The direct cost that Covid-19 inflicts on human health is obviously its most important effect on society. But this direct cost can be worsened by flawed economic and policy structures. And the indirect damage the disease causes through economic ripple effects could be large, so policymakers should do everything they can to minimize them.
Past decisions that have weakened our economic policy infrastructure will hamper our response to Covid-19; this is already baked in the cake. But there are some short-run ameliorative actions we take that might help, and, there are long-run policy changes that will aid our response to future epidemics.
In technical economic terms, Covid-19 combines potential supply shocks with sector-specific demand shocks. Basically, supply shocks hamper our ability to produce goods and services, and demand shocks are sharp cutbacks in spending from households, businesses or governments. I provide a list for policy makers of what could/should be considered to deal with some of these below.
The supply shocks come from disrupted global value chains, as, for example, Chinese production of inputs used by U.S. manufacturing and construction firms are not delivered on time because Chinese factories have temporarily closed. In countries where schools are shut down for long periods of time, a shock to labor supply can occur as working parents have to stay home to care for kids.
The potential sector-specific demand shock is to businesses where consumption is largely social—done with other people around. Think bars, restaurants, grocery stores, and malls. As people avoid social contact to minimize disease transmission, this leads to less activity in these sectors.
These effects mean it will be hard indeed for policymakers to spare the economy any pain from this.
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There’s very little that can be done about the supply-side shocks—particularly in the short-run. Demand-side shocks are generally easier to address with policy (in theory—policymakers still often fumble the ball in this regard), but the specific nature of the demand shocks associated with Covid-19 make them slightly harder to address. Simply giving households more money won’t boost consumption much in the sectors likely to be affected—the pullback in consumption is not driven by income constraints, but due to concerns over catching the illness.
This means that while traditional stimulus can be useful in keeping this sector-specific demand shock from spilling over to the economy more widely, it likely will not be able to completely neutralize the effects of this sector-specific shock.
What are the types of things policymakers should be thinking about as they wrestle with the economic effects of Covid-19 and (hopefully) think about the next epidemic? In the long-run, the list is obvious.
- Halt the steady downward trend of non-defense discretionary spending in the federal budget. This portion of the budget funds agencies like the Centers for Disease Control and Prevention (CDC) and the National Institutes of Health (NIH). Higher levels of this spending could also finance greater aid to states, including for public investments like universal high-speed broadband. This would allow many businesses to continue to operate during the next epidemic with many employees working remotely to avoid spreading the illness. Non-defense discretionary spending has been cut to the bone in recent decades, and the result is a less-robust public health infrastructure.
- Make paid sick leave a basic mandated labor standard. Far too many low-wage workers in the United States are compelled to work even when sick because they aren’t paid otherwise. Paid sick leave has been shown to significantly reduce the spread of disease—this is a major benefit.
- Reform the U.S. health system to expand coverage and reduce cost. Epidemics thrive on people reluctant to obtain health care because of its financial burden.
- Reform unemployment insurance (UI). The UI system provides income support to laid-off workers so that temporary spells of joblessness (like those caused by the cutback in social consumption and its spillover benefits) are less damaging. In recent years, state cutbacks to UI generosity and eligibility have greatly weakened the readiness of the UI system for an economic shock. Besides helping individual recipients, by supporting laid-off workers’ incomes and consumption during their period of joblessness, UI keeps this initial shock from snowballing into a wider slowdown.
But all of these options will take a long time to phase in and will likely miss the current Covid-19 epidemic. Is there anything in the short-run we could do to blunt the potential economic pain of Covid-19?
- The federal government could commit to picking up the tab for all Covid-19-related health spending. The South Korean government made this commitment early on in the Covid-19 outbreak. An obscure provision in the law governing Medicare allows governments to expand its coverage to anybody experiencing health costs due to an environmental emergency. Would anybody really complain if this was used to cover all costs from the coronavirus?
- Congress could pass measures to provide short-term cash payments to households. This could plug some (but likely not all) of the demand hole caused by the cutback of social consumption. These payments would yield the highest bang-for-buck if they are targeted at low and moderate-income households. This means by definition that centering income tax cuts as a mechanism for this is the wrong approach.
- Congress could increase funds temporarily for short-time compensation (STC) benefits. STC benefits essentially make up the income difference for workers who have their hours of work reduced. Congress could provide a premium to STC benefits for the duration of the virus. This would encourage sectors exposed to the Covid-19 demand shock—like restaurants—to cut hours across the board rather than lay-off workers. A number of states have decent existing infrastructure to allow this kind of work-sharing.
- Congress could enact temporary payroll tax cuts (both to workers and to employers) and mandate temporary paid sick leave. Payroll tax cuts could provide demand stimulus generally but also give firms affected by the temporary cutback in spending some breathing room to pay bills during the demand slowdown. The employer-side payroll tax cut would help firms finance the week of mandated paid sick leave. As always, any temporary cut to payroll taxes must be accompanied by provisions to hold harmless the trust funds (Social Security and Medicare, most importantly) that these taxes finance.
Perhaps notably absent from this list is anything about the Federal Reserve, even as the Fed’s response—culminating in today’s decision to cut interest rates by half a percent—occupied much of the economic commentary surrounding the response to Covid-19. The Federal Reserve is a hugely important economic institution, and their decisions matter a lot for many reasons—but they’re largely a sideshow in the response to Covid-19. For one thing, their main instrument to boost demand (cutting interest rates) operates with a lag that is long enough to likely miss much of the epidemic’s duration. Further, unlike fiscal policy responses, the Fed’s tool really cannot be tailored or targeted in any way to alleviate particular distress. If a knock-on effect of the economic damage done by Covid-19 includes distress in the financial sector, then the Fed can usefully provide liquidity and other support to banks (in exchange for banks’ forbearance in collecting debts from affected businesses). But, in the first round of response it seems like focusing on what the Fed will do is a bit of a distraction. Economic policy commentary has become far too Fed-centric over the past decade. We really need to start thinking of a much richer set of economic tools that can solve society’s problems in coming years.