Brad DeLong: Worthy reads on equitable growth, April 19–25, 2020

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. This is, I think, not a call for a Works Progress Administration as such, but rather a call for a very large-scale Public Health Tracking Administration. Read Heather Boushey, “A Modern-Day Works Progress Administration Could Prevent a Coronavirus Depression in the United States,” in which she writes: “To be effective in containing the virus in the United States, track and trace must be implemented in a coordinated way and done so across the nation. Experts at the Center for Health Security at Johns Hopkins University’s Bloomberg School of Public Health estimate that just to start an effective national track and trace system will require hiring 100,000 individuals alongside more investment in the state and local public health workforce. Depending on how the pandemic plays out over the course of 2020 and into 2021, public health officials easily could discover they need even more people power to track and trace. Robert Redfield, the director of the Centers for Disease Control and Prevention, says a significant increase in public health officials engaged in track and trace will be necessary if the coronavirus returns in force this coming winter. And former CDC Director Tom Frieden believes hundreds of thousands of new trackers and tracers are needed to do the job now. Where can the federal government find such an army of workers? The answer is among the tens of millions of workers idled amid the current recession.”
  2. This is a major institutional design failure. If I were designing this, then small businesses (and large businesses, too) would have had a right to take out loans to the amount of two years’ past receipts, and the Federal Reserve would have promptly discounted such loans at par. To find out what actually happened, read Amanda Fischer, “Early Lessons Learned from the U.S. Small Business Administration’s First Round of Lending from Its Payroll Protection Program,” in which she writes: “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 Payroll 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 … 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.”
  3. Supply chains as cost-minimizers appears to have been a trend of the past. Or, at least, it ought to have been a trend of the past. The very sharp Case Western University professor Susan Helper, who has been writing about supply chains recently for Equitable Growth, is, I think, correct here: the future will be how firms can use value chains to mobilize productive resources. Read her “How COVID-19 Makes the Case for ‘High-Road’ Supply Chains,” in which she writes: “Supply chains have been fragile for some time, dating back to before the COVID-19 outbreak. Within the last two decades, there have been major disruptions caused by the Fukushima Daiichi tsunami in Japan in 2011, the floods in Thailand that same year, and the SARS epidemic in China and Hong Kong from 2002 into 2003. Though long supply chains are known to increase disruption risk, the typical methods firms use to make global sourcing decisions do not sufficiently consider this risk to individual businesses. Furthermore, these methods rarely consider the societal risks at both ends of the supply chain … Global supply chains should not become 100 percent domestic. But both public- and private-sector leaders need to fully take into account the risks that far-flung supply chains pose … One small step to encourage high-road, versus low-road, supply chains is to develop a new approach to global sourcing decision-making, otherwise known as “total value contribution (TVC),” a term I and my two co-authors, John Gray and Beverly Osborn at The Ohio State University’s Fisher College of Business, propose in a forthcoming working paper. TVC encourages supply-chain managers to first consider how decisions affect value drivers, before they even consider costs.”
  4. Once again, without rapid expansions in testing, nothing prudent is possible. All policy shifts away from a frozen crouch have a substantial risk of producing a true mortality disaster. And we are not having rapid expansions in testing. The Trump administration’s handling of coronavirus truly does look like the worst in the world. Read my “The United States Has Been Treading Water on Coronavirus since Early April,: in which I write: “Other countries have managed to get R[0] well below 1—have begun substantially shrinking the daily number of new cases. The United States has not. Our current level of social distancing and lockdown appears to be producing about 30,000 new confirmed cases a day. We are no longer—and have not for two weeks been—ramping up and utilizing our testing capabilities. On our current trajectory we look to be incurring about 2,000 reported coronavirus deaths a day. Our medical system is handling the current run of cases. But it would be nice to get the number of cases down and the number of tests up so that we could begin implementing test-and-trace. But that requires a lot more tests—which are not there. And that required more effective social distancing to get R[0] substantially below one—which is not there, certainly not at a nationwide level.”

 

Worthy reads not from Equitable Growth:

  1. Unless we can keep the virus from approaching anywhere near its feared equilibrium attack rate of 80 percent in the southeast of the United States, the future there looks really bad—significantly worse than elsewhere in the country: Read The Economist’s take on the situation, “Dixie in the Crosshairs,” in which it the magazine writes: “The South is likely to have America’s highest death rate from covid-19. It has unusually unhealthy residents and few ICU bed … case fatality rates … tend … to be higher in cities than in rural areas, and lower where social distancing, as measured by traffic to workplaces and transit stations, is greater. One explanation is that health-care quality drops when caseloads surge. Places with few intensive-care-unit (icu) beds also have high case fatality rates, bolstering this hypothesis. However, demography is just as important. Places with older residents and more diabetes, heart disease and smoking have higher case fatality rates. Race and income also play a role … If covid-19 does infect most Americans, the highest death rates will probably not be in coastal cities—whose density is offset by young, healthy, well-off populations and good hospitals—but rather in poor, rural parts of the South and Appalachia with high rates of heart disease and diabetes. Worryingly, the three states that announced plans this week to relax their lockdowns (Georgia, Tennessee and South Carolina) are all in this region.”
  2. This is heartbreaking and depressing. So many missed opportunities. So many failures to look a month down the timeline. So much … stupidity in government. For generations to come, teachers in management and public policy courses are going to use the U.S. response to coronavirus—which looks to be the worst in the world—as a case study in what a bureaucracy should not do. Read Ryan Goodman and Danielle Schulkin, “Timeline of the Coronavirus Pandemic and U.S. Response,” in which they write: “What follows is a comprehensive timeline of major U.S. policy events related to the novel coronavirus pandemic. We’ve focused on the U.S. government’s preparation for a pandemic, tracking warning signals of COVID-19, and public and internal responses when the outbreak hit inside the United States. In our view, the timeline is clear: Like previous administrations, the Trump administration knew for years that a pandemic of this gravity was possible and imminently plausible. Several Trump administration officials raised strong concerns prior to the emergence of COVID-19 and raised alarms once the virus appeared within the United States. While some measures were put in place to prepare the United States for pandemic readiness, many more were dismantled since 2017. In response to COVID-19, the United States was slow to act at a time when each day of inaction mattered most–in terms of both the eventual public health harms as well as the severe economic costs.”
  3. And what should the United States have done? New Zealand did it: Work early and fast to isolate the spread; lockdown; test, test, test. Read Matthew Brockett, “New Zealand Seeks to Wipe Out Virus After Lockdown Success,” in which he writes: “Central to New Zealand’s approach is a scientific fact that most western leaders appear to have ignored … The virus usually has an incubation period of five to six days, twice as long as influenza … Most countries treated Covid-19 as if it were influenza … trying to slow its advance rather than eradicate it. Nations including the U.K. and the U.S. opted for such mitigation and suppression efforts after they found themselves overwhelmed by cases … [Prime Minister Jacinda] Ardern … on March 23 … announced a four-week nationwide lockdown …The economic hit may be worse upfront, but activity can resume sooner. The alternatives of mitigation or suppression may require restrictions to stay in place for many months, prolonging the economic pain. New Zealand’s strategy, which requires extensive testing and contact-tracing capabilities, is supported by the statistics.”
  4. The world would be in a much better place if Angela Merkel were the global leader right now. I think it is time for all of us to try to make it so. Read Jag Bhalla, “Coronavirus in Germany: Angela Merkel Explains the Risks of Loosening Social Distancing too Fast,” in which he writes: “Germany doesn’t have much “wiggle room” in its hospital capacity. The US has even less: When you have a huge hole where your nation’s leadership should be, it is wise to borrow the best of other people’s leaders. They can’t make America’s big decisions, but they can fill in some of the gaps. In the Covid-19 pandemic, we can take comfort in their competence and use their wisdom to guide us about what we each should do … German Chancellor Angela Merkel (who happens to have scientific chops) has an important lesson that we should all listen to … In simple and clear terms, she explains why Germany doesn’t have much “wiggle room”…. Covid’s current global average R0 is 2-2.5, but Germany has done a good enough job of managing its outbreak to get its reported estimated R0 down to 0.7 as of April 17. That’s low enough for Merkel to sanction “a tentative easing of restriction.” Germany is not out of the woods, however … Without robust testing, you can’t keep good tabs on R0 or the related Rt — and you can end up flying blind, risking health system overload and avoidable deaths.”
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Weekend reading: The federal government’s role in the coronavirus response edition

Posted on by Maria Monroe

This is a post we publish each Friday with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is relevant and interesting articles we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Now that Congress has passed the second round of funding for the Small Business Administration’s Payroll Protection Program—which provides loans to small businesses in response to the coronavirus recession—it’s time to look back at the federal government’s handling of the first round and correct its mistakes. Using data on loan sizes and distributions, Amanda Fischer takes us through some lessons that policymakers can learn from the first round of small business funding, which dried up in just two weeks. Fischer explains how existing inequalities may have biased how, where, and to whom the original $349 billion was distributed, leaving big businesses and certain small businesses in specific industries more likely to survive the coronavirus recession than their less-advantaged peers. Fischer calls on policymakers to not only continue passing additional aid for small businesses but also ensure better oversight and data collection into the distribution and allocation of the funding.

Another suggestion for improving federal government intervention in the face of the coronavirus recession comes from Heather Boushey on Medium: bringing back a Great Depression-era Works Progress Administration response. The U.S. economy will not be able to recover unless and until the public feels safe leaving their homes, knowing that the virus’s spread has been contained—and this is unlikely to happen without a great increase in our capacity to test, as well as track and trace individuals who have been infected. Widespread testing and a robust track-and-trace system require federal government intervention to coordinate and implement evenly on a national scale. The federal government is the only entity with the expertise and capacity to do so swiftly, and, Boushey argues, the Centers for Disease Control and Prevention could quickly step into this role: It is already trained in infectious disease tracking and knows how to manage privacy concerns around this type of data collection and surveillance.

As Congress refuses to provide additional funding for state and local governments to address the coronavirus pandemic and recession, the Federal Reserve’s Municipal Lending Facility may be what saves many communities across the United States. In an op-ed published in The New York Times this week, Claudia Sahm argues that the Fed’s unlimited ability to print money and backstop the short-term municipal bond market—which states use to smooth out revenues but which is facing lower lending rates by investors due to economic uncertainty—may help many communities weather this storm. However, Sahm writes, the restrictions on which communities can access this program often exclude small and midsize cities—including the 35 cities with the highest percentage of black residents—as well as rural areas. The Fed can and should lift these limitations, Sahm concludes, in order to support more municipalities facing dire economic circumstances in the face of congressional inaction.

Looking outside our borders, Pierre-Olivier Gourinchas, the S.K. and Angela Chan Professor of Management at the University of California, Berkeley, examines the coronavirus recession in European and emerging economies in a column covering his remarks at a March 24 online conference of more than 100 economists. He begins by stating that the pandemic and ensuing recession will affect all countries, despite slight differences in the timing of the onset of both the public health and economic crises and in the responses governments have taken. Gourinchas then runs through the three policy proposals the European Central Bank is considering to assist European countries in need, as well as the specific circumstances and challenges facing emerging economies and how they differ from those faced by advanced economies. While developed nations are dealing with deteriorating public health and economic situations within their borders, he concludes, we can’t leave behind developing nations in the recovery and response: We are all in this together.

Links from around the web

How has the $600 weekly Unemployment Insurance add-on affected workers in each state? Ella Koeze’s interactive in The New York Times looks at how the extra $600 compares to average weekly salaries in each state based on the wage-replacement rate to see where unemployment benefits under the new system will be greater or less than a worker’s normal salary. Koeze also examines how policymakers decided upon the $600 flat figure and how it will affect workers unevenly across regions, depending on factors such as cost of living and unemployment benefit floors and caps in various states.

The new coronavirus pandemic has shown the impact that socioeconomic status has on whether a person gets sick, writes Olga Khazan in The Atlantic, and experts say this could lead to a backlash against the better-off. Wealthier people are more likely to have the ability to telecommute, reducing their exposure to the virus, are less likely to have underlying health conditions, lowering their chances of getting seriously ill, and are more likely to practice social distancing correctly than their worse-off peers. It’s common for natural disasters or other crises to expose these gaps in society—and, as a result, these periods also tend to be “good for workers” as they can create an appetite for long-term social change. But, Khazan asks, will the backlash this time be against corporate CEOs or against the middle class? The answer to that question may determine how the working class views government interventions and who to blame for their socioeconomic circumstances.

Predicting recessions is hard for economists even when the world isn’t facing a global pandemic, writes Amelia Thomson-DeVeaux on FiveThirtyEight. In the best of times, it requires tons of research and often more than a few mistakes—and now, with countries around the world struggling to contain the public health and economic fallouts and all the usual sources of economic uncertainty flipped on their heads, it’s even harder to try to predict how long the downturn will last, what will turn things around, or how quick the recovery will be. Thomson-DeVeaux runs through why it’s so difficult to predict and properly diagnose recessions and recoveries, and how the coronavirus recession is as challenging, if not more so, to map.

Friday figure

Figure is from Equitable Growth’s “The coronavirus recession exposes how U.S. labor laws fail gig workers and independent contractors,” by Corey Husak and Carmen Sanchez Cumming.

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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.

Brad DeLong: Worthy reads on equitable growth, April 11–18, 2020

Posted on by Ed Paisley

Worthy reads from Equitable Growth:

 

  1. This seems to me to be 100 percent completely right. Read Jason Furman, “Dealing with the U.S. economic & public health effects of the coronavirus recession compassionately & with an eye on a strong recovery,” in which he writes: “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 … We [must] 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 … 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 … 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”

 

  1. Let us take a step back and remember just how large a “lost generation” was generated by the failure to prioritize employment recovery after 2009. Read Jesse Rothstein,” Great Recession’s ‘lost generation’ shows importance of policies to ease next downturn,” in which he writes: “he damage suffered by young workers in recessions lasts throughout their careers. Those who enter the labor market during recessions have permanently lower employment and earnings, even after the economy has recovered. This long-term scarring argues not only for quicker and stronger action to counter recessions when they occur but also for putting in place policies that can be automatically triggered at the first signs of a recession to limit its depth and duration. The Great Recession was the worst downturn since the Great Depression … Unemployment rose by 6.5 percentage points and took nearly 10 years to get back to its prerecession level. Job losses amounted to 8.7 million. Perhaps more importantly, the prime-age employment rate, which measures the percentage of people aged 25–54 who are employed, fell by more than 5 percentage points to its lowest level in 25 years and, despite continuing tightening in the labor market, has not quite fully recovered after 10 years. And yet, the long-term damage, while less visible, will cause more financial and career losses to cohorts of workers who entered the labor market during this period.”

 

Worthy reads not from Equitable Growth:

 

  1. This is the start of what looks to be a very useful ongoing series. I am going to keep track of this as I try to grasp what is going on. Read Michael Ettlinger and Jordan Hensley, “COVID-19 Economic Impact By State,” in which they write: “Even before governments had required widespread business closings, by mid-March almost every state showed at least small job losses. The data on the labor market impact of COVID-19 has been trickling in. Unemployment insurance (UI) claims have been reported on a weekly basis—with over 18 million in the three weeks through April 11. On April 3 we saw the Bureau of Labor Statistics (BLS) national report showing 701,000 jobs lost as of the survey taken the week ending March 14. Individual states have been releasing their state reports, but today marks the first release by BLS for all states. Below are a set of interactive charts and maps that allow for the selection of and comparisons between states using the BLS and latest UI claims data. It is important to note that as of the week for which the BLS data apply no state had implemented full stay-at-home orders and wide-spread business restrictions had yet to take hold. Yet, the impact of COVID-19 was already apparent. Map 1 compares states in the percent change in the number of jobs by state between the February and March surveys.”

 

 

Weekend reading: The structural changes needed to fight the coronavirus recession edition

Posted on by Maria Monroe

This is a post we publish each Friday with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is relevant and interesting articles we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Rising economic inequality left the U.S. economy and society particularly vulnerable in the face of the public health and economic crises caused by the coronavirus pandemic and ensuing recession, write Heather Boushey and Somin Park. After reviewing vulnerabilities that reinforce and deepen inequality in the United States, Boushey and Park suggest several broad policy ideas that lawmakers can consider now to better prepare to combat the sudden recession and the economic recovery, from addressing fragilities in our markets and leaving behind the idea that markets can do the work of government, to keeping income flowing to people and businesses and ensuring workers who are still employed can stay employed. And, while data collection may seem like a distant concern in times like these, Boushey and Park explain why getting accurate statistics that show how everyone across the U.S. economy is faring is a vital step in identifying entrenched structural weaknesses and enacting policies to repair and reverse them. Unless these vulnerabilities are addressed, the United States will emerge from yet another recession with unsustainable inequalities in income and wealth that further inhibit our ability to recover from crises.

One way to try to mitigate the effects of the coronavirus recession is to bolster small businesses in the United States, writes Amanda Fischer, a step that will have the added benefit of reducing economic inequality down the road. While the recently enacted Coronavirus Aid, Relief, and Economic Security, or CARES, Act did provide for hundreds of billions of dollars for struggling small businesses, reports from the White House this past week indicate that this funding has already dried up. More must be done to support small businesses, and it must be easier for them to gain access to this support, Fischer argues, looking at lessons learned from the implementation of the CARES Act, as well as the big business supports within the bill, to develop a set of proposals for how policymakers can move forward.

Policymakers can also use fiscal policy to fight both the public health threat caused by COVID-19, the disease the new coronavirus spreads, and the economic downturn. Guest columnist Olivier Blanchard presented three fiscal policy ideas in a recent online conference for more than 100 economists organized by Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley to discuss the coronavirus pandemic and recession. Blanchard summarizes his three recommended tasks ahead for fiscal policymakers, and shows why potentially incurring more debt should not be more of a concern for developed economies than doing whatever it takes to get the disease under control.

The coronavirus recession is exposing just how badly gig economy workers and independent contractors are treated under U.S. labor law, write Corey Husak and Carmen Sanchez Cumming. These workers make up 7 percent of the U.S. workforce, yet they do not receive most, if not all, of the basic benefits that make up the labor safety net, from employer-provided healthcare to the ability to join a union. They also tend to be on the front lines of the current crisis, as home care aides or delivery workers, or facing high levels of unemployment, as ride-hailing drivers, artists, or salon employees. While the CARES Act took the unprecedented step to include these workers temporarily in the eligibility pool for Unemployment Insurance, many states still are not accepting claims submitted by self-employed workers largely as a result of the overwhelming burden many unemployment offices are currently facing. Husak and Sanchez Cumming detail three policies lawmakers should consider to support these left-behind workers as they navigate the coronavirus recession and public health crisis.

The coronavirus pandemic highlights the enormous racial gaps in who is affected, from both a public health and an economic standpoint across the United States, writes Austin Clemens, as well as the necessity for disaggregating data by race and ethnicity. Marginalized populations are not only more exposed to the coronavirus because they are more likely to be working in “essential” industries that must remain open during the crisis, they also are more likely to have underlying health conditions such as asthma due to a long history of policy failures that disproportionately affect vulnerable communities. Adopting colorblind policies that fail to address the fact that certain people are more exposed to COVID-19, the disease spread by the coronavirus, will only reinforce the structural racism that made those people vulnerable to begin with. And while having disaggregated data will not alone tackle these issues, Clemens argues, gathering these data will help policymakers target their responses more appropriately.

Links from around the web

Headlines increasingly call out the racial disparities in who is getting infected by the new coronavirus and who is dying from COVID-19 in the United States, with political leaders increasingly lament these disparities. But will they actually do something about the structural and historical racism at the root of the issue? In an in-depth look in The New Yorker at the effect of the coronavirus on black communities, Keeanga-Yamahtta Taylor reviews the history of U.S. policies that cause African Americans to have worse health outcomes, socioeconomic standing, employment options, and housing opportunities, as well as the Trump administration’s inadequate response to the coronavirus pandemic and how it has impacted marginalized populations more than their better-off peers. If policymakers truly want to address the disparities faced by black communities in the United States—with regard to coronavirus and COVID-19, as well as future public health crises that are bound to arise—then Taylor says that systemic and structural changes, not superficial fixes, are needed to level the playing field.

Hardly any grocery store workers—who are deemed emergency workers and are still going into work every day amid the coronavirus pandemic—have access to adequate paid sick leave if they contract COVID-19. According to a new study, only 55 percent of workers at large U.S. stores get paid sick time, and just 8 percent could take the recommended two weeks off to self-quarantine after exposure the new coronavirus, reports Emily Peck for the Huffington Post. This not only puts these workers and their families at risk, but also threatens public health. Despite Congress including paid sick leave provisions in the second coronavirus legislative package passed in March, loopholes and exclusions for large companies mean that just 25 percent of workers across the U.S. economy actually gained access to paid leave.

New research from Columbia University says the coronavirus public health and economic crises will cause a sharp increase in the U.S. poverty rate, which likely will exacerbate existing racial inequalities and will disproportionately affect children. Poverty levels could easily reach 15.4 percent, writes Jason DeParle for The New York Times’ The Upshot, even if the economy recovers immediately—which is highly unlikely. And while the model that the Columbia researchers crafted doesn’t fully take into account the potential antipoverty effects of measures within the CARES Act, its predictions suggest “a coming poverty epoch, rather than an episode.”

Millennials are facing their second “once in a lifetime” economic downturn at a crucial moment in many of their careers, and this all but guarantees that many will end up worse-off than their parents, writes Annie Lowrey for The Atlantic. Millennials entered the workforce during the Great Recession of 2007–2009 and, as such, are more vulnerable to economic hardships than their parents ever were. Previous generations were better prepared to weather recessions because of the financial cushions they had the opportunity to build. But millennials have smaller savings accounts, fewer investments, lower home-ownership rates, higher levels of student loan debt, and they earn less money. And while recessions are never good for any age group or type of worker, millennials are now entering the phases of their careers where they should be starting to earn their peak salaries—and are, for the second time, being battered by a severe economic downturn.

Friday figure

Figure is from Equitable Growth’s “Rescuing small businesses to fight the coronavirus recession and prevent further economic inequality in the United States” by Amanda Fischer.

Posted in Uncategorized

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.