As the public health crisis resulting from the COVID-19 pandemic evolves, the economic consequences are becoming increasingly clear. To halt the spread of this disease, public officials and firms are making policy and business decisions that are rapidly bringing parts of the economy to a necessary standstill. Spending will fall rapidly at many businesses as people practice social distancing; firms are shutting down—hopefully temporarily; and millions of workers are experiencing reduced income (whether through hours reductions, furloughs, or layoffs), which will in turn put further downward pressure on spending.
The federal policy response thus far has focused on public health. First, Congress authorized $8 billion of funding for the health agencies. Second, the House of Representatives passed the Families First Coronavirus Response Act. This legislation will try to directly combat the virus and cushion those affected by: funding testing, creating and funding sick leave for many workers, and providing funds to states via Medicaid funds. The bill also includes more funding for unemployment insurance and unemployment insurance extensions, more funding for emergency SNAP benefits and waivers of SNAP work requirements, and flexibilities and funding to ensure that young and school-age children have access to food during school closures and quarantines. Taken together, these provisions are meant to support broader public health and individual health, but also the economic and food security of American households.
But these first two legislative steps will not be sufficient to address the economic fallout that is the necessary result of policies and decisions taken to preserve lives in the short-term.
The Federal Reserve has cut interest rates to zero, and while it has other tools to stimulate the economy, a crisis like this requires fiscal as well as monetary responses. The legislation passed thus far has been important, but another round of fiscal policy will be required immediately to fully address this crisis.
A robust fiscal response can provide income support to households, ensure broad and continuous access to safety net programs, provide incentives for employers to avoid layoffs, provide loans to small businesses, give liquidity cushions to households and firms, and otherwise stimulate the economy.
Provide income support to a wider array of households. The Families First Act expands access to paid sick leave and unemployment insurance, but far more people are losing income, tips, commissions, and hours than are helped through this legislation. Too many American households live on the financial edge and will require support whether or not they meet eligibility requirements for safety net programs. Potential options for providing income support to households include:
Providing cash aid to current holders of Electronic Benefits Transfer system (e.g. participants in the SNAP program).
Providing a bonus round of the Earned Income Tax Credit (proposed by Representatives Khanna and Ryan);
Reducing withholding to boost take home pay (proposed by Claudia Sahm);
Sending checks to most (or all) households (proposed by Jason Furman) to ensure they can continue their spending on necessities and then help restart the economy when many constraints are removed.
These options have different advantages and drawbacks. Leveraging the EBT system would be fast and well targeted. SNAP recipients may be the most necessary group to reach (they are 36 million of the Americans with the lowest incomes before the crisis), but many households would be left out (especially those without children). Changing tax withholding could also provide income support quickly, but it would only help those with income and will not provide much for the lowest-income individuals. EITC bonus payments or direct checks would both be helpful, but may take longer (a matter of months, not weeks) and may not be the best front-line defense.
A combined option: provide cash to all SNAP households by putting $250 per household member on the EBT cards as non-restricted cash (~$10 billion). In addition, send $1000 checks per adult to households (with an income cap that can be applied later as part of 2020 taxes) (~$200 billion) with checks for dependents of $500, which may take longer to mail (~$50 billion) due to the necessity to match dependents to households. Importantly, none of these funds should count against income thresholds for other public support. Congress could also allocate more funds to states via emergency TANF block grants to let states support the most vulnerable in a flexible way (~$10 billion).
Give liquidity cushions to households and firms. While the economic consequences of the pandemic are likely to generate a recession, the most acute portion (when much economic activity is paused) could be measured in months not years. Many households and firms could face temporary cash constraints. One option is for the federal government to simply not ask for payments in the short run. For example, all student loan payments (not just interest) could be paused without penalty (or depending on the structure of the loan, the government could make the payment to the vendor and simply add the payment to the end of the loan). All small business loans guaranteed by the Small Business Administration could be temporarily paid by the government. Tax payment deadlines (for both businesses or individuals who have not filed their 2019 taxes) could be extended 3 months. None of these actions would stop a recession or even cause a recovery after one, but they could generate space for some households and firms during the acute portion of the crisis. Because the government borrows so inexpensively, a brief delay in payments is not expensive to the government.
Additional loans for small businesses: The Small Business Administration could make more loan guarantees for firms. This may be a difficult time for many firms to borrow, though, as solvency pressures would make fair underwriting quite challenging for many lenders. Still, it is worth implementing for the firms that are able to qualify for loans.
Provide fiscal relief to firms based on maintaining payroll. Many small and mid-size firms could face extreme pressure to cut hours or employment. As some have noted, relief to households is important but would not necessarily help firms because many households will constrain their spending beyond necessities until the public health crisis is over (see Hamilton and Veuger). One way to try to shift their incentives—and provide the financial means to retain payroll—is to grant tax relief to firms based on the number of employees working at least 20 hours per week. One specific option is to allow payroll tax credits for up to 100 employees working at least half time, up to a monthly wage of $4,000. These caps would make sure the government is not sending billions to already profitable large firms or giving large payments per employee to small firms made up of highly paid professionals. The goal would be to provide relief to a small business that is trying to keep workers on the payroll. For example, a firm with 50 employees making $48,000 a year would receive $250 a month per employee. Cutting hours, wages, or employment would reduce the payments. This would cost $50-100 billion over 6 months with the overwhelming bulk going to firms with fewer than 100 employees. One could limit this to firms that maintain a certain percentage of payroll, but that might prevent support to those firms in the most desperate situations.
Provide wider stimulus support to the economy based on economic data. As many have noted this economic contraction will require help to households (point 1), but it is impossible to prevent some economic contraction given the social distancing restrictions that are being put in place. Importantly, given the possibility that the current scenario generates a deeper recession, Congress should pass policies with automatic triggers that kick in over time if the economy stays weak, including additional payments to households and states. For example, if the unemployment rate rises and stays elevated, additional payments to households could be made over time. More funds could go to states via FMAP. More funds could go to infrastructure via BUILD. Last June, the Hamilton Project and The Washington Center for Equitable Growth published a book of ideas for automatic stabilizers.
Specifically, if the unemployment rate rises half a percentage point (or the employment-to-population ratio falls half a percentage point in the next six months or the broader measure of unemployment (U6) rises a percentage point), then more direct household payments could go out to individuals, with another round of payments a year from now if the unemployment rate remains elevated; SNAP maximum benefits could be increased; unemployment insurance payments could be increased; and, unemployment insurance extensions could be automatically passed. These policies would provide ongoing support for the economy in the event of a deeper recession.
Congress should continue to fix holes in the safety net and create exceptions for the unique circumstances of the current health crisis. It could waive disability reviews to make sure the disabled are not going into doctors’ offices during a health crisis simply to satisfy a bureaucratic requirement (suggested by Rebecca Vallas). Congress could extend paid sick leave to a wider pool of employees instead of limiting it to mid-sized employers. Congress could continue to create flexibility within unemployment insurance and SNAP programs to make sure they can respond appropriately in this crisis. Congress can support childcare, in particular for health workers or others who must continue to work while schools are closed.
The actions taken by both Congress and the Federal Reserve have been important. It is increasingly clear, though, that there will be substantial economic fallout. More needs to be done to cushion the incomes of affected workers, support small and mid-size firms, and support the economy more broadly.