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.

Rescuing small businesses to fight the coronavirus recession and prevent further economic inequality in the United States

Posted on by Maria Monroe

Overview

The U.S. Congress last month mobilized trillions of dollars in the Coronavirus Aid, Relief and Economic Security Act to help workers and businesses survive while mandatory COVID-19 public health measures put our economy on hold. While the size of the support in the CARES Act—around $2.2 trillion that will be leveraged up to $6.5 trillion—is important, just as crucial is how that money gets deployed. The speed with which funds reach individuals and businesses will determine which workers, families, and employers will weather this deep recession caused by policymakers’ failure to manage a public health crisis before it also became an economic crisis.

Differences in the efficiency and accessibility of rescue efforts between small and large businesses, in particular, are important. On this point, policymakers face tough challenges in ensuring that assistance reaches the smallest companies. Tens of millions of small businesses operate in the United States. Lending to those businesses is a time-consuming underwriting task, and small businesses have less existing bank credit to draw upon during times of stress. What’s more, small businesses don’t have access to alternative sources of funding in the capital markets. While frictions also exist in trying to rescue larger businesses, the challenges are more modest, the companies are more resilient, and—for good or bad—our policymakers have much more practice doing it.

If large businesses receive seamless and generous help during the coronavirus recession, but small businesses are left with laggard or inadequate assistance, then it will exacerbate already severe levels of economic inequality, including wealth disparities by race, ethnicity, and gender. It will drive consolidation and concentration, and hurt small business owners, consumers, and workers. As policymakers consider injecting additional hundreds of billions of dollars into financial support for small businesses in the weeks and months ahead, this issue brief draws on lessons from the past and from early implementation of the CARES Act to inform potential policy changes and then offers a number of policy recommendations. Briefly, among them are:

  • A substantial increase in the size of financial assistance, especially as each day of mandatory public health lockdowns increase the likelihood of small business failures
  • An easing of hurdles, so that small businesses can gain access to small business rescue funds
  • Leveling the playing field to ensure equal access for both small lenders and small businesses owned by people of color and women, perhaps including a specific set-aside for the smallest of small businesses
  • More aggressive steps to reduce unlawful discrimination and an affirmation of a commitment to fair lending
  • Complementing direct aid to small businesses with a moratorium on legal actions related to late payments, such as bills owed to debt collectors, lenders, and landlords
  • Structural reform to build financial plumbing that allows us to aid small businesses faster the next time a crisis strikes

Policymakers must quickly and effectively deploy aid to the businesses that need it most or else it will leave our economy more fragile, more concentrated, and less equitable than it was before the coronavirus.

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Rescuing small businesses to fight the coronavirus recession and prevent further economic inequality in the United States

The consequences of rising economic inequality for small businesses

We enter the coronavirus recession at an already fragile time for U.S. small businesses. Business formation in the United States has fallen by half over the past 40 years, across both industries and services, as well as across geographic locations.1 Whereas in the past, most new establishments were startups, today, incumbent firms increasingly expand with more and more locations of the same business.2 In the words of researchers from the Federal Reserve Bank of Cleveland, “markets that used to be served by independent entrepreneurs creating businesses are now increasingly being served by the expansion of existing businesses.”3

Small businesses, consumers, and workers suffer from rising concentration and consolidation by big firms

This is understood by most people as they move through the U.S. economy. The number of small retailers fell by 85,000 from 2005 to 2015, and Amazon.com Inc’s online sales platform now accounts for 38 percent of all online retail sales.4 Independent grocery stores are declining in numbers and market share.5 And Walmart Corp. now controls more than a quarter of all grocery sales.6 Despite the appearance of choice, three car rental companies control nearly all brands in the industry.7

Consolidation in the banking industry has likewise been stark. The number and market share of small and community banks has dropped precipitously, while total assets held by the four largest U.S. banks—JP Morgan Chase & Co., Bank of America Corporation, Citigroup Inc., and Wells Fargo & Company—grew from 6.2 percent of all industry assets in 1984 to 44.2 percent of industry assets in 2011.8

What’s worse is that economic crises are particularly hard on small businesses, providing a dire warning for policymakers as they grapple with the coronavirus recession. The total number of businesses is based on the number of firm “births” and “deaths” each year. The apex of the previous global financial crisis, 2009, marked the year where business deaths mostly strongly outpaced business births.9 For the three months ending in March 2009, new business creation reached its lowest point since the U.S. Bureau of Labor Statistics began collecting the information in 1992.10

This long-term rise in consolidation and decline in small businesses has coincided with a period of worsening economic inequality, decreasing economic mobility, and increasing profit-hoarding by firms.11 The U.S. economy has experienced 40 years of wage stagnation,12 particularly for lower-wage workers.13 And a persistent lack of economic progress leaves workers’ share of income generated by firms on a steady decline.14

Meanwhile, the top 1 percent of households experienced income gains of 162 percent from 1980 to 2016.15 This same group also has registered a nearly 300 percent increase in wealth since 1989. (See Figure 1).

Figure 1

Similarly, intergenerational mobility—the chance for children to earn more money than their parents—has become harder and harder for successive generations to achieve since the 1940s.16 It also has become less likely that the children of rich parents experience downward mobility.17

At the firm level, large companies have been able to hoard profits, which were at near-record highs relative to Gross Domestic Product in the years heading into the coronavirus recession. And free cash flow—the money firms generate after new investment—has grown, too.18 Despite technology and innovation that should be decreasing transaction costs, the cost of financial intermediation—what banks charge to manage the flow of money from savers to firms or individuals wanting to spend money on new projects—nearly doubled in the period from 1980 up until the current coronavirus recession.19

Finally, mobility has also decreased for companies. Popular tropes about “disruptive” new U.S. firms upending old ways of doing business mask the reality that large companies are increasingly likely to maintain their dominance while small corporations are less and less likely to become big and profitable.20

Some economists argue that this is the inevitable result of globalization, technological innovation, or economies of scale, and that the result is better for both workers and consumers. But increasing consolidation and more entrenched economic inequality is not natural law. The role of policy choices in arranging our market structure is unmistakable. Policymakers chose to bail out Wall Street rather than save homeowners a decade ago.21 There is a long history of declining antitrust enforcement.22 And policy choices and court decisions make it harder to join a union.23

There are many factors at play in our complex global economy. But the 40-year trend in consolidation and declining business formation, which accelerates during recessions, has moved lockstep alongside an increase in economic inequality and a decline in economic mobility for individuals and firms alike across the United States. If U.S. policymakers allow small businesses to fail and large businesses to prosper during and after the coronavirus recession, then their actions will accelerate the 40-year feedback loop in which opportunity hoarding by the few begets even greater amounts of opportunity hoarding.

Small business failures and the racial, ethnic, and gender wealth gap

Declining small business formation and increasing inequality do not transmit through the economy equally for everyone. Race, ethnicity, and gender are crucial determinants in terms of which small businesses succeed. Any support to businesses needs to acknowledge and address persistent structural economic disparities. The policy response from Congress and the U.S. Small Business Administration needs to protect communities most at risk of being exposed to the new coronavirus or contracting COVID-19, the disease itself, and the related economic recession. Moreover, these same communities are the least likely to see the benefits of economic recovery without deliberate and specific policy attention and action.

Business ownership is a key route to wealth creation in the United States, and one way to help close the racial and ethnic wealth gap and support economic mobility is to facilitate an increase in entrepreneurship among people of color. Unfortunately, the wealth gap between white households and black and Latino households makes small business creation more difficult for people of color. The median white household had 10 times the wealth of the median black household and eight times the wealth of the median Latino household in 2016.24 This wealth forms the foundation from which business opportunities can grow, as it is nearly impossible to start a new venture without the financial support that comes from accumulated wealth.

Black and Latino households also are less likely to have a relationship with a lending institution, as 17 percent and 14 percent of black and Latino households, respectively, were classified as “unbanked,” or lacking access to a checking or savings account.25 That’s compared to just 3 percent of white households.26 (See Figure 2.)

Figure 2

Other research suggests that neighborhoods with a higher percentage of residents who are people of color are less likely to have access to a bank branch.27

For those people of color who do achieve entrepreneurship, one study found that black entrepreneurs have both higher levels of wealth and higher levels of wealth mobility than black workers.28 The same study also found that black entrepreneurs have levels of wealth mobility equal to those of white entrepreneurs, while white workers have greater wealth mobility than black workers.29

As the previous section discussed, in recent years, the rate of business creation in the United States has been declining in absolute terms, though the rates of business creation among entrepreneurs who are people of color now exceeds the rate for whites.30 In other words, business formation may be slumping, yet the racial and ethnic business formation gap is, at least, closing.

The coronavirus recession could thwart that progress if small businesses owned by people of color are not assisted quickly and equitably. Black- and Latino-owned firms may face particularly harsh circumstances during the coronavirus recession, as those firms have historically been concentrated in the personal service and retail industries,31 sectors that are especially suffering as the country is on a mandatory public health lockdown.32

One persistent problem for facilitating entrepreneurship among people of color is access to credit, created and perpetuated by an economic system whose foundations are rooted in discrimination. U.S. policymakers must be careful not to reinforce existing disparities in credit access for minority versus nonminority business owners as they seek to help small businesses during this recession. One recent study by the Federal Reserve Banks of Atlanta and Cleveland found that black-owned small businesses applied for new funding at a rate 10 percentage points higher than white-owned firms, but their approval rates were 19 percentage points lower.33 This race and ethnicity-based disparity in businesses’ ability to get credit persisted even among firms with revenues topping $1 million.34 Minority-owned businesses that were approved for credit received the full amount requested 40 percent of the time, compared to 68 percent of the time for nonminority-owned firms.35

The source of minority-owned small businesses credit also may play an important role. The Federal Reserve Bank of Cleveland study found that black and Latino-owned firms were more likely to access funding via a Community Development Financial Institution, or CDFI, and less likely to get funding from a large or small bank.36 Policymakers should be mindful of this fact, particularly as CDFIs themselves face operational and funding challenges even in good times.37 Other evidence suggests that disparities exist even within the CDFI industry itself, with ones owned by people of color having less capital than those owned by whites.38

Research suggests that inequities also exist for businesses owned by women. One report by the U.S. Senate Small Business and Entrepreneurship Committee found that while businesses owned by women account for 30 percent of small companies, they received only 16 percent of all conventional small business loans and 17 percent of SBA-backed loans.39 Their loan applications are more likely to be rejected than those from businesses owned by men, and the loans they get are likely to have more stringent terms.40 Other research shows that in traditionally male-dominated fields such as financial services and information technology, women are disadvantaged in terms of new client referrals from networking.41 These gender effects, of course, can be compounded by race and ethnicity—with women of color experiencing intersecting forms of disadvantage.

Help for small businesses in the CARES act

U.S. small businesses enter the coronavirus recession with significant vulnerabilities. And small business formation and prosperity has key relevance to economic inequality, including inequality across race, ethnicity, and gender. With that in mind, this section of the issue brief describes the aid flowing from Congress to small businesses during the coronavirus recession, and potential design and implementation challenges.

The small business provisions of the CARES Act

The central provision for small businesses in Congress’ coronavirus rescue bill is a $349 billion loan program administered by the Small Business Administration.42 The program’s loans are underwritten by participating banks and other lenders at a below-market interest rate of 1 percent. This funding will allow businesses with fewer than 500 employees to borrow up to two and a half months of average monthly payroll expenses, with a cap of $10 million.43

Funding can be used for payroll, mortgage interest, rent, or utilities. If the employer keeps workers on payroll or rehires them by June 30, 2020, then loans are forgiven,44 hence the program being known as the Paycheck Protection Program. If employees are partially rehired, forgiveness is prorated; if they’re not rehired by the end of June, then the funding must be paid back, with interest, within 2 years. According to a provision in the SBA’s guidance, which was not included in the CARES Act statute, only 25 percent of any loan forgiveness can be for nonpayroll expenses.

Regardless of whether loans are forgiven, the SBA guarantees full repayment of loan amounts to participating lenders, meaning that financial institutions accept no credit risk in these transactions. Loans are disbursed on a first-come, first-served basis, with those who reach their lender earliest having an advantage in securing financing through the Paycheck Protection Program.

Challenges for equitable implementation of these provisions

The size and the timing of the small business-focused rescue funds are the first challenges. The current size of the aid allocated by Congress will be a major, perhaps insurmountable, impediment to a healthy small business recovery. The Small Business Administration notes that approximately 30 million small businesses exist in the United States.45 These firms accounted for 62 percent of new private-sector job growth from 2005 to the onset of the coronavirus recession.46

Given the number of small businesses in the country and the magnitude of the economic shutdown, $349 billion won’t be enough to prevent a sectorwide derailment of small firms. To put this funding in context, small business payroll and related compensation expenses totaled around $288 billion a month, using the most recent available data from 2016—meaning the Paycheck Protection Program could support all eligible firms’ payroll and compensation for just less than a month and a half.47

Even worse, this estimate excludes other small business costs (mortgage, rent, supplies) and assumes the full $349 billion is available to lend. Though some program details are still unclear, it appears that the fees allocated to financial institutions for processing loan applications also will be paid by the Small Business Administration out of the $349 billion appropriation amount. Lender enticement is structured such that the SBA guarantees repayment of the loans to banks and credit unions while also providing fee income structured as a percentage based on the loan amount offered (ranging from 5 percent on small loans to 1 percent on the largest loans).

Further, lending institutions are compensated by collecting the 1 percent interest rate charged on the 2-year loan, though they are prohibited from collecting fees from participating small businesses. All told, lenders will likely receive between $5 billion and $20 billion in up-front fee compensation for participating in the program.48 In total, the $349 billion appropriation, less lender fees, will not be enough to prevent the failure of many small businesses.

What’s worse, though lenders are compensated at a higher percentage rate for originating loans with lower principal balances, the high transaction cost of loan origination—and rush to grab funding before it runs out—may skew lending even further away from the smallest of businesses. Simply put, it’s easier to originate one $10 million loan than 50 $200,000 loans.

Then, there’s the timing challenge. First, the money will probably not come soon enough, given the scope and length of small business shutdowns. Major cities and states began mandatory lockdowns weeks ago.49 Without revenue, small businesses cannot operate for long absent relief. One study found that half of all small businesses have only enough cash on hand to survive for 27 days.50 Restaurants and bars are particularly vulnerable, as the average small business in the service industry has only enough to survive 19 days without income.51

While applications began on April 3, and news outlets reported that banks were evaluating borrowers, the roll-out has not been smooth. One news report issued on the day of the program’s launch says it all: “Massive Small Business Rescue Gets Off to Stormy Start.”52 Social media is filled with posts of small business borrowers and lenders alike desperate for program rules. One survey found that less than half of small businesses obtained funds from a bank in the past 5 years, meaning lending relationships either don’t exist or may be outdated.53 As of Monday, April 13, the SBA reported that more than 880,000 applications for assistance have been approved, totaling more than $217 billion.54 While those early numbers demonstrate tremendous interest and enrollment in the program, it’s likely that the chaos of that early program implementation will leave many businesses behind.

Second, many small businesses have very little revenue to supplement the SBA funding. It’s impossible for most small businesses to operate at anything beyond minimal capacity during this pandemic. This is especially true for small businesses in the service sector that require face-to-face customer contact. One survey, released on the same day as the application period began for the Paycheck Protection Program, said that one-fourth of small businesses have already closed, and another 40 percent reported that they would have to close at least temporarily in the next two weeks.55

Anecdotal stories paint a very stark picture. Sales have plummeted by 80 percent at one California company that prints cards for commercial businesses.56 One restaurant in Washington, D.C. reported that even with a takeout business open, sales have dropped by 80 percent.57 Nail and hair salons, gyms, movie theaters, clothing boutiques, and many other services businesses across the country have completely shuttered.

Third, small businesses probably won’t be able to rehire employees by the end of June 2020, as required under the Paycheck Protection Program in order for loans to be forgiven. The U.S. economy has undergone an abrupt and severe shock, which means it is unrealistic to expect small businesses to ramp-up employment by June 30. Beyond the economic challenges involved in rehiring employees, there’s the question of whether the public health emergency will be over in two months. The mayor of Washington, D.C. last week suggested that the city may not reach the peak infection rate until late June or early July.58 Social distancing measures may remain in place for months to come.

Fourth, funding constraints are made more pressing by the Small Business Administration’s definition of an eligible small business. While small firms owned by large companies are generally excluded from benefitting from the Paycheck Protection Program, certain exceptions exist, most notably in the hotel and food service businesses. The result is that fast-food chains such as Burger King, Whataburger, and Arby’s could benefit from this funding over “mom-and-pop” restaurants, even though these chains have deep-pocketed and highly creditworthy private equity owners.59

Policymakers should be concerned about extending a too-small amount of help to firms that have little chance of rehiring employees by the deadline. With limited ability to repay even a modest loan, additional debt could trap businesses without offering them a pathway out of the recession. The home mortgage foreclosure crisis of a decade ago provides an important warning on this point: About 1 in 3 borrowers who received a government loan modification ended up redefaulting. Households stretched themselves to keep paying mortgages they ultimately couldn’t afford, because the government rescue program was insufficient.60

Policymakers should not make the same mistake again and encourage small businesses to “throw good money after bad.” Aid must be drastically scaled up, and perhaps paired with efforts to reduce or eliminate outgoing funds from small businesses, through measures such as halting debt collections or imposing moratoria on legal actions related to rent or mortgage payments. All told, we must provide assistance that is robust and lasting, and help small businesses get through the length of the pandemic.

Administrative concerns over small business lines of funding in the CARES Act

The Small Business Administration is already facing administrative challenges in deploying this rescue aid. The $349 billion appropriated in the CARES Act amounts to many multiples of what the relatively small government agency is accustomed to processing in a given year. It approved 58,000 applications through its flagship program last year.61 Yet on the second day of the Paycheck Protection Program, the SBA was so swarmed with activity that its website crashed.62 One participating lender received 212,000 applications for loans in just more than a day of the program being operational.63

Implementation programs appear to be effecting small and community lenders particularly hard.64 This will have knock-on effects for which small businesses receive funds. One Federal Deposit Insurance Corporation study found that community banks were four times more likely to operate offices in rural counties.65 (See Figure 3.)

Figure 3

While the simple four-page application form makes it more likely that the rescue money won’t get trapped in bureaucratic processes,66 lenders are still reporting inconsistencies in the documentation required by the SBA. The agency will need to ramp-up operational capacity to prevent fraud and serve the needs of small businesses and participating lenders in the weeks ahead.

Racial, ethnic, and gender equity implications of the Paycheck Protection Program

Demand for small business loans will probably far outpace supply. Given that fact, alongside structural problems in small business lending, credit discrimination within the Paycheck Protection Program is a real concern. Absent data collection that allows for visibility into discriminatory trends and strong enforcement of fair credit laws by the U.S. Department of Justice, new small business programs may well entrench old patterns of bias. Lending institutions have wide latitude to pick and choose between loan applications, as eligible borrowers compete for a small pot of funding. This is likely to exacerbate existing biases favoring white-owned firms over minority-owned firms, as lenders exert power when credit demand outpaces limited supply.

One threshold problem is a lack of small business lending data, disaggregated by protected characteristics—information that is collected related to mortgage lending which has formed the basis of decades of policy research and fair lending enforcement. The Consumer Financial Protection Bureau was mandated to collect such data pursuant to the Wall Street Reform and Consumer Protection Act of 2010.67 But the new agency never completed the mandate. Recently, the Consumer Financial Protection Bureau settled a lawsuit with fair-lending advocates that required them to complete the rule.68 But amid the coronavirus pandemic, the agency has halted progress on the rule’s implementation.69

Finally, one troubling feature of the Small Business Administration’s guidance as it relates to the Paycheck Protection Program is the absence of a restatement of the protections afforded under fair lending law. This absence is conspicuous given that the guidance does restate law as it relates to nondiscrimination for religious institutions.70

Furthermore, policymakers must be aware of how administrative choices designed to expedite the deployment of funding may have knock-on distributional consequences for minority-owned small businesses. Some lenders participating in the program, for example, are favoring small business clients who already have relationships with the bank, either through official policy or in practice, as evidenced in recent news reports.71 Guidelines released by the Treasury Department encourage lenders to do so, since in these instances, these small businesses could be considered already “vetted” for the purposes of anti-money-laundering and related rules.72 While this will deliver aid modestly faster, it will also reinforce existing disparities in access to credit between white-owned firms and entrepreneurs who are people of color.

What’s more, because funding under the Paycheck Protection Program is provided on a first-come, first-served basis, firms with access to resources such as attorneys or financial managers may benefit from first-mover advantages. Technical assistance is probably needed. Press accounts suggest a frenzied roll-out of the program, with borrowers forced to navigate systems that are not yet fully established.73 Additionally, some banks are directing customers to online-only application systems.74 This could have distributional impacts on small businesses that do not have broadband access or web-savvy literacy in navigating online application forms.

The limitations on those small firms eligible for small business funding also will have distributional consequences, including by race and ethnicity. Implementing guidance from the Small Business Administration bars the agency from receiving a loan from any business whose owner (defined as 20 percent or more as an equity holder) is “incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years.”75 This prohibition goes beyond existing SBA regulations on criminal prohibitions, which only prohibit business owners currently incarcerated, on probation or parole, or currently indicted for a felony or crime of moral turpitude.76

Given that 100 million Americans have some sort of arrest or conviction record, this prohibition will lock out a wide range of borrowers from accessing small business funding.77 And because our criminal justice system has structural racism embedded in every step of the process, this limitation will disproportionately lock out entrepreneurs of color.78 It should be dropped entirely—at a minimum for the duration of the coronavirus recession, but optimally permanently.

Finally, the Small Business Administration in the past has also faced challenges in reaching business owners whose primary language was not English. An SBA Inspector General report found that during Hurricane Maria in September 2017—a Category 5 storm that swept through the U.S. territories of Puerto Rico and the Virgin Islands—the agency did not have sufficient Spanish language assistance.79 Again, policymakers need to increase resources for small businesses whose owners’ primary language is not English and conduct oversight regarding access for these populations. Without such efforts, the Paycheck Protection Program will reinforce racial and ethnic disparities as the nation recovers from the coronavirus recession.

Help for large businesses in the CARES act

In contrast to the numerous hurdles facing small businesses seeking access to funding through the Paycheck Protection Program, large businesses can and are receiving financial support via a variety of avenues through the Federal Reserve and the U.S. Treasury Department. Some of this funding is via the CARES Act and some via existing or new lending facilities set up by the Fed. By and large, these funds are being deployed relatively quickly and at a greater scale. This section of the issue brief breaks out those funding channels to demonstrate the economic inequality baked into the U.S. financial system and the CARES Act.

The Federal Reserve’s response to the coronavirus recession for big businesses

Earlier in March and without requiring prior authorization from Congress, the Federal Reserve unveiled financing programs pursuant to the authority provided by Section 13(3) of the Federal Reserve Act, colloquially known as “13(3).” These recent programs today are bolder and broader than anything previously undertaken by the Fed, but the model for the interventions was developed during the 2008 financial crisis.

Under these recent 13(3) programs, the Fed is buying bonds and extending loans to investment-grade companies—large firms such as McDonald’s Corp., Exxon Mobil Corp., and The Walt Disney Co., all of which are seen as the lowest-risk corporate investments.80 The Fed’s efforts also include support for financial instruments such as Exchange Traded Funds and Money Market Mutual Funds, comprised of those large companies’ debts.81 Another program, called the Term Asset-Backed Securities Loan Facility, was set up to purchase the safest consumer and student debt and existing SBA loans (those made prior to the Paycheck Protection Program in 2020), and was later expanded to cover commercial mortgage-backed securities and collateralized loan obligations.82

All told, the Fed’s market interventions for larger and more creditworthy firms exceed those for small business by many multiples.83 Both as a result of the Fed’s market stabilization measures, as well as large companies’ size and less risky profiles, most investment-grade companies have been able to secure funding in the private market, raising record amounts of capital in recent weeks to bolster their finances and reassure investors.84 Again, this is stark when contrasted with small businesses, which, in nearly half of cases, have no relationship with a lender at all.85

The CARES Act’s provisions for big businesses

Beyond these Fed interventions, Congress authorized $454 billion in the CARES Act to capitalize a fund run by the Treasury Department, jointly with the Fed, and directed toward large businesses.86 This pool of funding will serve as a down-payment for investments, again made pursuant to the Fed’s 13(3) authority. The taxpayer-provided backstop is needed for these facilities, as historically Fed implementation of 13(3) requirements prevents the central bank from making riskier investments absent further support from Congress.87 By providing first-loss protection that stands ahead of the Fed, this pool of funding allows for loans, bond purchases, or equity investments that reach further down the “risk curve,” and therefore help larger companies in more perilous conditions.

Federal Reserve Board Chair Jerome Powell has noted that the $454 billion will likely be leveraged 10-to-1, meaning that taxpayers’ down-payment will support $4.5 trillion of investment into the U.S. economy.88 To put that amount in context, the total amount of all bank commercial and industrial loans outstanding in 2019 totaled $2.35 trillion.89 And all new nonfinancial corporate debt issued in the same year was $1.41 trillion.90 None of this support will be forgiven by the federal government, as is the case with the small business rescue funds, but it is important to note that the scale of relief afforded to large businesses is many multiples the size of the Paycheck Protection Program for small businesses. Generally speaking, aid to large businesses has some modest restrictions on dividend payments, stock buybacks, and executive compensation. But the program includes no requirement that they rehire any employees at all, compared to small businesses which must bring back their workforces by June 30, 2020.

The Fed in mid-April announced the creation of several programs backstopped by CARES Act funds, including programs for mid-sized businesses called the Main Street Lending Program.91 But its target is relatively large firms—those with up to 10,000 employees or $2.5 billion in revenue with a minimum loan size of $1 million. These programs will reach middle-market companies with riskier profiles than the investment-grade companies initially helped by the Fed. This quick roll-out of rescue funds to a broad range of larger businesses contrasts poorly with the slower roll-out and more troubled small business program, underscoring how the Fed and other policymakers have fewer “off-the-shelf” rescue options available for smaller firms.

Conclusion and policy recommendations

The CARES Act offers crucial assistance to small businesses at an unprecedented scale and on an unprecedented timeline. But the economic pain caused by the coronavirus recession will undoubtably overtake even these relatively bold policy efforts. U.S. policymakers in Congress and the Trump administration must address the concerns outlined in this brief or run the risk of worsening economic inequality, further limiting economic mobility for individuals and firms alike, and widening the racial, ethnic, and gender wealth gap across the United States.

To summarize the recommendations in this issue brief, policymakers must further help small businesses by:

  • Drastically increasing the size of financial assistance and speeding its deployment, especially as each day of mandatory public health lockdown increases the likelihood of small business failure
  • Easing hurdles to access by pushing out or eliminating entirely the June 30, 2020 rehiring deadline by which loans can convert to grants, as well as loosening limitations on use of funds
  • Leveling the playing field by ensuring equal access for both small lenders and small businesses owned by people of color and women, perhaps including a specific set-aside for the smallest of small businesses in any subsequent round of funding
  • Complementing direct aid to small businesses with a moratorium on legal actions related to late payments, such as bills owed to debt collectors, lenders and landlords
  • Taking aggressive steps to reduce the likelihood of unlawful discrimination by collecting better lending data
  • Affirming a commitment to fair lending through both Small Business Administration outreach and Department of Justice enforcement

Some of these steps could be taken now by the Small Business Administration in concert with the Treasury Department to improve the shape of the distribution and oversight of existing Paycheck Protection Program funding. And program changes are all the more urgent as time passes. President Donald Trump says his administration may seek additional funding for small businesses in future legislation, which means there is an opportunity to establish more policy changes in the next round of funding.92

Beyond strengthening the Paycheck Protection Program, policymakers should think about other ways to deploy funding to small businesses quickly and efficiently over the long term. The 2008 financial crisis and the decade since was a lost opportunity to develop fairer, more transparent, and more equitable ways to deploy emergency funds to real people and small businesses. In the case of 2008, our policy infrastructure failed to help borrowers save their homes but was very efficient at rescuing large banks.

Taking that lesson to heart, policymakers might consider enabling the federal government to partner with automated paycheck systems such as those run by Automatic Data Processing, Inc. and Paychex Inc. to use existing pipelines to release money faster to small businesses, many of which already use one of these services to handle their payrolls. Even still, these new partnerships will take time and may come too late for many small businesses.

To that end, we must think about long-term reforms both as this crisis unfolds and as we prepare for the next recession. Mehrsa Baradaran, a law professor at University of California, Irvine School of Law and a Washington Center for Equitable Growth board member, years ago proposed establishing a system whereby all Americans are afforded the opportunity to open bank accounts through the U.S. postal system.93 Such a system run by the U.S. Postal Service could also include small businesses, thereby expediting the deployment of funds and reducing the costs of financial intermediation in a crisis.

In 2018, law professors Morgan Ricks at Vanderbilt University School of Law, John Crawford at U.C. Hastings College of Law, and Lev Menand at Columbia Law School proposed a similar idea but centered in the Federal Reserve. They proposed to allow all U.S. individuals and businesses to open an account at the Fed—a benefit currently afforded only to banks.94 Again, such a system in the future could allow for the quick deployment of funds during times of emergency.

And then, there’s the proposal from Saule Omarova and Robert Hockett, both of Cornell University School of Law. In 2018, they proposed establishing a permanent National Investment Authority, similar to the Reconstruction Finance Corporation employed during the Great Depression.95 This proposed agency would have a democratically accountable governance structure and would be responsible for efficiently and transparently administering bailout funds and mobilizing production in the national interest during national crises.96 Such a system could prove useful in the future, particularly as the threat of climate change bears down on communities and financial markets around the world.

Entrepreneurship and business formation are important to the U.S. economy and offer individuals and families a pathway to accumulate wealth—to draw down upon to pay for higher education, buy a house, or pass on to the next generation. If policymakers’ responses to the coronavirus recession reinforces, rather than mitigates, the trend toward the increasing concentration among large firms and declining small business dynamism, then our country will emerge more fragile, more concentrated, and less equitable than it was before.

—Amanda Fischer is the policy director at the Washington Center for Equitable Growth.

The three ways fiscal policy can be used to fight COVID-19 and the coronavirus recession

Posted on by Maria Monroe

Late in March, before the U.S. Congress passed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act and President Donald Trump signed it into law, economists Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley invited me to kick off an online convening of more than 100 economists and experts to discuss the coronavirus pandemic and the coronavirus recession that was already underway, and how to use fiscal policy to address these twin crises here and around the world. The questions I raised and the points I made remain germane as the CARES Act begins, slowly, to deliver economic relief to workers and businesses, stimulus to the economy, and support for the U.S. healthcare sector. I’ve also since written on this topic.

Here are my thoughts on how to use fiscal policy to address the pandemic.

The first task, above all others, is to slow the spread of COVID-19, the disease spread by the new coronavirus. In the short run, fiscal policy can only play a limited role, as the binding constraints are mostly on the technological side. The challenge is to give the right incentives to firms, as well as funding for federal agencies, to produce tests, explore drugs, and develop vaccines. All this spending is essential, existential, and expensive, but still small in macroeconomic and budgetary terms—less than 1 percent of Gross Domestic Product.

The second task is disaster relief—aiding the people and businesses affected by the economic shutdown. The economic losses are tremendous. A large proportion of households had no cash reserves even before this disaster. Already more than 16 million new unemployment claims have been filed, and many millions more Americans are out of work. On the business side, many small and medium-size enterprises, whose value represents 45 percent of American business, don’t have enough cash to survive more than a few months without assistance. The challenge here is to achieve the best trade-off between speed and targeting.

The CARES Act provides individuals with a combination of increased unemployment benefits for those out of work and cash payments to all Americans up to an income cap. For businesses, the U.S. government is providing funds for banks to make loans. So far, the programs have revealed how difficult all these tasks are. The loan program so far has been administratively and financially inadequate to the task. The crisis has also exposed the administrative weaknesses of the Unemployment Insurance system in many states. To increase the probability that those who need the funds get them, the overall legislative package, which also includes aid for state and local governments and for public health efforts, has erred on the generous side, reaching about 10 percent of GDP. It will be important to adjust and target it better over time.

The third task is support of aggregate demand. In a normal recession, support of aggregate demand would be the priority for fiscal policy. But this is not a normal recession. In the short run, so long as confinement and lockdown constraints are on, potential output will remain much lower. The decrease in potential output under full lockdown and closing of nonessential businesses probably ranges between 25 percent and 40 percent. As long as lockdown is in effect, demand must also be permitted to decline by around that amount. Sustaining demand above output—say, through tax cuts for firms or households—may lead to rationing and inflation rather than an increase in activity.

This concern about supply constraints may not be a major issue, as much of the spending being supported would likely go toward items such as making mortgage payments and buying food. And even if there is some rationing and some inflation, the distribution effects—namely, that poorer households have enough to eat—are such that the outcome is still desirable. Nevertheless, while potential output remains much lower, boosting aggregate demand beyond what is needed for disaster relief is probably unwise.

If and when the COVID-19 infection rate is under control, and restrictions are relaxed, and we have been able to avoid widespread bankruptcies, potential output is likely to return close to its old level. Will there be a need to boost aggregate demand then to help the economy recover more quickly? On the one hand, there will be pent-up demand from consumers who were prevented from buying cars and other durables during the lockdown. On the other hand, the rate at which restrictions are removed, and likely concerns about the possible reimposition of restrictions if the infection rate rises again, will likely lead to precautionary saving by consumers and low investment by firms. Government should be ready to act but not commit yet to a specific level of fiscal expansion before we see which way demand goes.

Developed economies such as the United States should not worry about the increase in debt resulting from these measures. Suppose that the combination of increased budget deficits and decreased output leads to an increase in debt-to-GDP ratio of 30 percent. Should this lead policymakers to limit expenditures now by providing more loans rather than grants, or by some other means? Short of a defeat in the fight against the coronavirus, debt will remain sustainable. And if we lose that battle, debt sustainability will be the least of our problems. Advanced-country governments should not hesitate to run deficits if, given constraints on monetary policy, deficits are required to maintain output at potential. And those constraints on monetary policy, due to very low interest rates, are likely to continue. Indeed, rates are likely to be even lower in the future than they were expected to be before the COVID-19 crisis.

To sum up, we need to do whatever it takes, spend whatever we need to spend, to combat this disease and support the individuals and businesses deeply affected by the needed economic shutdown. Increased hunger and greatly increased bankruptcies are not acceptable outcomes. And we need to be ready and committed to spend more if demand does not pick up and understand that the American economy can well withstand any resulting increase in debt.

—Olivier Jean Blanchard is a Senior Fellow at the Peterson Institute for International Economics and was the chief economist at the International Monetary Fund, from September 2008 to October 2015.

Brad DeLong: Worthy reads on equitable growth, April 5–11, 2020

Posted on by Ed Paisley

Worthy reads from Equitable Growth:

  1. Equitable Growth’s Heather Boushey considers the larger challenges of economic recovery from the coronavirus recession that we will soon confront in “Beware of Austerity Demands Once the Immediate Crisis Passes,” in which she writes: The need for substantially increased public spending and investment will not diminish once the public-health crisis fades. What will diminish is the broad political consensus that made possible the recently approved $2.2 trillion burst of federal spending to support families and businesses during this economic shutdown. Indeed, if recent history tells us anything, that consensus will fall apart once the immediate health crisis dissipates and people can gradually return to work. That will be another dangerous moment for the country … The risk of doing too little to support families and businesses will still far outweigh the risk of doing too much. We will need to continue to pump money into the economy if we are going to avoid a coronavirus recession that makes the Great Recession of 2007–2009 a fond memory. Families will continue to need support, as businesses struggle to ramp their operations back up … There was a need for substantially greater public spending before any of us ever heard of the coronavirus: to address pervasive economic inequality, to invest in human, physical, and intellectual capital. That need will be even greater in the virus’s wake. But deficit hawks—particularly the über alles crowd, who believe that budget deficits are acceptable only when caused by tax cuts—will be out in force, demanding austerity. We got a taste of what’s to come when some members of Congress objected to the $600 weekly increase in unemployment-insurance checks contained in the Coronavirus Aid, Relief, and Economic Security Act, because some low-income workers might receive a little bit more now than they do when they’re working. Politicians who fretted about short-term work disincentives in a week when more than 3 million people had just been laid off are not going to give a damn about workers a few months from now.”
  2. As incomes fall in savings rates rise in response to expectations that commodities not available now will be available in the near future, extremely delicate macroeconomic management is needed to keep the circular flow of economic activity and income going. The cleanest way would be a universal basic income funded partially by a recapture tax hike plus extremely generous zero interest rate loans to businesses. But we are not going to do the cleanest way, are we? Christina Patterson lays out a path that our current configuration of political power has a chance of adopting, although not a large chance of adopting. Read her “The most exposed workers in the coronavirus recession are also key consumers: Making sure they get help is key to fighting the recession,” in which she writes: “Policymakers should be especially focused on targeting policy responses toward those who lost their labor income if they want to limit the severity of the coronavirus recession … Weekly unemployment benefits and the extension of benefits to part-time and contract workers will help … Moreover, hundreds of billions of dollars targeted for firms that maintain their employee payrolls close to where they stood as of February 2020 could help firms stave off that initial wave of layoffs or encourage them to bring back employees who were either let go or furloughed. There already are reports, however, of Unemployment Insurance systems in the 50 states, the District of Columbia, and U.S. territories being overloaded by recently laid-off workers seeking unemployment benefits. And the financial assistance to firms to keep workers employed is suffering through bottlenecks at their banks and the U.S. Small Business Administration. In order for the smoothing effects of unemployment benefits on workers’ marginal propensities to consume to be successful, we need workers to be able to access those benefits quickly and sustainably now and as the extent of the coronavirus recession becomes more clear.”
  3. It’s not one-stop shopping for information, but it’s as close as you are going to get. Go to Equitable Growth’s “Policy Resources for the Coronavirus Recession” page. Here’s the opening text to a wide variety of content: “’The coronavirus is first and foremost a public health crisis. In order to address the health crisis, policymakers have insisted for the well-being of us all that people stay home and shutter businesses, inducing an economic downturn. It has also put the people who can least afford it on the front lines of this crisis: low-wage and hourly workers, families, and small and medium-sized businesses. Historically high economic inequality, which, when combined with a porous social safety net, makes the United States particularly vulnerable to economic shocks. This economic fragility is a direct result of prioritizing markets over people for the last 50 years. Though a dire problem in boom times, high economic inequality is particularly stark in a downturn because it exacerbates the severity of recessions and amplifies the impact on the people and communities who can least afford it. At the same time, because many low-wage and hourly workers are women and people of color, the coronavirus recession will only serve to exacerbate existing economic and racial inequalities if we do not take appropriate action. A growing body of research provides a framework for how the federal government can make choices that fully supports people and families and ensure that we address the health crisis and move swiftly into economic recovery, rather than falling into a deep recession. To effectively respond to the coronavirus recession and build a more resilient economy for the future, we must level the playing field between the rich and the rest of us and implement policy solutions that will protect U.S. families now and in the future. That includes prioritizing the small and medium-sized businesses who need support now while the economy is on ice, rather than shareholders. The Washington Center for Equitable Growth is producing resources to connect existing evidence-backed research with the policymaking community to ensure the best available ideas inform a broad, deep, and long-term response to this growing crisis.”

 

Worthy reads not from Equitable Growth:

 

  1. When economists write the history of the coronavirus depression and when historians of medicine write the history of the coronavirus plague, everyone involved in the Trump administration, especially its economic policy and epidemiological staff, will be judged extremely harshly for failing to understand how important it was to ramp up testing, failing to take steps to ramp up testing, and failing to properly use the testing resources available. This may be the greatest single policy and governance mistake the United States has made in half a century. Read James Stock, “Data Needs for Shutdown Policy”, in which he writes: “If the virus is still not widespread, then … there is still time to implement measures—more severe than those currently in place in the US—to suppress it until a vaccine or treatment becomes available. If the virus is widespread, then the true death rate is low and cautiously opening up the economy becomes an option. Data from random testing of the population, which are still unavailable, are critical to informing this choice … All available options are bad, but some are worse than others. The problem is, we don’t know which options are the least bad because we don’t know the true mortality rate or how prevalent the virus is in the population … The positive testing rates to date cannot be readily generalized. At the same time, there are some individuals, possibly many, who have or have had the virus but did not meet stringent guidelines for getting tested. Sometimes this is called the asymptomatic rate, although more precisely it is the fraction of infected who do not meet testing guidelines … The asymptomatic rate is critical for projecting the epidemic dynamics and the policy response … If the [fraction of those infected and developing immunity who are not tested or whose test is not positive] rate is low … this ‘protracted status quo’ policy will lead to very many deaths, perhaps in the millions, and it could be preferable to take very strong action now to stamp out the virus, avoid those deaths, and wait until a vaccine is available. In the jargon of the model, doing so requires bringing … [the] rate of new infections … [close] to zero … restrictions … more stringent than currently in place in Italy.”
  2. Superbly written and analyzed by Adam Tooze. Read his “Shockwave: The World Goes Bust,” in which he writes: “’By this time last year, a miasma of uncertainty was clouding global markets. Investment was retreating … True conservatives, as distinct from those merely wedded to the religion of the stock market, welcomed the prospect of a shakeout. It was time for a purge, time to slim down the businesses that had gorged on too much cheap funding, time for a return to discipline. This, they believed, was the way out of the weird alternate reality created by monetary stimulus since 2008. Instead, in the summer of 2019 the central banks once again stepped into the ring … As 2020 began, the self-confidence of the technocrats remained intact. The chief preoccupation in Europe wasn’t the immediate economic situation, but the possibility of striking a new Green Deal … Then news of a new threat began to trickle out. On 31 December 2019 China informed the World Health Organization of a novel virus. Its lethality, and the fact that it could be passed from human to human, were quickly confirmed. But Trump and his adherents had no more time for the ‘Wuhan virus’ than they did for climate change. On the stump at Davos on 22 January he scornfully waved away questions about it … On 23 January the Chinese leadership began an unprecedented lockdown: a cordon sanitaire was thrown around Wuhan, a city of 11 million people in Hubei province … How to gauge the threat? The obvious model was SARS in 2003, and it was a reassuring one: China may have botched the first steps of its response to Covid-19, but it had experience with these things and would soon regain its grip … In the course of February, economic forecasters began adjusting their predictions downwards by 0.1 or 0.2 per cent … The weekend of 22 and 23 February… Beijing might be winning its war against Covid-19, but in Italy the containment strategy had failed. As the quarantined area stretched to include Milan, the weakest link in the Eurozone was about to lose half of its national output. Given the impasse over banking risks and a common fiscal policy, how would Europe rise to this public health challenge? … Hard on the heels of the Italian shock came the realization that something was terribly wrong in the United States itself. America has a formidable public health apparatus, and had well-laid plans for dealing with a pandemic. But, as became increasingly clear, the Centers for Disease Control and Prevention and the Food and Drug Administration had disastrously botched the deployment of a test for the virus. Trump remained obstinately unconcerned. As financial markets began to show signs of real nervousness, he advised investors to ‘buy the dip’ and lashed out at China and the Democrats for fearmongering … Meanwhile, people who actually do the sums were arriving at terrifying conclusions … Monday, 8 March it was clear that a massive sell-off was underway. Over the next two weeks markets collapsed. Everything sold. The dollar surged, threatening to crush those who had borrowed dollars. To halt the wave of panic-stricken selling, the Fed has propped up every major domestic credit market … The massive response of the central banks has stopped the panic. But we are only at the start of the shutdown. Every day brings news of corporate downgrades, which will progressively tighten the supply of credit. The recessionary spiral is only just beginning. In the United States the unemployment numbers released on 26 March and 2 April were unlike anything seen before: 3.3 million people registered for benefits in the first week and 6.6 million in the second. Even worse is expected in the days and weeks to come. Forecasting at this point is little more than a guessing game.”
  3. The Obama administration had the chance to profoundly overhaul the White House Office of Information and Regulatory Affairs. It did not. I have never gotten a straight story as to why it did not. Read Todd N. Tucker and Rajesh D. Nayak, “OIRA 2.0: How Regulatory Review Can Help Respond to Existential Threats,” in which they write: “The next administration should overhaul the Office of Information and Regulatory Affairs (OIRA). Changing OIRA’s structure and its regulatory review process are an essential step toward long-term, structural change. Proposed changes include: enhancing the office’s capacity, promoting sustainability in cost-benefit analyses, and building equity and inclusion considerations more firmly into formal review.”

Weekend reading: Helping the hardest-hit during the coronavirus outbreak 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

New research shows that those workers whose earnings are hit hardest during recessions are also those whose consumption is most sensitive to drops in income. When these mostly young and low-income workers are laid off, they drastically cut their consumption and spending, which makes economic recovery harder and slower to achieve. Christina Patterson explains her research about the effects of recessions on workers’ marginal propensities to consume, which looks at how much consumption falls for each unit of lost income. She also shows how certain industries and occupations tend to have higher proportions of workers with high MPCs—and these are exactly the ones that have already been impacted by the coronavirus recession. The struggles these sectors and their workers face can amplify recessions by decreasing overall demand and consumption across the economy. In light of this, Patterson argues that lawmakers should prioritize those workers with high MPCs when distributing stimulus money from the $2.2 trillion coronavirus relief package in the coming weeks and months.

As scientists around the world look for a cure for COVID-19, the disease caused by the new coronavirus, economists and social scientists are also studying the effects of the pandemic. Studies are looking into a range of subjects, from the public health ramifications of COVID-19, to the economic costs of the outbreak and social distancing, to whether quarantines and lockdowns are effective in preventing the spread of the disease. Equitable Growth highlights 10 new workings papers to give an overview of the diverse research being done on this pandemic and where we go from here.

Three important questions regarding U.S. financial stabilization policies must be answered in today’s financial and economic reality, writes J. Nellie Liang of The Brookings Institution, in a summary of her remarks in a video conference on the coronavirus recession organized by Equitable Growth Steering Committee member Emmanuel Saez and Equitable Growth grantee Gabriel Zucman at the University of California, Berkeley. Where do these policies fit into the overall set of policy responses? What has been done so far? And what still needs to be done? Liang answers each of these in turn, showing how financial stabilization policies work with public health responses and fiscal policy to address crises by reducing the cost of borrowing and ensuring the flow of credit to households and businesses. Liang argues that more needs to be done to help small and mid-size businesses stay afloat during the coronavirus recession, to address the consequences when people and businesses will defer their mortgage payments, and to ensure that banks can weather the recession and emerge from it quickly.

Every month, the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. This week, the February 2020 data were released. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Kate Bahn and Carmen Sanchez Cumming put together four graphs using data from the report, which show that prior to the unexpected economic crisis resulting from the coronavirus pandemic, low unemployment and a steady quit rate signaled a strong labor market.

Links from around the web

While many white-collar workers have made the move to telecommuting, many lower-income workers are still leaving the safety of their homes to take public transit, go to work, and provide needed services for the rest of us—and The New York Times has the smartphone data to prove it. Jennifer Valentino-DeVries, Denise Lu, and Gabriel J.X. Dance analyze that data and confirm that while people across income groups are moving around less than they did before, wealthier people are able to do so less often than their worse-off peers. Additionally, they write, “in nearly every state, they began doing so days before the poor, giving them a head start on social distancing as the virus spread.” They found these trends across the nation, including in the 25 largest metropolitan areas.

While the well-off are also more able to order grocery deliveries to avoid physically going to the supermarket, most of the 42 million Americans who are part of the Supplemental Nutrition Assistance Program are unable to use food stamps to order their groceries online. They are being forced to risk their health by going to the store in person to be able to put food on the table for their families, reports Liz Crampton for Politico. Only six states currently allow those in the program to purchase food online, as difficulties can arise with regards to elements such as verification and payment of delivery fees. Considering the almost inevitable jump in applications to join the Supplemental Nutrition Assistance Program in the near future as a result of the coronavirus recession, Crampton writes, lawmakers and activists are rushing to find workarounds. Even so, the situation provides yet another example of how low-income families are at higher risk during the pandemic than their wealthier counterparts.

For those parents who are able to work from home, the separation between work life and family life has been almost entirely eliminated. In the face of this new reality, writes Samantha Schmidt for The Washington Post, fatherhood has become more visible than ever. While fathers now have more involvement in their children’s lives and childrearing more broadly than preceding generations, mothers still take on more home life responsibilities than fathers, even when both parents work full time and even when mothers earn more than fathers. Maybe, posits Schmidt, this pandemic will shed more light on fathers as caregivers and the disparities in couples with regards to caregiving and chores.

The coronavirus outbreak is wreaking havoc on U.S. economic and social life as we know it, but maybe we can turn that into a good thing, opines The New York Times’ Editorial Board. While the pandemic has united us in some ways, it has also exposed the chasms that separate us and the strain that has been placed on our democracy and society over the past half-century due to growing inequality. And though Congress has taken some action to fight the effects of the new coronavirus, there is much more to do—and unfortunately, it is unclear whether there is enough political willpower to do so. Our country has historically emerged from its darkest periods stronger and more unified, the Editorial Board writes, and this crisis can provide an opportunity for us to build a more just, more free, and more resilient United States.

Friday figure

Figure is from Equitable Growth’s “The most exposed workers in the coronavirus recession are also key consumers: Making sure they get help is key to fighting the recession” by Christina Patterson.

Posted in Uncategorized

U.S. economic policy principles for confronting the coronavirus recession

Posted on by Maria Monroe
The coronavirus recession is a looming result of the current pandemic.

This post reflects our organization’s overall guiding policy principles for confronting the coronavirus recession as detailed on March 24. 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.

The United States is facing—or indeed already is in—an economic recession. This is a highly unusual recession in that it’s been induced by a global pandemic which has led policymakers to shut down many parts of the U.S. economy. For the well-being of all of us, people are staying home and shuttering businesses. Public health experts know that to protect everyone in our communities, we must come together by staying apart. Decreasing the transmission of the virus and “flattening the curve” is, at the same time, causing an economic slowdown.

Our nation’s economic policy response to the coronavirus recession must start by acknowledging that the goal is to get as many people as possible to stop engaging in face-to-face contact or travel while doing so in a way that will allow us to swiftly get back on track once we have addressed the ongoing health crisis. If we truly flatten the curve and policymakers effectively respond to the true scale of this crisis, then we can avoid a full-scale coronavirus recession. We can think of this nationwide economic shutdown as “putting the economy on ice,” so that it can be ramped back up after the health crisis is addressed.

Today’s concerns about falling into a deep and protracted coronavirus recession are exacerbated by historically high economic inequality, which, when combined with a porous social safety net, makes the United States particularly vulnerable to economic shocks. This economic fragility is a direct result of prioritizing markets over people for the past 50 years. It is why the United States is one of only three industrialized countries that does not ensure every worker has access to paid time off when they are sick. It is why the United States spends just 0.6 percent of Gross Domestic Product on support exclusively for families and children, the second lowest of all Organisation for Economic Co-operation and Development, or OECD, countries. It is why our countercyclical spending programs are less developed and less able to cushion economic shocks than most of our economic counterparts.

High economic inequality is a problem in boom times, but it is particularly stark in this crisis, as it amplifies the severity of both the pandemic as well as the economic downturn.

How should policymakers respond?

To effectively respond to the coronavirus recession, U.S. policymakers must keep income flowing and pause expenses for individuals and businesses, ensuring they are ready to get back to work once the health crisis passes. But responding to the crisis without also making our economy more resilient against future shocks would be a mistake. That is why we are calling for permanent, inequality-fighting policy changes that improve the country’s safety net and work supports, and that enhance automatic fiscal stabilizers.

Keep income flowing

Here are four key ways to keep income flowing to U.S. workers and their employers so that both can ride out the coronavirus recession and rebound. Specifically:

  • Provide paid leave. It is dangerous, morally wrong, and downright inhumane in the midst of a public health and economic crisis to ask workers to choose between risking their health or risking the livelihood they depend on to support their families. The time is now for a law that ensures every worker has the right to earn paid sick days, medical leave, and caregiving leave, so that we can address the current outbreak and avoid this problem when the next crisis strikes.
  • Boost unemployment insurance. Congress must increase the amount of unemployment insurance benefits and ensure it reaches everyone―the unemployed, those whose hours are cut, and the many gig workers who make our economy run. Each state runs their own Unemployment Insurance program, but due to underfinancing and states making changes to their programs that make it harder to access or become eligible, the systems are not covering enough workers. Prior to this crisis, estimates were that around a third of the unemployed received benefits. In the context of COVID-19, we must ensure that:
    • Unemployed workers are relieved of the need to search for work or report to a new job to receive benefits, both of which can pose a public health risk if the job-seeker has symptoms of COVID-19 or is in a high-risk group.
    • All workers are covered—even the self-employed.
    • States encourage firms to adopt work sharing, a policy that allows employers to reduce hours rather than cutting jobs and is particularly effective when the reduction in demand is temporary.
    • Unemployment benefits make families whole and include covering the costs of maintaining health insurance coverage.
  • Help small businesses pay their bills. The government must support small and medium-sized businesses now so they can quickly reopen their doors once the crisis is over. The government should open lines of credit at its long-term borrowing rate with deferred repayments and give business owners more time to fully repay the loans. This is especially important for businesses with fewer than 500 employees, which account for about 60 percent of U.S. employment and are at greater risk of cash flow problems.
  • Ensure corporate assistance helps workers. Any corporate assistance must ensure that it puts workers first. The only purpose in providing aid to companies is to prop up the economy during the coronavirus recession, so that everyone can get back to work once the health crisis recedes. If the support doesn’t ensure that people remain employed by those companies, then there’s no point in providing assistance. Any corporate bailouts must impose conditions that empower workers through good wages, collective bargaining, and health and retirement security. Taxpayer investments should also promote sound financial management, should be structured as government equity stakes that allow close oversight, should provide for transparency and accountability, and should prevent opportunistic profiteering.

Additional fiscal stimulus

Given the nature of this crisis, effective automatic stabilizers, with effective triggers, are one of our best defenses so that the coronavirus recession does not turn into a full-scale economic depression. While some policymakers may raise the alarm at the cost of doing additional stimulus, now is not the time for them to worry about raising deficits and debt. And though it may be tempting for Congress to let the Federal Reserve step in and save the day, monetary policy alone will not be able to solve this problem. The Federal Reserve is taking drastic measures, but it has limited room to reduce interest rates—its most powerful tool. The need for fiscal relief is paramount. Specifically in the form of:

  • Direct payments: Policymakers need to quickly direct money into the hands of low- and middle-income families who will help jump-start the economy if given more financial support to spend on things such as food and rent.
  • The Supplemental Nutrition Assistance Program: We must inject money into supplemental nutrition assistance to stabilize the economy―for every $1 billion spent on this program during the Great Recession, $1.5 billion in GDP was generated.
  • Medicaid and the Children’s Health Insurance Program: To avoid state budget cuts that inevitably happen during recessions, the federal government needs to increase its support to states and assume more of a share in funding for Medicaid and the Children’s Health Insurance Program as states’ unemployment levels rise.

While there is a long list of other policies to consider—such as putting a hold on home and rental foreclosures and evictions for both families and businesses—these are the ones that can best address the underlying fragilities caused by economic inequality and disparate access to quality jobs. As we confront the coronavirus, we are fast being reminded that people are the foundation of the economy. Without people to work the jobs that keep the economy afloat, gains from economic growth at all levels of the income ladder disappear. We are also reminded of how high economic inequality—and the ensuing inequalities in workplace benefits, incomes, access to healthcare, and other basic services—creates fragilities that are making both the crisis itself and addressing it that much harder.

We are also learning that as our shared response to coronavirus continues to evolve, we need to remember that the economy isn’t something that happens to us—it’s the result of choices that policymakers make. People and communities may have individual agency, but the only entity with the power to mobilize resources and not further exacerbate rising inequality at such a large scale is the government. This coronavirus epidemic illustrates that individual choices are absolutely critical but far from enough. The power of federal, state, and local institutions and the people within them to make far-reaching decisions can alter the trajectory of disasters such as the one facing us now.

The most exposed workers in the coronavirus recession are also key consumers: Making sure they get help is key to fighting the recession

Posted on by Maria Monroe
The coronavirus quarantine has led to many workers being laid off from jobs in numerous industries, food service included.

Overview

The United States is currently facing the fastest economic downturn in its history, which, without strong action, could also become one of the most severe that it has ever seen. In response, U.S. policymakers are currently distributing $2.2 trillion in new stimulus funds, as well as discussing the potential for more spending. The question of how to target that spending is crucial to its effectiveness. My working paper, “The Matching Multiplier and the Amplification of Recessions,” demonstrates that over the past several decades, the workers with labor market earnings that are hardest hit in recessions are precisely those who have the highest marginal propensity to consume—those whose consumption is most sensitive to fluctuations in their income. These findings suggest that those workers with a high marginal propensity to consume should be the key target for stimulus money.

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The most exposed workers in the coronavirus recession are also key consumers: Making sure they get help is key to fighting the recession

In this issue brief, I first present the key findings in my working paper and then apply my framework in a preliminary analysis of the current coronavirus recession. Briefly, my working paper finds that young and low-income workers both have higher marginal propensities to consume and are most exposed to aggregate fluctuations. When recessions hit, firms lay off young and low-income workers first, and this unequal incidence deepens recessions as these workers cut their consumption dramatically, leading to lower demand and more layoffs.

I then provide some additional discussion of this mechanism in the context of the current coronavirus recession. Preliminary evidence suggests that not only are these main overall effects still important today, but also that the occupations and industries that are most exposed to the initial shock of the coronavirus pandemic are the very industries and occupations that are even more likely to have workers with high marginal propensities to consume. This pattern indicates that understanding the incidence of the shock could be unusually important at the current moment.

I close with a look at the policy responses that U.S. policymakers should be focused on, among them making sure stimulus funds get to these workers as swiftly and sustainably as possible over the next days, weeks, and months. In this way, the shock delivered to the U.S. economy by COVID-19, the disease spread by the novel coronavirus, will be less severe and the economic recovery closer at hand.

The unequal exposure of workers to business cycles

At the core of both traditional and modern Keynesian models of the macroeconomy is the potential amplification of initial shocks coming through a powerful consumption multiplier. The consumption multiplier captures a simple and intuitive feedback loop: When there is a shock that decreases aggregate demand in the economy, some of that translates into lower incomes for workers, which leads to depressed demand, which again feeds back into incomes, ad infinitum. Through this feedback mechanism, the initial demand shock is amplified, and the size of each of these feedback loops is determined by the aggregate marginal propensity to consume, or MPC, which measures how much consumption falls for each unit of lost income.

The size of the aggregate marginal propensity to consume is therefore an important object for U.S. policymakers to understand, as it determines the potential strength of this feedback loop. In my working paper, I show that the unequal incidence of business-cycle shocks in the labor market substantially increases the aggregate MPC and thus the strength of this amplification channel. In general, when recessions hit, it is the workers whose spending is most sensitive to their own income, such as people without savings, who are most likely to lose their jobs or otherwise have their earnings cut. Economies where this inequality of response to recessions is stronger are themselves much more affected by initial shocks: The inequality matters not only for the workers who are directly affected, but also for all workers, as the effects ripple through the economy via this consumption multiplier channel.

The correlation between a worker’s marginal propensity to consume and the exposure of that worker’s earnings to recessions is a challenging moment to measure as it requires high-quality data on both consumption and income. I overcome this by proceeding in two steps. First, I measure the MPCs for different demographic groups by looking at how much their consumption falls per dollar lost when they become unemployed. I find that, on average, household consumption drops by 50 cents for every dollar of labor income that is lost when someone in the household becomes unemployed, though there is substantial variation across demographic groups. (See Figure 1.)

Figure 1

In Figure 1, you can see some of the variation across demographic categories (demonstrated by the span of the x-axis). In general, these differences match what we might expect: Groups that are less likely to have a buffer of savings respond much more to losing income. Younger, low-income, and African American workers, for example, respond more than older, higher-income, nonblack workers, who may have had more time to save for rainy days or may have easier access to a loan that can tide them over.

Moreover, it is precisely this overlapping demographic group of younger, low-income workers who also have labor incomes that are very exposed to recessions. In my paper, I show that, historically, this difference is not driven primarily by the industries in which they work, but rather appears to happen within individual firms. In other words, it is not primarily the case that younger, lower-income workers tend to cluster in certain exposed sectors, but rather that when a recession arrives, firms cut hours, wages, and employment of their employees with higher marginal propensities to consume before those with lower MPCs.

This means the lower-income receptionist is laid off before the higher-income scientist. Moreover, it is perhaps the younger receptionist who just started at the firm who is laid off before the more senior receptionist at the firm. This young receptionist may have had less time to build savings, and therefore, when she loses her job, she has to alter her consumption more dramatically to get by.

On the flip side, this measured correlation between marginal propensities to consume and income sensitivity to aggregate economic conditions also implies that the incomes of the high-MPC demographic groups grow more during recoveries. Indeed, in the midst of strong Gross Domestic Product growth through 2019, lower-income workers were finally experiencing strong growth in both wages and employment.

Over the past two decades, the estimated magnitude of this correlation between marginal propensities to consume and income exposure to business cycles is large enough to increase the aggregate response of consumption to income by 30 percent. In my paper, I also show that when looking separately at individual local labor markets, in places where this correlation is stronger—such as places where the earnings of higher-MPC workers are even more responsive to business cycles than the nation as a whole—the response of the local economy is more drastic. This finding provides additional empirical support for the relationship I find overall.

These results mean that U.S. policymakers should be concerned about the unequal incidence of recessions not only out of concerns about equity but also because this “inequality of incidence” affects the economy for all of us. The U.S. labor market is structured such that high-MPC workers are more likely to lose their jobs in recessions, and this makes the entire economy more susceptible to aggregate demand shocks. Policies aimed at equalizing the incidence of the shock will mitigate the amplification that occurs through this channel.

The COVID-19 shock to the U.S. economy

What does this mean for the current shock delivered to U.S. economy by COVID-19? Detailed U.S. labor market data will not be available for some time, but we can look at initial data to understand the degree to which the shock of the coronavirus pandemic has disproportionately hit the labor earnings of workers with higher marginal propensities to consume. Ultimately, as the health shock delivered by COVID-19 becomes an economywide demand shock, it will likely affect all workers. But the initial incidence of the coronavirus recession can affect that process by strengthening or weakening the first round of the Keynesian feedback loop. Preliminary evidence suggests that policymakers should expect this channel to be particularly large.

Even though it is still early to know for sure which workers are most exposed to this COVID-19 shock, we can make an educated guess using some existing data. I classify the exposure of workers based on the combination of their occupation and their industry. Workers in industries that are inherently social will be more likely to have been laid off in response to the public health shock and the stay-at-home orders that followed. I use early data on weekly Unemployment Insurance claims by industry to identify these industries.

Specifically, I calculate the percent increases in initial claims in each industry between the week ending March 14 and the week ending March 21. The data is not yet available for all states, so I focus on data from Michigan, which has provided detailed data, under the assumption that the industrial distribution within Michigan is representative of the nation. The executive order in Michigan closing bars and other public spaces was signed on March 16, and therefore the initial claims from the week of March 16 to March 21 will capture the immediate effects of this on the labor market.

The industries that are initially most exposed to the COVID-19 shock in Michigan are those with the largest increase in Unemployment Insurance claims, such as food services, hotels and accommodations, and general services. Moreover, within industries, workers in occupations that are easy to do from home are less likely to have lost their jobs in the state than those in occupations that are less flexible along this dimension.

The American Community Survey collects information on how individuals get to work, and following other recent work, I measure flexible occupations as those with at least 5 percent of workers working at home from 2010–2019. The flexible occupations by this measure include engineers, artists, and managerial occupations (this yields similar classifications to those described by University of Chicago Booth School of Business professors Jonathan Dingel and Brent Neiman in their paper “How Many Jobs Can Be Done at Home,” who employ an alternate approach using the task content of occupations). Of course, this is an approximation, as companies may have figured out how to make other occupations more flexible in recent weeks, but it proxies for which occupations are more or less likely to be done remotely over the coming months.

Putting it all together, the workers that are most exposed to the COVID-19 shock are probably those who are in inflexible occupations within exposed industries.

Using the methodology in my working paper, I estimate the marginal propensities to consume for the different industry and occupation bins. Specifically, I use data from 1982–2015 from the Panel Study of Income Dynamics to measure the change in consumption per dollar lost when workers lose their jobs. I measure this both on average in the population and for workers in different industry and occupation bins, as described above.

A clear picture emerges from the resulting estimates. Workers who are likely to be the most exposed to the shock—those in inflexible occupations within exposed industries—are precisely those with the highest estimated marginal propensities to consume. Workers in industries exposed most immediately to the COVID-19 shock have slightly higher MPCs than those in less-exposed industries, but workers in inflexible occupations have much higher MPCs than those in flexible occupations.

Moreover, the difference across groups is substantial. Workers in inflexible occupations and in industries that have seen the biggest increases in initial layoffs have marginal propensities to consume that are about double those of workers in flexible occupations within industries that were less directly affected. (See Figure 2.) These results echo findings in several other recent pieces on occupational exposure to the COVID-19 shock, which also find that occupations that are lower-income and require less education are much more exposed.

Figure 2

As a loose point of comparison, I implemented a similar exercise examining what happened during the Great Recession of 2007–2009, defining the initially exposed industries as those with the largest increases in Unemployment Insurance claims from September 2007 and April 2008, a window that should roughly capture the onset of the Great Recession. In that case, the most exposed industry was construction and the least exposed was education.

Given the very different nature of the 2008 shock, there were no obvious dimensions that defined which specific occupations within industries were exposed initially to the twin housing and financial crises. Therefore, I focus only on industry to define which workers were most exposed in 2008. The bottom part of Figure 2 shows the estimated MPCs for each third of that cross-industry distribution: The workers in the more exposed industries had higher MPCs on average, but the differences were much more modest. This suggests the initial shock from COVID-19 is more unequally distributed than the initial shock was in 2008.

It is important to note that the patterns in Figure 2 capture only the initial incidence of the COVID-19 shock. To the extent that this initial public health crisis sparked by the coronavirus pandemic becomes a more traditional aggregate demand shock, the general patterns that I document in my working paper are likely to persist as the consumption multiplier loop begins. As firms are forced to shed workers, they are likely to follow the patterns of past recessions and lay off their receptionists before their scientists.

Conclusion

The estimates above suggest that policymakers should be especially focused on targeting policy responses toward those who lost their labor income if they want to limit the severity of the coronavirus recession. The good news is that there are several tools at their disposal that will achieve this—and, even more encouraging, many of these policies are featured in the $2.2 trillion stimulus bill that Congress passed in late March.

The extra $600 in weekly unemployment benefits and the extension of benefits to part-time and contract workers will help all unemployed workers smooth their consumption, dampening both the level of marginal propensities to consume across the board and the dispersion in MPCs among the unemployed. Moreover, hundreds of billions of dollars targeted for firms that maintain their employee payrolls close to where they stood as of February 2020 could help firms stave off that initial wave of layoffs or encourage them to bring back employees who were either let go or furloughed.

There already are reports, however, of Unemployment Insurance systems in the 50 states, the District of Columbia, and U.S. territories being overloaded by recently laid-off workers seeking unemployment benefits. And the financial assistance to firms to keep workers employed is suffering through bottlenecks at their banks and the U.S. Small Business Administration. In order for the smoothing effects of unemployment benefits on workers’ marginal propensities to consume to be successful, we need workers to be able to access those benefits quickly and sustainably now and as the extent of the coronavirus recession becomes more clear.

Federal and state policymakers should take quick action to ensure these benefits can be rapidly distributed, for example, by following the policy recently recommended by economist Arindrajit Dube at the University of Massachusetts Amherst and Jesse Rothstein at the University of California, Berkeley in their issue brief “Pay now, Verify Later to Loosen the Unemployment Insurance Bottleneck.” Similarly, Congress and the Trump administration need to make sure the funds for businesses to maintain their payrolls are distributed quickly, and as they prepare to draft the next round of stimulus legislation, keep targeting aid toward those who both have lost the most and who are most likely to spend the dollars they receive.

—Christina Patterson is currently a postdoctoral scholar at Northwestern University. She received her Ph.D. in economics from the Massachusetts Institute of Technology in 2019 with a focus in macroeconomics and labor. In July 2020, she will begin as an assistant professor at the University of Chicago’s Booth School of Business.

Three important questions to answer about U.S. financial stabilization policies amid the coronavirus recession

Posted on by Maria Monroe
Financial stabilization policies are critically important amid the coronavirus crisis.

The Federal Reserve Board last month took extraordinary actions to deal with the financial shocks delivered by the coronavirus pandemic. And Fed action, in a number of ways, will determine how well the recently enacted $2.2 trillion Coronavirus Aid, Relief, and Economic Security, or CARES, Act deals with the looming coronavirus recession. Amid all of these fast-moving events, economists Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley invited me to join an online convening of more than 100 other economists and experts to discuss the role of U.S. financial stabilization policies in the current economic and financial situation.

Following is a summary of my comments at the convening on March 24 and a few thoughts following the enactment of the CARES Act.

There are three important questions that need to be answered about U.S. financial stabilization policies in today’s financial and economic situation. Where do financial stabilization policies fit into the overall set of policy responses? What has been done so far? And what more needs to be done? And, to be clear, financial stabilization policies include monetary policy, emergency liquidity policies, and financial stability, or macro-prudential, policies.

On the first question, financial stabilization policies cannot, on their own, solve the current crisis. They stand behind the public health responses, which are paramount. They also stand behind fiscal policies that can offer direct relief to households and businesses harmed by the spread of the coronavirus.

But financial stabilization policies are critically important. They address the economic and financial fallout by reducing the cost of borrowing and ensuring the flow of credit that households and businesses need. While less direct, financial stabilization policies can’t wait until the others are in place. Financial markets won’t wait. For them to function, they need to be able to measure risk and return. But this has been extremely difficult amid the huge range of uncertainty brought on by the spread of the coronavirus, leading to high volatility and market dysfunction. Financial policies can help to stabilize the situation.

Combined, the policies will place some boundaries around the range of uncertainty of how deep the cuts to U.S. economic activity will be. That will provide information about a lower bound for the extent of losses that investors and financial institutions are likely to take. Financial stabilization policies can provide liquidity to prevent unnecessary insolvencies. But a longer-term solution to the economic costs of the coronavirus has to involve fiscal transfers, with a solution for how to share across society the costs of this pandemic.

Turning to the second question about what has been done, monetary policy was the first step taken. The Fed cut interest rates twice, and now rates are at the effective zero lower bound. The Fed still could do more with forward guidance or quantitative easing. But I think the primary issue is not about whether interest rates are low enough to encourage more borrowing. Instead, it’s about ensuring that credit continues to flow to households and businesses. The actions that the Fed has taken so far to increase liquidity have helped on that score. Liquidity, though, is not capital. It’s a bridge to a longer-term solution.

On emergency liquidity provisions, I’ll mention a few things that policymakers have done in broad terms. I could discuss very detailed, acronym-laden programs, but I think it’s probably more useful to think in broader terms.

First, the Fed has quickly purchased a large amount of Treasury and other federal government securities. Many people call these asset purchases quantitative easing, but they actually are intended to address market dysfunction. There were some odd signs in U.S. Treasury securities markets a few weeks ago, likely owing to unwinds of leveraged positions and increasing operational risks with a high volume being transacted away from typical business settings. The Treasury securities market is especially important because Treasury securities are used to price many other assets.

Most of the other facilities opened by the Fed are targeted to getting credit to businesses to keep their cash positions intact, to maintain investments, and to keep employees. For example, there’s a facility to which investment-grade corporations can issue commercial paper, one in which investment-grade corporations can issue medium-term bonds and loans, and one to support issuance of asset-backed securities.

These facilities are funded with capital from the U.S. Treasury Department through the Exchange Stabilization Fund and loans from the Federal Reserve. Capital provided by the Treasury is a critical element. The Federal Reserve can lend only if “secured to its satisfaction.” In the 2008 financial crisis, capital was provided by the Troubled Asset Relief Program to facilities where the Federal Reserve could not otherwise be secured to its satisfaction. Note that with the passage of the CARES Act at the end of March, the U.S. Treasury Department has an additional $454 billion in the Exchange Stabilization Fund, which it can provide as capital for facilities that the Fed can then lend against and provide needed financing to businesses.

Many facilities rolled out by the Fed in March had been used in 2008. In an effort to get them out as quickly as possible, some were released with the exact same terms and adjusted later. But some actions are new, such as facilities for investment-grade corporate bonds. Another new set of actions are macro-prudential policies, most of which were developed after the crisis.

The most visible new macro-prudential policy is to encourage banks to draw down the capital and liquidity buffers that they have built up since the end of the previous crisis. Current capital ratios are much higher than they were going into the past crisis. Capital buffers can be used to absorb losses and support lending. There is an open question, however, about how much capital buffers should be drawn down, given the uncertainty about how deep this recession could be.

Federal banking regulators also recently issued guidance to financial institutions to defer payments on loans to borrowers harmed by the coronavirus. That action will give households and businesses up to six months where they may have to pay only interest and can defer the principal. Debt is not extinguished, but borrowers are given more time to make payments. Subsequent guidance clarified that loan modifications for borrowers harmed by the virus would not automatically result in an immediate capital charge.

In addition, banks voluntarily agreed to suspend share repurchases for at least through the second quarter. That may seem like a small action, but the eight largest banks last year conducted $100 billion in share repurchases. To put that in context, the new pool of capital for business lending provided in the CARES Act is $454 billion.

Turning to my third question: What else needs to be done? I think one of the more important areas is to offer more help to small businesses. There isn’t yet a broad solution for small- and mid-sized businesses that have had to shut down because of the pandemic. THE CARES Act includes a major program with $349 billion in capital for loans to small businesses through a U.S. Small Business Administration framework, with possible loan forgiveness if businesses retain their employees. But the SBA framework is limited and will not reach mid-size businesses.

A facility such as the new Main Street Business lending program in the CARES Act could offer loans to help businesses bridge the immediate reduction in income to an economic recovery down the road. This solution requires a determination of how much of the costs the mid-sized businesses and their lenders will bear themselves, and how much the broad taxpayer base will share through capital provided by the Treasury.

Another area that needs attention is the possible consequences when households and businesses defer their mortgage payments. Residential mortgage modifications caused problems in the 2008 financial crisis because missed payments would mean investors in the mortgage-backed securities into which these individual loans were bundled did not receive their interest. This led to large declines in asset prices and follow-on fire sales. In the current situation, where payment shortfalls are temporary, a liquidity solution for homeowners and mortgage servicers can help to prevent it from becoming a solvency problem.

The last area for financial stabilization that I would like to mention are policies to ensure the largest banks have sufficient capital to weather a severe protracted recession. That will ensure the current recession doesn’t become deeper and longer than it needs to be. Banks have entered this recession with capital and liquidity buffers in place. And they are suspending share repurchases temporarily. But the plunge in activity in the second quarter of 2020 will be much deeper than in any quarter of the Great Recession of 2007–2009, and more actions may be needed. It is critical to a quick and strong recovery that the solvency of financial institutions is not questioned, and they can continue to function as intermediaries. This is a critical issue to get right.

—J. Nellie Liang is an economist and a senior fellow at The Brookings Institution. She previously worked at the Federal Reserve Board as a research economist and was the director of the Division of Financial Stability.

JOLTS Day Graphs: February 2020 Report Edition

Posted on by Carmen Sanchezcumming

Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for February 2020. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.

1.

Two months prior to social distancing measures, the quit rate remained steady at 2.3%, reflecting confidence about the labor market before the unexpected decline in economic activity.

2.

The vacancy yield reflected a tight labor market with more job openings than hires taking place for the month of February.

3.

February was the last month of low unemployment at a rate of 3.5%. Before March’s increase to 4.4%, there was fewer than one unemployed worker per available job opening.

4.

The Beveridge Curve reflected an expansionary labor market before heading into the economic contraction necessary to address the coronavirus public health crisis.

The latest research on the public health and economic costs and benefits of containing the coronavirus pandemic

Posted on by Maria Monroe

Scientists around the world are scrambling to find and test anti-viral drugs and a new vaccine for COVID-19, the disease behind the coronavirus pandemic now sweeping the planet. Economists and other social scientists are equally busy attempting to unravel the economic and social consequences of the new coronavirus pandemic. These scholars are looking at a range of issues. Several examine the public health and economic costs and benefits, and the overall efficacy of social distancing. Others explore the links between the epidemiology of the disease and its economic consequences. And others are looking at U.S. historical lessons about the economic impact of the 1918 “Spanish flu” and the political impact of other recent public health scares.

We’ve selected 10 recently published working papers to highlight. Two of these studies are real-time analyses of social distancing and mobility in Italy and China, respectively, amid the coronavirus pandemic, looking at the public health dynamics in those two countries. Three of the studies step back into U.S. history to offer lessons about the 1918 flu pandemic on subsequent economic growth and about the reaction of voters to Ebola during the 2014 midterm elections. And the other four working papers model the spread of the coronavirus and its social and economic implications.

Let’s preview each of them in turn, grouping them together in rough subject categories.

Estimating the economic effects of social distancing and quarantining

“Does Social Distancing Matter?” by Michael Greenstone, director of the Becker Friedman Institute for Economics at the University of Chicago, and Vishan Nigam, a predoctoral fellow at the Energy Policy Institute at the University of Chicago

Greenstone and Nigam project that three months to four months of “moderate social distancing” in the United States starting in late March 2020 would save 1.7 million lives by October 1. The two economists then employ the U.S. government’s value of a statistical life to project that “the mortality benefits of social distancing are about $8 trillion or $60,000” per U.S. household; about 90 percent of the “monetized benefits are projected to accrue to people age 50 or older.” Their analysis suggests that moderate social distancing over the next seven months would have substantial medium- and long-term economic benefits.

“What Will Be the Economic Impact of COVID-19 in the US? Rough Estimates of Disease Scenarios,” by economist Andrew Atkeson at the University of California, Los Angeles

Atkeson engages in another modeling exercise to estimate the spread of COVID-19 over the next 12 months to 18 months based on those who are susceptible to the disease, actively infected with the disease, or either recovered or dead and so no longer contagious. How an epidemic plays out over time is determined by the transition rates between these three states. The working paper applies this model to estimate whether “the fraction of active infections in the population exceeds 1 percent (at which point the health system is forecast to be severely challenged) and 10 percent (which may result in severe staffing shortages for key financial and economic infrastructure) as well as the cumulative burden of the disease over an 18-month horizon.” They say their model will allow policymakers to make “quantitative statements regarding the tradeoff between the severity and timing of suppression of the disease through social distancing and the progression of the disease in the population.”

“The Macroeconomics of Epidemics,” by economists Martin S. Eichenbaum at Northwestern University, Sergio Rebelo at Northwestern’s Kellogg School of Management, and Mathias Trabant at the School of Business and Economics at Freie Universität Berlin

In this working paper, Eichenbaum, Rebelo, and Trabant examine “the interaction between economic decisions and epidemics.” They model how “people’s decisions to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths.” They then explore how these decisions “exacerbate the size of the recession caused by the epidemic.” They conclude that “in our benchmark model, when vaccines and treatments don’t arrive before the epidemic is over and healthcare capacity is limited, optimal containment policy saves roughly half-a-million lives in the United States.”

“Data Gaps and the Policy Response to the Novel Coronavirus,” by economist James H. Stock at Harvard University

Stock employs another epidemiological model of contagion to provide economists with a “framework for understanding the effects of social distancing and containment policies on the evolution of contagion and interactions with the economy.” Stock explores how different policies that yield the same transmission rate can “have the same health outcomes but can have very different economic costs.” His working paper suggests that “one way to frame the economics of shutdown policy” is to find those policies that “trade off the economic cost against the cost of excess lives lost by overwhelming the healthcare system.”

“An SEIR Infectious Disease Model with Testing and Conditional Quarantine,” by economists David W. Berger at Duke University, Kyle Herkenhoff at the University of Minnesota, and Simon Mongey at the University of Chicago—all of whom are Equitable Growth grantees

These three economists employ another infectious disease epidemiology model to understand how “the role of testing and case-dependent quarantine” can “dampen the economic impact of the coronavirus and reduce peak symptomatic infections,” both of which, they say, “are relevant for [understanding] hospital capacity constraints.” Their model starts at “a baseline quarantine-only policy that replicates the rate at which individuals are entering quarantine in the United States in March 2020,” they explain, then posit that their model can be “used to forecast the effects of public health and economic policies” as the coronavirus continues to spread across the nation.

Real-time research on the coronavirus pandemic in China and Italy

“Human Mobility Restrictions and the Spread of the Novel Coronavirus (2019-nCoV) in China,” by Hanming Fang at the Ronald O. Perelman Center for Political Science and Economics, Long Wang at ShanghaiTech University, and Yang Yang at the CUHK Business School at The Chinese University of Hong Kong

In this working paper, these three scholars “quantify the causal impact of human mobility restrictions, particularly the lockdown of the city of Wuhan on January 23, 2020, on the containment and delay of the spread of [COVID-19].” Their working paper seeks “to disentangle the lockdown effect on human mobility reductions from other confounding effects including panic effect, virus effect, and the Spring Festival effect” in Wuhan (referring to the Chinese New Year dates of January 23, to February 2, 2020), finding that “the lockdown of the city of Wuhan on January 23, 2020 contributed significantly to reducing the total infection cases outside of Wuhan.” They also find that “that there were substantial undocumented infection cases in the early days of the [COVID-19] outbreak in Wuhan and other cities of Hubei province, but over time, the gap between the officially reported cases and our estimated ‘actual’ cases narrows significantly.” In addition, they find “evidence that enhanced social distancing policies in the 63 Chinese cities outside [of] Hubei province are effective in reducing the impact of population inflows from the epicenter cities in Hubei province on the spread of [COVID-19] in the destination cities elsewhere.”

“Compliance with COVID-19 Social-Distancing Measures in Italy: The Role of Expectations and Duration,” by Guglielmo Briscese at University of Chicago, Nicola Lacetera at University of Toronto, Maria Macis at Johns Hopkins University’s Carey School of Business, and Mirco Tonin at Free University of Bozen-Bolzano

These four scholars examine something different than the rapid spread of the coronavirus in Italy, focusing instead on how Italians’ “intentions to comply with the self-isolation restrictions introduced in Italy to mitigate the COVID-19 epidemic respond to the length of their possible extension.” Based on survey results, they find that “respondents who are positively surprised by a given hypothetical extension (the extension is shorter than what they expected) are more willing to increase their self-isolation.” But they also find that “negative surprises (extensions longer than expected) are associated with a lower willingness to comply.” They conclude that their findings “provide insights to public authorities on how to announce lockdown measures and manage people’s expectations.”

Historical lessons from past epidemics

“The Coronavirus and the Great Influenza Pandemic: Lessons from the ‘Spanish Flu’ for the Coronavirus’s Potential Effects on Mortality and Economic Activity,” by economists Robert J. Barro at Harvard University, José F. Ursúa at the fund management firm Dodge & Cox, and Joanna Weng at EverBright, a healthy living online platform focused on Asia

These three economists examine the “mortality and economic contraction during the 1918–1920 Great Influenza Pandemic [to] provide plausible upper bounds for outcomes under …COVID-19.” Extrapolating from data for 43 countries, they estimate “flu-related deaths in 1918–1920 of 39 million, 2 percent of world population.” This indicates that “150 million deaths” are possible worldwide amid the current coronavirus pandemic. They find that “annual information on flu deaths [between] 1918–1920 and war deaths during WWI imply flu-generated economic declines for [Gross Domestic Product] and consumption in the typical country of 6 [percent] and 8 percent, respectively.”

“Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu,” by economists Sergio Correia at the Board of Governors of the Federal Reserve System, Steven Luck at the Federal Reserve Bank of New York, and Emil Verner at the Massachusetts Institute of Technology’s Sloan School of Management

These three economists examine the “geographic variation in mortality during the 1918 Flu Pandemic” in the United States to arrive at the finding that “more exposed areas experience a sharp and persistent decline in economic activity.” They estimate that the 1918 pandemic reduced manufacturing output by 18 percent and was driven by both supply- and demand-side shocks to the U.S. economy. They also examined the economic effects of the pandemic across U.S. cities, finding that “cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over.” They conclude that the “economic costs and benefits of nonpharmaceutical interventions … not only lower mortality; they also mitigate the adverse economic consequences of a pandemic.”

“The Virus of Fear: The Political Impact of Ebola in the U.S.,” by economists Filipe R. Campante at Johns Hopkins University’s School of Advanced International Studies, Emilio Depetris-Chauvin at Pontificia Universidad Católica de Chile, and Ruben Durante at Universitat Pompeu Fabra

This study by three economists and political scientists examines “how fear can affect the behavior of voters and politicians by looking at the Ebola scare that hit the United States a month before the 2014 midterm elections.” They say that by “exploiting the timing and location of the four cases diagnosed in the United States, we show that heightened concern about Ebola, as measured by online activity, led to a lower vote share for the Democrats in congressional and gubernatorial elections, as well as lower turnout, despite no evidence of a general anti-incumbent effect (including on President [Barack] Obama’s approval ratings).” They further note that “politicians responded to the Ebola scare by mentioning the disease in connection with immigration and terrorism in newsletters and campaign ads,” a strategic response that “came only from Republicans, especially those facing competitive races, suggesting a strategic use of the issue in conjunction with topics perceived as favorable to them.” Their conclusion about the effects of the Ebola scare in 2014: “Our findings indicate that emotional reactions associated with fear can have a strong electoral impact, that politicians perceive and act strategically in response to this, and that the process is mediated by issues that can be plausibly associated with the specific fear-triggering factor.”