line of the coronavirus pandemic, exposing themselves to serious risk of illness and death. Others have underlying medical conditions that will place them at far greater risk. The U.S. economy abandons many members of marginalized communities at the intersection of these groups, and the results are beginning to be seen in victims of the coronavirus.

In Washington, D.C., where about equal proportions of the population are black and white, just 19 percent of positive diagnoses are white. A staggering 75 percent of all deaths so far in Washington are black residents. As researchers and journalists start to piece together the statistics, the same patterns are evident across the country.

Thanks to the efforts of professor Ibram Kendi at American University and others, at least 29 states now track racial disparities in their coronavirus data releases. But it shouldn’t be up to one academic to urge states to collect these data. This piecemeal approach only underscores how inadequate the federal response has been. Just 22 percent of all coronavirus infections reported to the Center for Disease Control and Prevention include data on race.

The federal government, to date, shows little interest in mandating more reporting or providing resources to states to keep better data, leaving states to collect whatever level of detail they prefer and leaving us without important nationwide data. These data that are collected reflect a shameful reality of the U.S. economy and healthcare system: Americans from historically marginalized communities are more physically exposed to the new coronavirus and are more at risk of catching and dying from COVID-19, the disease spread by the virus. And they are more exposed to it because they are more likely to be working in many essential industries that must remain open during the crisis.

New York City’s urban transit workers, for example, are 61 percent African American or Hispanic. Amazon.com Inc.’s workforce is 27 percent black (although just 8 percent of managers at Amazon are African American) and 19 percent Hispanic. U.S. Postal Service workers also are disproportionately black. A Pew Research survey found that Latinos are more likely than Americans overall to have lost their job or taken a pay cut.

At the same time, marginalized communities—especially African American communities—are a high-risk group because of policies in the United States that have led to poor health outcomes in their communities. Black Americans are considerably more likely than any other group to have asthma, for example. This is largely because African Americans are more likely to live close to sources of pollution, either because those sources were intentionally built in black neighborhoods or because poverty driven by structural discrimination forced them to seek out inexpensive housing in polluted areas. These policy failures burden vulnerable communities with respiratory diseases.

These insights are important for any policymakers who claim to care about all of their constituents. Policies that aim to help Americans recover from the health and economic crises caused by the coronavirus pandemic and ensuing recession must address the needs of those who have been most severely harmed. Failing to recognize that certain communities are more exposed to the coronavirus and preferencing “colorblind” policy will reinforce the systemic racism that made these communities so vulnerable in the first place. It will also make those communities more vulnerable in the next crisis.

Having appropriate data will not, in and of itself, solve the problems detailed above. But as a threshold concern, policymakers must have disaggregated data to create policies that will address these underlying economic and health disparities—and that data must be available to voters so that they can hold our elected officials accountable. I have written frequently about the need to track economic growth for Americans at every level of income, because growth over the past four decades has overwhelmingly favored the rich. But even in the 1950s and 1960s, when rich and poor Americans enjoyed similar levels of economic growth, African Americans were being left behind. New research that carefully separates the impacts of income and race generally indicates that they have economic outcomes that are worse than white Americans of similar incomes.

For all of these reasons, policymakers should pay special attention to how race, poverty, and participation in essential industry occupations intersect to put many Americans at much higher risk of economic crisis, illness, and death. They need to continue to enact the policies proposed in Equitable Growth’s GDP 2.0 project, and they must invest in a more robust federal response to the current crises that includes funding for standardized data collection across the states so we can identify communities that are hardest hit by the pandemic and respond accordingly.

Dealing with the U.S. economic and public health effects of the coronavirus recession compassionately and with an eye on a strong recovery

Posted on by Maria Monroe

On March 24, I presented to a teleconference of about 100 economists and other experts gathered by my colleagues Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley my ideas on how we should use U.S. fiscal policy to provide relief to economic victims and set the U.S. economy up for a quicker recovery from the coronavirus recession. Since this was only a few days prior to the enactment by Congress of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security, or CARES, Act, I focused on general principles and also addressed a fundamental question that the administration and governors are confronting daily: How do we decide when it’s safe and smart to reopen the U.S. economy? Below is a summary of my remarks, updated to account for more recent events.

The first question to address was how big a package should be enacted. Congress and the administration agreed on an adequate amount, $2.2 trillion in the CARES Act, but only as an initial step. The legislation provides support for individuals, businesses, and state and local governments amounting to about 10 percent of Gross Domestic Product. With tens of millions of workers having applied for Unemployment Insurance benefits over the past several weeks and 20 percent or higher unemployment a distinct possibility, this is the minimum of what’s needed to provide basic aid to families and businesses and prevent the economy from dropping into an even more dramatic freefall. It also buys time to consider next steps.

Second, there was a debate about whether the package should focus entirely on social insurance—aid to those directly affected by the falling economy, such as Unemployment Insurance and support for struggling businesses. With aggregate demand plummeting due to jobs disappearing, confidence falling, and much of the country being homebound, is it also appropriate to begin injecting untargeted money into the economy to support consumer spending?

In an economy where consumer spending accounts for 70 percent of GDP, steeply declining aggregate demand is a disaster in the making. The best way to support consumer spending is for the government simply to write checks to individuals. The question for policymakers is not whether, but when and how much. Truthfully, we don’t know the best timing, so I think Congress and the administration made the right decision to support aggregate demand with $1,200-per-individual payments. Again, far, far more will be needed in subsequent legislation.

Another point I made regarding flexibility: Any programs we design now, especially those aimed at businesses, should be sufficiently flexible to accomplish more than one goal. Just as an example, the Troubled Asset Relief Program, originally intended to buy toxic assets amid the financial crisis in 2008, ended up recapitalizing the banks. The programs the federal government is beginning to implement for businesses could end up serving unanticipated purposes.

My third concern was that we not allow administrative constraints to slow or prevent the distribution of money at a time when speed is of the essence. Many federal and state agencies suffer with antiquated information technology and are not well-suited to making significant changes to programs at a rapid pace. There are very good ideas, for example, for precisely targeting increased Unemployment Insurance benefits based on income and other factors. But for now, I think Congress took the right approach of simply adding $600 to every weekly benefit check for up to four months. Unemployment benefits will need to be extended, and the next legislation can be refined to include greater complexity in how we provide aid.

In addition, where government administrative capabilities are limited, we need to use private-sector capabilities. For instance, we are using banks to advance funds to businesses because in so many cases, these relationships already exist. That is much, much faster than relying on the Small Business Administration to get checks out the door. Banks can then be repaid by the federal government. This is essentially how we are financing the paid sick leave requirement Congress has approved.

Finally, far and away the most important economic issue at this moment has been whether to expand and extend the shutdowns across the country due to grave public health concerns. There are two ways to think about it: One that seems to have been prevalent in the White House is to simply place a dollar value on the lives that could potentially be lost, compare that to the anticipated loss of GDP from the measures needed to save those lives, and then compare the two figures and decide whether the loss of GDP is worth the lives to be saved. That is a harsh way of looking at the issue, but it’s one that economists such as Stephen Moore and Arthur Laffer have been advocating, and they have had, at least until recently, enormous influence.

But, given the nature of the pandemic, that simplistic, grisly trade-off is not the right question. The right question to ask is whether, by taking costly measures now—in particular, preserving social distancing by extending the shutdown to every state—and for longer periods of time, we can avert far more costly measures down the road. If, by opening the economy, you cause hospitals to have 10 times as many people showing up, you end up having greater spread of the disease, a higher death rate, more workers caring for loved ones, and greater economic pain as well.

So, instead of a simplistic lives vs. GDP calculation, you need to ask what the economic and human costs are of not strengthening and maintaining social distancing now, with the risk of having to engage in far greater social distancing later. It seems clear right now that continued social distancing, rather than opening the economy prematurely, passes a cost-benefits test. A combination of macroeconomic and epidemiological modeling will provide essential information to help policymakers make educated decisions about how and when to open the economy.

The CARES Act and the two new coronavirus relief laws that preceded it are only the beginning. The federal government has a massive task ahead of it to support families and businesses, limit the depth and length of the coronavirus recession, and bring about a strong economic recovery.

The coronavirus pandemic requires a wartime commitment for essential workers’ access to childcare

Posted on by David Evans
U.S. National Archives and Records Administration

The current public health and economic crisis caused by the coronavirus pandemic is reshaping society and the U.S. labor force in ways not experienced since World War II. Factories that previously made luxury products are being repurposed to produce medical and sanitation supplies. Retired doctors and nurses are re-enlisting in the fight against COVID-19, the disease spread by the new coronavirus. Meanwhile, hundreds of millions of U.S. workers have been told to remain at home under public health ordinances, drawing comparisons to London during the blitz.

This rapid restructuring of the U.S. workforce is posing another challenge reminiscent of World War II: the need to provide essential workers with the childcare services required to efficiently protect and support families. These frontline workers, including all the nurses and doctors, grocery store and pharmacy workers, food processing and restaurant carry-out staff, truck delivery and taxicab drivers, transit workers, and first responders who are keeping the rest of us safe, fed, and transported need childcare support more than ever. Bold, wartime thinking was required to meet the childcare needs of the 1940s. Similar efforts may be warranted today.

The nation’s childcare system is undergoing simultaneous supply- and demand-side shocks. On the supply side, several states have ordered the vast majority of childcare centers closed while some advocates are calling for further shutdowns to help slow the spread of the new coronavirus. Even prior to the pandemic, the childcare industry was in a crisis with dire economic implications. Most childcare businesses are very small, with 44 percent of providers either self-employed or working for a private household. Profit margins in the industry are often razor thin, and the median wage for caregivers is only $11 an hour. These types of low-wage workers are at particularly high economic risk during the coronavirus recession.

On the demand side, parents who are still employed are now telecommuting and trying to juggle childcare, homeschooling, and their own day jobs. The role of the childcare industry in supporting the U.S. economy by freeing up parents’ time to engage in work has rarely been clearer. While many frontline workers still need access to childcare, the millions of Americans working from home or unemployed and looking for work have caused demand for childcare services, and the ability to pay for them, to rapidly decline.

As access, demand, and money for childcare has plummeted in recent weeks, there is significant concern as to whether the industry can weather the ongoing crisis. A recent member survey by the National Association for the Education of Young Children finds that 30 percent of childcare providers could not survive a closure any longer than two weeks, and 49 percent are already losing income because families cannot afford care. This survey was conducted before the recent jaw-dropping spike in unemployment—further signs of a demand shock—was fully understood.

Just as the stability of the childcare industry is most precarious, first responders and other essential workers fighting COVID-19 need it more than ever. A recent analysis by the Center for Economic and Policy Research shows that more than one-third of essential workers—those employed by grocery, convenience, and drug stores; public transit; shipping and logistics; cleaning services; healthcare; and childcare and social services—have a child at home. Nearly one-quarter earn less than 200 percent of the poverty line, meaning any childcare they could find would be difficult to afford without assistance.

Nationally, nearly 100,000 public schools—a massive source of free care (and education) for children during the day—are closed, further complicating essential workers’ childcare needs. While the Families First Coronavirus Response Act—the second congressional action signed into law by President Donald Trump early last month—provides emergency caregiving leave for some parents dealing with these school closures, healthcare providers and first responders were excluded from this benefit.

Unfortunately, recent U.S. Department of Labor regulations adopt a very broad definition of workers who belong in these categories. The new rules carve out of the coverage many parents who should reasonably access these leave benefits.

Learning from the history of an earlier wartime commitment

There is no direct historical comparison for this rapid, complex shift in America’s caregiving needs. The closest may be the sudden expansion of women’s labor force participation in the 1940s as part of the nation’s WWII effort. Among women whose husbands were in the U.S. armed forces, labor force participation shot from 15.6 percent in 1940 to 52.5 percent in 1944. This sudden shift in the labor force required a reorganization of home life and childcare arrangements when the modern childcare industry was still in its infancy.

The public response, as described in historian William M. Tuttle Jr.’s review of 1940s childcare policy, was a mix of moral panic and uncertainty in the country’s ability to meet this need. For the first time, “latchkey” or “door key” kids were part of the national conversation. Stories filled newspapers and congressional hearing rooms of children locked in cars and chained to trailers while mothers went to work with no one home to watch their children. While some of these stories were certainly apocryphal, they spoke to a new source of national anxiety.

In response to these concerns, advocates and organizers engaged in practical, grassroots planning to meet this new need, including calls for a national nursery school system. Tuttle Jr.’s review describes how, in the following years, the country embarked on a bold public and private expansion of childcare options to support mothers involved in the war effort.

In many respects, the childcare system that emerged in the 1940s looked like the patchwork system of today. Most mothers relied on informal caregiving from family members, and private childcare centers opened across the country—often operated by firms engaged in wartime production seeking to attract new female workers. By 1942, the Children’s Bureau (now under the jurisdiction of the U.S. Department of Health and Human Services) began issuing local grants for Extended School Services, which provided afternoon care for school-age children using communities’ existing infrastructure.

But the federal government’s boldest action, and biggest departure from today’s childcare system, was a short-lived experiment with universal, federally funded childcare centers. Using funds from the Defense Housing and Community Facilities and Services Act of 1940—popularly known as the Lanham Act—the U.S. government funded childcare centers in more than 650 communities with defense industries across the country. Families were eligible to send their children to these Lanham Act centers, regardless of income, for a small fee. Adjusting for inflation, the cost to families was less than $11 per day.

Lanham Act centers were only widely available from 1943 to 1946, and not every child who needed care had access to a center. When soldiers, sailors, and marines returned home from the war, women were once again pushed out of the workforce, and the perceived need for childcare went with them. Despite the limitations of the program, a 2013 study identified both short- and long-term benefits. Using U.S. census data, Arizona State University researcher Chris Herbst found that communities with access to high levels of Lanham center funding were associated with greater labor force participation for women and improved education and employment outcomes for their children in the decades following the war.

It is important to note that the Lanham Act was not designed as a childcare bill. It was a public works initiative intended to help local communities shore up the housing and infrastructure needs for communities with defense-related industrial production and for those engaged in the national defense. The federal government, however, understood that parents could not productively contribute to the war effort if they did not have someone to care for their children. Childcare was recognized as just as important as a roof overhead or a road connecting homes to factories, and the government responded accordingly.

This wartime commitment to childcare is critical in the current war against COVID-19, particularly at a time when having grandparents babysit is no longer a safe option and school-based care is temporarily closed. While a universal, Lanham-type effort may not be feasible or appropriate during the current pandemic, governments across the country are not out of options.

Fighting the coronavirus pandemic today

At the state and local level, some jurisdictions hit hardest by the coronavirus are finding creative solutions to the childcare crisis. Vermont has pledged to cover providers’ forgone tuition costs. Several states are allowing some centers to provide emergency childcare for essential workers. New York City has also opened around 100 Regional Enrichment Centers providing early childcare and K–12 education for the children of designated employees. At these centers, class sizes are kept very small to reduce the risk of infection.

Unfortunately, early data suggests that few eligible families are currently receiving these services. As these programs are still new, enrollment could rise as governments resolve administrative hurdles and engage in more public outreach about these options. Still, parents may be concerned about the risk of viral transmission at these centers, which is why some experts have called for an expansion in funding for one-on-one home-based care and better guidance for public health officials.

Even in jurisdictions providing emergency childcare, many essential workers are left out. In New York City, for example, Regional Enrichment Centers are open to the children of healthcare workers, first responders, transit workers, and other essential city employees. This is a valuable resource for these families, but the program should be expanded to support other frontline workers such as delivery drivers, grocery store staff, and other private employees offering nutrition, care, and comfort to individuals staying home.

So far, the federal government has provided limited aid to the childcare industry. The Coronavirus Aid, Relief, and Economic Security, or CARES, Act, enacted late last month, funnels $3.5 billion to providers through emergency funding to the Child Care and Development Block Grant. Because most childcare providers are small businesses, they are also eligible for the Paycheck Protection Program designed to keep staff on payroll during the public health crisis. Unfortunately, experts doubt that underresourced providers will have fair access to the funds or that the program can alleviate the long-term challenges facing the childcare industry.

The CARES Act was a good start, but the aid it provides is far short of the $50 billion in flexible funding advocates estimate is necessary to see the industry though the coronavirus recession. Childcare centers and home-based providers need additional support covering their operating costs during the crisis. Tuition assistance should be expanded to more essential workers who need to secure childcare outside of school. Finally, the childcare workforce needs better protection, including personal protective equipment, hazard pay, and resources for finding substitute caregivers when necessary.

Any relief must also include protection for immigrant families, documented or otherwise. More than 17 percent of frontline workers are foreign born, and, currently, many immigrants are left out of coronavirus relief efforts. Workers with an Individual Taxpayer Identification number (as opposed to a Social Security number), undocumented workers, and mixed-status families will not be eligible for the forthcoming stimulus rebates. This is money that could have gone to securing childcare. With 1 in 5 childcare workers being foreign born, protecting the immigrant community is a necessity in any effort to protect the childcare industry.

Fortunately, federal policymakers still have an opportunity to engage in a bold wartime effort to support childcare. Congress and the White House are currently eyeing an additional legislative package that could expand some of the provisions in the CARES Act and provide additional economic aid. Incorporating significant and creative childcare investments in the fourth coronavirus package will be critical in protecting the childcare industry during this crisis and ensuring that frontline workers can productively fight the new coronavirus.

Congress must also plan for a “postwar” period. Shoring up the childcare industry now will help guarantee that it is there to aid in the coronavirus recession and economic recovery once the public health crisis ends. Research shows that access and affordability of childcare impact labor force participation. If childcare services are not readily available when the crisis subsides, then it could slow families’ return to work, particularly if social distancing practices are relaxed in such a way that grandparents and other vulnerable caregivers are still encouraged to self-isolate. In order to prepare the U.S. economy for an economic recovery, the childcare industry may need to have capacity that exceeds even pre-pandemic levels.

Nearly 50 years after the end of the war, Tuttle Jr. closed his review of World War II childcare policy with this critique:

The tragedy of the Second World War experience is how little carry-over value it had in the decades since 1945, even in the face of the country’s mounting need for [childcare].

In the next few weeks, Congress must do what it can to ensure that historians studying our own coronavirus experience cannot say the same.

The coronavirus recession exposes how U.S. labor laws fail gig workers and independent contractors

Posted on by Maria Monroe
Grocery delivery during a global pandemic and shelter-in-place has new implications.

The mandatory public health measures to control the spread of COVID-19 are deepening the effects of the coronavirus recession. More than 17 million workers are now seeking Unemployment Insurance benefits, 42 states plus Washington, D.C. and Puerto Rico are under shelter-in-place orders, and the U.S. Congress, Federal Reserve, and Trump administration are undertaking unprecedented efforts to cushion the economic blow. According to estimates by the Washington Center for Equitable Growth’s Director of Macroeconomic Policy Claudia Sahm, the U.S. unemployment rate reached 14 percent in early April.

Though the coronavirus recession is affecting most workers, the 7 percent of the U.S. labor force who are classified as independent contractors are among the most at risk because of their lack of any of the basic building blocks of the labor safety net. For instance, they are not:

  • Entitled to many health and safety protections
  • Able to join a union
  • Eligible for benefits such as health insurance or the right to earn sick leave or other forms of leave
  • Are not covered by minimum wage or overtime laws

One notable exception is that for the first time in history, the Coronavirus Aid, Relief, and Economic Security, or CARES, Act established temporary eligibility rules for pandemic Unemployment Insurance benefits for independent contractors. Most states, however, are not currently accepting claims from independent contractors and other self-employed workers, leaving behind thousands of workers who are now suffering. This is a result of an unprecedented volume of incoming claims, years of lowering employers’ tax burdens at the expense of robust unemployment systems, and confusing guidance from President Trump’s Department of Labor, the last of which seems to exclude many independent contractors that the law sought to make eligible.

Notwithstanding the important expansion of Unemployment Insurance, independent contractors are among the most vulerable during the coronavirus recession. Many independent contractors provide face-to-face services. They are either the workers most exposed to the new coronavirus on the job—such as home care aides and food and last-mile delivery workers—or most likely to be out of work without a safety net—as with workers such as ride-hailing drivers, artists, and hairdressers. Despite being classified as essential, those in the first group often lack the most basic rights and protections, such as sick leave or health insurance. Because they are at the frontlines, they and their families are at particular risk of getting sick.

The coronavirus recession is therefore making already precarious working conditions even more insecure. Research shows that self-employed workers at the bottom of the income scale tend to be worse-off than comparable workers in traditional employment relationships. Platform-based “gig-workers” providing in-person services—generally a subset of self-employed independent contractors—are disproportionately people of color and from low-income backgrounds. This means that the workers most affected by layoffs or lack of access to benefits are also among the least likely to have the financial cushion needed to weather this crisis. (See Figure 1.)

Figure 1

Fighting for fair working conditions

Like workers at Amazon.com, Inc., Amazon’s grocery store subsidiary Whole Foods, and McDonalds Corp., many independent contractors are fighting for better working conditions in this crisis. In late March, independent contractors at Instacart, a service that picks out and delivers groceries to subscribers, held a nationwide strike demanding that the platform provide them with basic protective gear, hazard payment, and a fair sick leave policy. Just a few days before that, workers protested in front of Uber Technologies Inc.’s headquarters in San Francisco, where drivers called for the enforcement of Assembly Bill 5, or AB 5.

Implemented in January 2020, AB 5 closes major regulatory loopholes in U.S. labor law, making it more difficult for employers to misclassify workers as independent contractors. In doing so, the law limits firms’ ability to rely on business models based on low labor costs, holding them accountable for providing their workers with benefits, rights, and protections. Though these efforts to re-classify gig workers as employees have been slow-moving and met with big pushback from gig employers, AB 5 can serve as a model for the nation.

Independent contractors’ lack of the right to form a union or collectively bargain translates into lower earnings, lack of access to benefits, and more exposure to workplace violations such as wage theft and sexual harassment. Any attempt to collectively bargain would likely violate the Sherman Antitrust Act, which specifically exempts unions for employees from antitrust rules, but this exemption does not apply to independent contractors. Therefore, if independent contractors banded together to raise their pay, they could be illegally colluding to raise prices—another way that current law actually protects companies from their workers.

Policies to help independent contractors through the coronavirus recession and beyond

For all these reasons, this crisis is expected to worsen the already insecure economic standing of low-wage contractors. But there are things that policymakers can do, in addition to passing laws such as AB 5, to make sure that these workers are not left out.

First, this is a public health emergency, but few independent contractors have the right to earn sick leave or medical leave. The Families First Coronavirus Response Act, the first emergency legislation passed by Congress, allows contractors to qualify for a tax credit if they themselves have coronavirus or have certain caregiving responsibilities, but many others must make an excruciating decision between badly needed income and endangering their health and others’ in this pandemic. While more than 75 percent of all workers have access to paid sick leave and paid vacations, no independent contractors have these benefits unless they live in a state which allows them to buy into its paid medical leave system. Establishing these protections for everyone, without regard to employer, would make us all healthier.

Second, instead of taxpayers picking up the bill, gig employers should be paying into the Unemployment Insurance system for their workers, as several states require. Unemployment still happens to gig workers, and it should be clear that their employers cannot evade this joint responsibility with their workers.

Third, and most importantly, independent contractors need the right to organize themselves into a labor union so they can take collective action to raise their pay, benefits, and working conditions. If they were able to unionize, then gig workers could bargain for more protective equipment to prevent the new coronavirus from spreading the COVID-19 disease to them or from them to others—one of the key demands currently going unmet. The PRO Act, recently passed by the U.S. House of Representatives, would update the law to provide these workers with expanded rights to form a union.

The coronavirus recession has exposed how decades of growing income inequality, the deterioration of worker protections, and labor laws hostile to unions render workers and the entire U.S. economy much more vulnerable to public health crises and economic downturns. The recovery from this recession will be both quicker and more complete if policymakers act to help the most vulnerable workers, since the hardest hit are also the ones with the consumer power most needed to help the U.S. economy bounce back. Moreover, doing so permanently will help ensure that on the other side of this recession, our economy is both more equitable and more resilient.

Anyone out of work can find their state unemployment program’s information at this link and determine if they qualify for benefits.

The coronavirus recession and economic inequality: A roadmap to recovery and long-term structural change

Posted on by Maria Monroe

This post reflects our organization’s overall guiding policy principles for confronting the coronavirus recession and its relationship to U.S. economic inequality as detailed on April 16. These principles still hold as there remains much to be done across communities and workplaces throughout the United States now and in the weeks and months ahead. Our coronavirus recession page provides updated analysis and policy resources from Equitable Growth.

Overview

The coronavirus pandemic presents a new and unprecedented challenge to the United States. First and foremost, it is a public health crisis that makes it impossible for our society and our economy to function as usual due to the necessary social distancing required for the health of us all. Because the federal government neither acted early enough to contain the deadly coronavirus nor swiftly enough to forestall mass layoffs, our nation is now facing a health crisis and economic recession simultaneously.

What’s more, the underlying problems of U.S. economic inequality today will only prolong and deepen this coronavirus recession. Historically high economic inequality has concentrated economic resources among those at the very top of the U.S. income and wealth ladders while leading to fewer and fewer protections for the economic security of workers and their families. This has left the United States particularly vulnerable to shocks such as health, climate, and economic crises.

Only a decade has passed since the end of the previous global financial crisis, from which U.S. working- and middle-class families had barely recovered despite a record run of economic growth. Indeed, younger generations and many families, especially families of color, never recovered.1 To avoid that same outcome on the other side of the coronavirus recession, policymakers’ response today will be most effective if directed at the roots of these underlying problems of economic inequality.

Decades of failed economic policies, based on ideology instead of evidence, and a blind adherence to the idea that markets can solve every problem, have made our economy and our society more vulnerable. Our nation now faces a grave economic challenge and concentrated efforts to weaken public institutions and leave decisions up to the market over the past 40 years mean our policymakers and society are ill-equipped to handle it. Disparities by income, race, ethnicity, and gender are inevitably exacerbated by this shift of social and economic risk from collective institutions to individuals—rendering any response to a deep recession and eventual recovery all the more difficult.

An economy only functions when there are people who are able to act as producers and consumers. The first principle of a strong and stable U.S. economy is to ensure the ability of people to secure a good, steady job that provides enough income for people to support their family and buy goods and services. The new coronavirus has uncovered how even as one of the richest economies in the world, the United States remains incredibly fragile.

This issue brief diagnoses why high and rising economic inequality left our economy and our society particularly unprepared to cope with the coronavirus pandemic and ensuing recession. Six key points of vulnerability are then detailed—ranging across inequalities in health, wages, purchasing power, worker power, and government investments—followed by a roadmap of broad policy principles to help guide policymakers as they consider long-term structural changes for the U.S. economy. These principles are detailed toward the end of this issue brief. But briefly, they are:

  • Recognize that markets cannot perform the work of government
  • Address fragilities in our markets themselves
  • Keep income flowing to all the unemployed workers and small businesses now and in future crises
  • Ensure those who are still employed can stay employed
  • Produce headline economic statistics that represent the well-being of all Americans

The coronavirus recession is exacting a large human toll across our nation. This toll is all the more insidious due to the economic inequalities that cause the health and economic damages to fall unequally and inequitably among us. To have any chance of emerging on a stronger footing as a nation with less economic inequality and more sustainable economic growth, policymakers need to enact a robust set of protections that will ensure high-end inequality is contained, build counterweights to concentrated power, and provide economic security for all now and going forward.

Download File
The coronavirus recession and economic inequality: A roadmap to recovery and long-term structural change

Diagnosing U.S. economic inequality and the coronavirus recession

For decades, policymakers and economists alike have put their faith in the idea that markets are the best and only way for our economy to deliver what’s needed for sustained economic growth and well-being. This promise has not delivered. Over the past five decades, the U.S. economy has been characterized by high economic inequality and a lack of strong, stable, and broadly shared economic gains and well-being. Economic power at the top has translated into social and political power coalesced among an elite few. Those who start with economic advantages are able to design a system of economic inequality that preserves and amplifies their position at the top, to the detriment of the rest of us and the public good.2

Allowing markets to determine outcomes, while pretending that the rules that govern markets are always neutral and fair, shifts economic risk toward people and families and away from institutions that could better bear them.3 At no time has this been more apparent than right now. Amid the coronavirus pandemic, many of the workers most likely to be in jobs with a high degree of face-to-face contact with the public—and thus at greater risk of exposure—are those least likely to have access to paid sick time or employer-provided health insurance. Those in jobs that allow them to telecommute are also the workers most likely to have the best insurance coverage and most generous workplace benefits.4

At the same time, we’ve reduced the risks for those at the top, including big corporations. Whereas power once rested in freely chosen democratic institutions that collectively shouldered risk, that risk is now borne by individuals while the governance of commercial activity is determined by those with the money and power to subvert those same institutions. The failed ideology that claims the benefits of unconstrained private activity accrue to everyone with greater efficiency and fairness than collective governance is exposed today as not just failing but also false. As we see in this moment, a healthy economy and society require a competent, well-resourced federal government.5

The coronavirus pandemic reveals how this shift in risks plays out across communities. Death rates are higher in communities of color, in no small part due to structural racism, segregation, and industrial policy, all of which have exposed them to greater levels of air pollution alongside underlying health inequalities due to overrepresentation in vulnerable jobs and a failure to invest in ensuring all communities have access to high-quality and affordable healthcare. At the same time, it’s now abundantly clear that the jobs that make it possible for those with families to go to work every day—childcare centers, schools, nursing homes—also are heavily staffed by women, especially women of color and, in particular, immigrants to our country, and are among the least paid. These jobs are a key building block of a functional economy.6

Before the coronavirus crisis hit, the U.S. economy was experiencing the longest economic expansion in our history. But the headline numbers belied serious structural weaknesses, as the benefits of growth accumulated disproportionately to the already wealthy. New data show that in 2016—the latest year available—those in the top 10 percent of incomes accounted for 38 percent of the nation’s total personal income, while those in the lowest 10 percent accrued only 2 percent. Children in the United States used to have a 90 percent chance of earning more than their parents, but those chances had dropped to just 50 percent by 1980.7

When the new coronavirus hit our shores, policymakers were ill-prepared. The fragilities created by economic inequality undermined our capacity to remain economically and politically stable. On the one hand, too many workers and their families were obstructed from accessing basic protections and the kind of jobs and income security that could help our nation weather this storm. On the other hand, those at the top who subverted our markets and our democracy to protect themselves, not our nation as a whole, are better prepared to ride out the coronavirus recession and further entrench the economic inequalities that left our nation unprepared for these twin public health and economic crises in the first place. These economic inequalities are identifiable and actionable.8

The six key vulnerabilities facing our nation due to high economic inequality

There are six key factors that made the United States and the U.S. economy particularly susceptible to the coronavirus pandemic and COVID-19, the disease delivered by the new coronavirus. Each of them, when examined together, are not only a problem today but also threaten to become even more enduring as our economy goes through a wrenching recession and continues to confront the very real consequences of climate change. If these are not corrected, the United States is likely to experience a slow and inequitable economic recovery. These six factors are:

  • Too many people lack the basic protections that would have slowed the spread of the virus.
  • Workers lack the power to share in the gains of the economic expansion that would have given them protections and security.
  • Decades of stagnant wages and meager workplace benefits leave many families without enough savings to weather the coronavirus recession.
  • Policymakers starve public goods of investments that would have enabled better protections from the coronavirus pandemic and ensuing recession.
  • States and localities don’t have the resources to deal with a pandemic or a recession.
  • Business concentration across markets increases consumer and small business vulnerabilities just when those threats are most dire.

Let’s now look at each of them in turn.

Too many people lack the basic protections that would have slowed the spread of the virus

The gaps in our social insurance systems and labor market regulations to protect workers and families, including the lack of paid leave, unstable schedules, and limited access to childcare, both exacerbated the spread of the virus and left millions of workers highly at risk of not only contracting COVID-19 themselves but also spreading it further to their own families and wider communities. Compounding the problem is the lack of health insurance or fear of high medical bills, both of which kept—and are still keeping—those who feel sick from seeing a doctor, placing a serious burden on these individuals, as well as raising rates of transmission.9

Research is already showing the significant economic and psychological toll this pandemic is taking on these workers. These stresses are heightened for people at the intersection of these eroded protections and institutional discrimination. People of color and immigrants, for example, are often foreclosed from accessing the limited protections that do exist, or are forced by their already precarious economic straits to succumb to workplace abuses at the hands of their employers.10

Workers lack the power to share in the gains of the economic expansion that would have given them protections and security

Civic institutions—especially labor unions, which once served as voices for many wage-earning workers (though never representing all workers)—have suffered a long decline. Now, only 1 out of every 15 private-sector workers belongs to a union. On top of this, labor laws and policies have failed to reflect the growing role of the fissured workplace in our modern-day economy, where firms subcontract pieces of their work so they can avoid responsibility for workers and working conditions.11

These two debilitating trends in our labor market mean that corporations that are ultimately in charge of labor practices and that make the largest profits are not liable for maintaining 21st century workplace standards. The coronavirus pandemic exposed the failure of these labor market inequalities and the need for them to manage health crises and family care, as well as protect workers against layoffs and the loss of these key health and family benefits.12

Decades of stagnant wages and meager workplace benefits leave many families without enough savings to weather the coronavirus recession

At the onset of the coronavirus pandemic in the United States at the beginning of the year, millions of people across the country were one paycheck away from financial catastrophe, even after a decade of economic expansion and historically low unemployment. Case in point: Four in 10 adults in the United States said that if they had a $400 emergency expense, they would have to borrow, sell something, or would not be able to pay it.13

As the coronavirus recession continues, more and more workers and their families who are most likely to spend money are robbed of buying power, which will undermine one of the key drivers of economic growth—the stable incomes that drive consumer spending. Today, less-well-off workers in sectors of the economy most immediately exposed to the consequences of necessary self-distancing, such as food services, hotels and accommodations, and general services, are now joining Unemployment Insurance telephone queues alongside millions of other workers who have been let go or furloughed by a broader array of firms, which will further crimp consumer spending.14

Policymakers starve public goods of investments that would have enabled better protections from the coronavirus pandemic and ensuing recession

Decades of tax cuts, culminating in the sharply regressive Tax Cuts and Jobs Act of 2017, have fueled a long-term decline in federal revenue that has starved resources that can be used to fund critical public investments and basic governmental functions, including in public health. High concentrations of income and wealth hamstring our political system because the wealthy dictate the legislative agenda and shape news headlines.15

Yet these same wealthy elites don’t prioritize investments in public health infrastructure or other public goods, such as an effective Internal Revenue Service or the provision of paid leave or wage replacements during emergencies—even though the lack of these policies have accelerated the spread of the new coronavirus, endangering us all. Case in point: even as people at the top end of the wealth distribution can retreat to their private enclaves with concierge medicine, too many others cannot access high quality care amid this crisis. The government is the only entity with the power and scope to dismantle the control that the economic elite have over our political system.16

States and localities don’t have the resources to deal with a pandemic or a recession

During and after the Great Recession of 2007–2009, hard-hit state and local governments saw large drops in capacity as Medicaid rolls rose and tax revenues fell. The decline in resources and staffing continued in the 2010s even as the economy recovered. Yet the critical role that states and localities play in addressing the coronavirus pandemic are clearly emerging in community after community. From ensuring hospitals are prepared to putting in place and enforcing stay-at-home orders, the importance of effective local policymakers is abundantly clear.17

Now, state and local governments are likely to experience sharper drops in their capacity to provide the services needed to cope with the coronavirus recession, which will surely induce further cuts to health and education and exacerbate the ongoing weaknesses. If this happens, it will not only starve communities of the investments they need to thrive but also leave the nation even less prepared for the next crisis. Austerity in state governments likewise disproportionately harms people of color, as public-sector jobs form the basis of a strong middle class for black and Latino workers.18

Business concentration across markets increases consumer and small business vulnerabilities just when those threats are most dire

Wealthy and powerful corporations use their status to maintain dominance in the marketplace. Large businesses and monopolies muscle competitors out of business, suppress wages, and hobble innovation. These companies are also precisely the ones that will thrive after the coronavirus pandemic passes. Strong cash reserves combined with political influence allow entrenched businesses to swoop in when asset prices are low and reshape rules of entire markets in the aftermath. The collapse of small businesses will disproportionately hurt people of color for whom business ownership is an especially important route to wealth creation and to closing the racial wealth gap.19

We can see how these fragilities created by inequality are playing out right now by looking at the healthcare industry having to cope with the coronavirus pandemic. Hospital consolidation resulted in higher costs, decreased quality of care, and fewer worker protections, leaving staff less able to deal most effectively with the surge of incoming COVID-19 patients alongside the collapse in other hospital procedures that provide key sources of revenue. Similarly, private-equity backed clinics and doctors—alongside profit and nonprofit hospitals more generally—fought against surprise billing legislation, which would limit patients from being hit by huge out-of-network fees for care, a problem whose impact will increase as more people need care.20

Huge pharmaceutical companies have likewise used their market power to suppress low-cost competition from generic alternatives by preventing the development of generic medicines, paying generics companies to delay launching their products, and excluding competition by other anticompetitive conduct. And they have offshored the production of these drugs and their key ingredients, leaving our healthcare system very vulnerable to a pandemic. Developing a coronavirus vaccine or treatment is paramount, but it is also critical that we ensure such solutions are affordable and readily accessible to prevent unequal access to life-saving medicine.21

The failure to prevent coronavirus infections and deaths and the ensuing recession

President Donald Trump’s focus is and always has been on the stock market rather than conceiving of and effectively implementing a comprehensive and fully thought out federal plan to address the coronavirus pandemic and its economic effects. Case in point: Though the administration knew about the threat of the virus in early January and took an early effort to limit the transmission into the United States by halting travel from China, where the virus first emerged, it did not use that time to prepare sufficient stockpiles of medical and protective supplies.22

Nor did the Trump administration put in place an economic plan to limit the transmission, such as immediately requiring all firms to provide paid sick time or ensure access to free test kits, let alone free healthcare. These failures are now distorting our economy and seriously undermining our economic stability—failures that are further fueled by the key vulnerabilities detailed above that are intertwined and ensconced across the breadth of our society and economy.23

The incidences of the coronavirus in the United States have surpassed every other nation, and the underlying fragilities may make our economic crisis equally uniquely bad. Some economists and policymakers argue that these fragilities were the inevitable result of globalization, technological innovation, or economies of scale, and that the result in the end will be better for both workers and consumers. But the role of policy choices in arranging our market structure—from the choice to bailout Wall Street rather than save homeowners a decade ago, to a long history of declining antitrust enforcement, to policy choices and court decisions that make it harder to join a union—are unmistakable and remain enduring.24

Solutions to come out of the coronavirus recession more quickly and sustainably

Congress, the Trump administration, and states and localities have each taken steps to address the twin health and economic crises facing all of us today. As policymakers consider the next federal aid package, they also need to address long-term structural challenges in our economy. They should focus on the following priorities:

  • Recognize that markets cannot perform the work of government
  • Address fragilities in our markets themselves
  • Keep income flowing to all the unemployed workers and small businesses now and in future crises
  • Ensure those who are still employed can stay employed
  • Produce headline economic statistics that represent the well-being of all Americans

A detailed examination of each of these priorities closes out this issue brief.

Recognize that markets cannot perform the work of government

The federal government must step up and provide the effective leadership required to fully contain the new coronavirus. This includes ensuring that all across the United States, people have access to testing and protective gear, that our national health infrastructure is prepared for patient loads—without putting the lives of healthcare workers unnecessarily at risk—and that proper and effective steps are taken to protect all workers and contain the spread of this new, deadly virus. The only entity with the capacity to manage this health and economic crisis is the federal government.

Policymakers must reject the false premise that tax cuts and deregulation form the basis of effective macroeconomic stimulus. Research finds that even in the best of times, tax cuts favor the wealthy and are not stimulative because rich households just preserve their wealth and income rather than deploying it in an economy that is 70-percent powered by consumer spending. Similarly, researchers have found payroll tax cuts to be among the least effective stimulus programs during recessions.25

This is especially true in a pandemic, when discretionary spending is limited by social isolation. Instead of cutting taxes and cutting regulation, the federal government must save the economy through the expansive fiscal stimulus that this extraordinary crisis warrants.

Policymakers also need to rebalance their priorities going forward to provide a stronger foundation for our economy and our society. Across all levels of government, revenue is too low. Policymakers need to find ways to tax the enormous wealth concentrated in one part of our economy, so that we can deploy it for the common good. Over the decade since the end of the financial crisis, investment has been low relative to the resources firms have on hand, even as our nation is facing grave challenges—from the lack of a health system sufficiently resourced to address a pandemic, even though Americans spend twice as much on healthcare per capita than our economic competitors, to the need to ensure all children have access to world-class educational opportunities, and from the lack of basic family economic stability for most Americans in the wealthiest nation in the world, to the urgent and pressing need to address climate change.26

Much of this work is done by state and local governments. Without federal assistance, many will have to pivot to austerity in the months and years ahead due to strict limits on deficit spending, thereby undermining any federal efforts to provide macroeconomic stimulus in the short run and address the underlying fragilities in the medium to long run. Supporting states and localities through the crisis and beyond is an urgent national economic priority.

Nor can markets fix the structural racism and gender inequities that permeate the foundations of our economic system. Coronavirus policy interventions must affirmatively seek to break the feedback loop of disadvantage and exclusion. This means directing healthcare investment for testing and treatment in communities of color, pursuing policies that expressly and progressively support low-wage workers and care workers, and requiring proactive engagement with minority-owned small businesses, rather than relying on them to navigate complex bureaucracies and overcome entrenched discrimination. Otherwise, these pervasive inequities will become further entrenched.27

Address fragilities in our markets themselves

For too long, the U.S. economy has been on a path toward greater corporate concentration across industries. Policymakers cannot allow the coronavirus recession to amplify this trend. This is why they must ensure the stability of U.S. small and medium-sized businesses and provide them the support they need so that they are still standing once we’ve solved the health crisis.28

Policymakers need to increase the size of assistance, especially as each day of mandatory public health lockdown increases the likelihood of small business failures. They need to ease hurdles to access to financing by reducing barriers to small business aid. They must level the playing field by ensuring equal access for both small lenders and small businesses owned by people of color and women. And they must take aggressive steps to reduce the likelihood of unlawful discrimination by collecting better lending data, affirming a commitment to fair lending, and requiring that the Small Business Administration affirmatively further the issue of credit access.29

All of these policy actions must also include lasting structural reform to ensure that the next time this happens, small businesses can access the financial plumbing easily and quickly so that they can cope effectively and efficiently. At the same time, we cannot allow the largest businesses to receive blank checks. We must use the oversight tools provided in the Coronavirus Aid, Relief, and Economic Security, or CARES, Act to hold the U.S. Treasury Department and Federal Reserve accountable in establishing aid programs that deliver for workers.30

All rescue programs for businesses should ensure that funds are directed to productive uses that support workers and customers, and not financial speculation. This should include banning dividends and stock buybacks for the duration of assistance, including a prohibition that banks suspend capital distributions during the crisis in order to support lending to the real economy. Congress should also make maximal use of its oversight powers to ensure that the $500 billion directed to large corporations is free from fraud and does not merely enrich the well-off.31

If there are future bailouts or use of the Federal Reserve’s emergency lending authority, policymakers should use both fiscal and central bank policies to improve corporate governance, empower workers to influence how businesses operate, and protect taxpayers from the risks posed by thin capitalization and profiteering by corporations.

And policymakers need to recognize that for too long, they’ve acted as though the Fed holds all the cards in a recession, as if an economic downturn can only be solved by monetary policy. Not only is monetary policy unable to tackle this crisis alone, the Fed has also already used its most powerful tool: cutting interest rates. Monetary policy needs to work together with effective fiscal policy. Still, it is essential to keep in mind that monetary policy actions that are taken have important distributional implications. Policymakers must ensure that the policies being implemented at the Fed do not simply rescue those at the top who started at a much better place and have the resources to weather the storm.32

Keep income flowing to all the unemployed workers and small businesses now and in future crises

So long as the new coronavirus continues to spread without a vaccine or effective treatments available, there will be swaths of the U.S. economy that will remain shut down or intermittently turned on and off. As the health and economic crisis continues, more layoffs are likely to occur, so the more resilient that policymakers can make businesses and families, the more long-term damage can be mitigated.

Policymakers should start by extending direct payments, Unemployment Insurance, small business grants and loans, aid to states, and emergency paid leave until the coronavirus recession passes. The most effective way to do this is to use unemployment rate-based “triggers” that only turn off when the recession is ending and the recovery is underway. This allows programs aimed at maintaining incomes to ramp up and wind down automatically. Policymakers also should make it easier for employers to cut employees’ hours and have them access partial unemployment benefits in order to foster a faster economic recovery.33

Macroeconomic stability also requires that all people who are unemployed and their families can access healthcare. If the Trump administration continues to leave unemployed workers, including immigrants and their families, without access to healthcare, Congress must step in with a special enrollment period for Obamacare, subsidized COBRA health insurance plans for employees who are laid off but want to keep their employer-based health plans, a Medicare buy-in, expanded Medicaid, or some combination thereof.34

The challenge of supporting those out of work is magnified by the reality that the sectors of our economy that are the first economic casualties of the coronavirus pandemic and ensuing recession tend to be small businesses with little cash reserves and with employees who are mostly paid at the low end of the wage scale and provided with few benefits. As of mid-March, more than 90 percent of jobs lost were in low-wage industries, particularly in the accommodations and food services industries, heightening the likelihood that this causes real hardship for those affected.35

Both these business owners and their employees are precisely the people who are likely to have little in savings. As we support those out of business or out of work, policymakers must ensure that these policies are inclusive and reach these hard-hit businesses and workers. As we look to the long term, what our economy needs is more families with economic security, gained through policies that ensure fair pay—such as encouraging more union coverage—and helping families afford the big-ticket items, such as a home, a college education, and retirement, without having to take on unmanageable debt.

Ensure those who are still employed can stay employed

Policymakers need to ensure that businesses do not become hotspots for transmitting the coronavirus. To that end, all workers must have what they need to do their job safely for themselves and the public. This means, first and foremost, ensuring that we adopt widespread testing and provide protective gear, starting with essential industries—healthcare, food production and distribution, utilities, and childcare, among others—but extending to all as necessary as more parts of the economy are opened back up.

This moment of crisis has exposed deep underlying fragilities, too. To move forward, policymakers need to make our economy more resilient by establishing for all workers, including contractors and gig workers, guaranteed universal paid sick days and paid family and medical leave, universal access to health care—including free coverage for any coronavirus-related illnesses—and high-quality, affordable, safe care for children, both young children and those who may need care while schools are closed, while parents are working.36

Produce headline economic statistics that represent the well-being of all Americans

Amid a pandemic and a steep and swift decent into recession, concerns about how policymakers calculate headline economic statistics may seem to be a misplaced priority. Yet the inability of policymakers to convey how this recession will affect people differently up and down the income and wealth ladders means that effective solutions to get to the economic recovery swiftly and sustainably will be equally elusive. A continuing inability to fully appreciate and identify structural weaknesses in the U.S. economy for all workers and their families during the recession will make it even more likely that existing economic inequalities become further entrenched, to the peril of a more equitable economy emerging on the other side of the recession.

Although Gross Domestic Product growth may once have been a reliable indicator of the fortune of most Americans, many have been left behind over the past several decades, making GDP a misleading metric. In an era where economic inequality has swelled to levels approaching those last seen nearly a century ago, policymakers need to know who is prospering from economic progress and who is suffering in a downturn. We can lay the groundwork now to make sure we understand who benefits from a future recovery and what other action is needed. The effectiveness of our policies to save the U.S. economy and ensure that growth is broadly shared depends on using the most precise measurements for today’s economy.37

Conclusion

Unless policymakers actively address all of these structural issues detailed in this issue brief, the United States will experience continued increases in income and wealth inequality amid the coronavirus recession and coming out of it. This is exactly what happened after the Great Recession, when the U.S. economy lost 8.7 million jobs and $12 trillion in total household net worth. One group emerged as strong as ever: the wealthiest 1 percent, who regained what they had lost by 2012. That year, their inflation-adjusted average wealth (not including any funds hidden in overseas accounts) was $13.8 million—just 3.5 percent below the 2007 peak. Middle-class families, meanwhile, were still recovering in March of this year.38

The United States was founded on a set of principles that a democratically elected government could act in the interest of the general welfare. That faith has proved tremendously powerful over the course of our history, when we have shown the ability to come together as a nation to address sweeping structural crises. Crises have a way of bringing us together. We must now act as one to make our nation stronger, more resilient, and more equitable today and for generations to come.

—Heather Boushey is the president and CEO of the Washington Center for Equitable Growth and the author of Unbound: How Inequality Constricts Our Economy and What We Can Do about It (2019, Harvard University Press) and Finding Time: The Economics of Work-Life Conflict (2016, Harvard University Press). Somin Park is a research assistant to the president and CEO of Equitable Growth.

Two significant U.S. macroeconomic needs to consider amid the coronavirus pandemic

Posted on by Maria Monroe

Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley organized a teleconference in late March of more than 100 economists and other experts at which I, along with several other economists, presented our ideas for responding to the recession that was already developing due to the coronavirus pandemic. A few days after that virtual conference, the U.S. Congress enacted and President Donald Trump signed into law the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act, and the U.S. Department of Labor released consecutive weekly Unemployment Insurance claims data revealing about 10 million U.S. workers filed for unemployment benefits. This summary of my remarks at the teleconference has been slightly revised to take into account these subsequent developments.

I started my remarks at the teleconference with an ironic apology. Like most economists, I had never given much credence to “real business cycle theory,” which posits that recessions and other significant fluctuations in the business cycle are an optimal response to economic conditions and that government should not try to do anything about them. I always thought it preposterous that a recession, particularly one that could put the Great Recession to shame, would ever be an optimal response to anything. Yet this one is, in its way, optimal because it is the inevitable result of a sensible public health policy. If you live long enough, even the preposterous can turn out to be true.

So, what we have now is a recession that we’re not trying to end because it is indeed optimal for most of us to continue sitting at home. Rather than ending it, our focus right now is on how we get through it, how we minimize its depth, its length, and its impact on people. Following are the ideas I suggested.

There are two significant needs. The first is social insurance. The key issue here is how best to navigate the balance between speed and targeting. These two goals naturally conflict. If you want to target aid to reach those in greatest need, then you cannot do that quickly. And government needed to act quickly. The idea I advanced was to employ ex post targeting. Send the money now and target it later. How? Send checks to everybody—say, $2,000 a month. And at some later time, when the dust has settled, determine who lost significant earnings and who did not. For those who lost the most, the money would be considered a grant. But for those who lost little or nothing, the money would be considered a loan, and it would be “clawed back” through the tax system.

The Coronavirus Aid, Relief, and Economic Security, or CARES, Act provides for $1,200 for everyone, with that money going out the door starting in April and without a clawback provision. This is surely better than nothing, but it is far from perfect. For those who are truly needy, the amount is too small. And those who are not needy, the amount is too big.

The second big issue is how to support the business continuity. The most important thing is providing lots of liquidity. I believe the model for this should be the Troubled Asset Relief Program, enacted amid the twin housing and financial crises in 2008. There is quite a lot of misunderstanding about this program, which played a major role in preventing the financial crisis that began the Great Recession from being an even deeper catastrophe. TARP was not a bailout of the banks. We did not give money to the banks. The Treasury lent the banks money on attractive terms for the taxpayer. The Treasury received preferred stock or warrants, and the taxpayer ended up making money. This should be the model for maintaining business liquidity in the current crisis as well.

I think it makes sense to create a new program that uses banks to provide loans to small businesses. We need to encourage a lot of financial institutions, with the backing of the federal government, to become the lenders of last resort for many kinds of businesses. Except in one important way, the kind of program I discussed in the teleconference is what was enacted in the CARES Act. The speed with which the business-lending component of the new stimulus funding had to be rolled out has led to some glitches, but I still believe using banks is the best approach.

But there is another idea, one that was partly incorporated into the CARES Act, about which I expressed some concerns. That idea is to provide grants to businesses to hold on to their employees and pay essential expenses. An offshoot of this idea was enacted, because the loans to businesses become grants if the firms retain their employees.

Frankly, this approach worries me. I believe it’s essentially providing social insurance through firms. I understand the good motives behind it, but I’m concerned about the bad motives of employers who would seek to game the system and enrich themselves at the taxpayer’s expense. I believe giving cash to individuals, through Unemployment Insurance and other means, is simpler and less open to abuse than giving it to them through businesses. Social insurance is for people, not for helping businesses survive.

In general, I don’t think we should hold businesses harmless. This may sound heartless, but I don’t think we should be as afraid of business bankruptcy as some people are. Bankruptcy is not liquidation. The typical company, especially a large one, can separate the financial side of the firm from the operations side. Firms can operate under Chapter 11 bankruptcy while they reorganize. So, I think we should be open to that as a possibility in many cases. Equity holders in large public companies get the upside when things go well, and they should bear the consequences when things don’t, even for acts of God.

Finally, with respect to the question of balancing health costs and economic costs, there is ongoing pressure on the Trump administration to open the U.S. economy soon. The White House is extending its national shutdown recommendation by only two weeks or so at a time. Some governors, remarkably, have not even shut down their states’ economies. We will see what the consequences of those decisions are.

One possibility that a policymaker raised with me was to consider self-quarantining for a month, opening for a month, and being prepared to shut down again if the health consequences warranted it. Might this be a better approach than a long, continuous quarantine? I am not sure, but my sense is that stop-and-start is probably dangerous to the long-run health of our people and our economy. We probably need to reconcile ourselves to a long confinement, with the federal government continuing to support people and being prepared to boost the economy when we’re ready to open for business. Clearly, we are in for a very difficult period ahead.

—Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University and previously served as the chair of the White House Council of Economic Advisers in the administration of President George W. Bush.