Who Should Get a Coronavirus Bailout and How?

You don’t have to go home, but you can’t stay here (unless you live in the Bay Area, in which case you actually do need to go home). Photo: Spencer Platt/Getty Images

Policy-makers across Europe and North America have finally done the responsible thing — and engineered a global recession of historic proportions.

To prevent the novel coronavirus from killing millions of people, the U.S. economy has gone on medical leave. All major sporting events, conferences, and concerts have been canceled. Bars, restaurants, and casinos have been shuttered. Hotels and airlines are rapidly becoming something akin to VCR repair shops — vestiges of a bygone industrial era frequented primarily by eccentrics. The entire San Francisco Bay Area is sheltering in place. In the 21st century, the business of America is discretionary consumer spending. And throughout vast swathes of the country, such spending is now effectively prohibited.

Some contrarians argue that the treatment for the COVID-19 pandemic may prove worse than the disease. After all, global recessions kill humans en masse, too. And the nonfatal suffering that results from suddenly cutting off workers’ access to income is surely massive if unquantifiable. As of 2019, nearly 40 percent of Americans could not afford to cover an unexpected $400 expense. If our government were incapable of replacing the income that workers and businesses are now losing to social distancing, then the contrarians might have a point; allowing the virus to spread freely would arguably be preferable to condemning wide swathes of the workforce to penury.

Fortunately, we are the wealthiest nation in human history, and have the lowest borrowing costs of any major government on the planet, and thus, can easily afford to contain the pandemic and keep our people well provisioned simultaneously. All we need is for Congress to overcome its superstitions about deficits, and supply the economy with the many trillions of dollars in stimulus that even many center-right economists say we need.

And there are signs that Capitol Hill’s debt-phobia is a treatable condition. The Trump administration has begun discussing a $1.2 trillion relief package that would include immediate $1,000 cash payments to all U.S. adults, while Senate Democrats have proposed a cash-assistance package that would provide up to $18,000 in direct aid to a family of four. Bailouts for some of the hardest hit (and/or most Donald Trump–adjacent) industries, paid sick leave, and billions in loans to small businesses are among the many other measures under consideration.

These are (almost) all worthy ideas. But they are also woefully inadequate to the scale of the present challenge. Here is a rundown of who the federal government must “bail out,” and the extraordinary measures it must take to do so:

1) Workers

This one should go without saying. Already, one in five U.S. workers have lost jobs or hours as a result of the pandemic. And American laborers are even more vulnerable to this economic shock than their counterparts in other developed countries, due to our nation’s exceptionally threadbare safety net. Most European countries have long provided their workers with forms of social insurance like universal health care, months’ worth of paid leave, public child care, child allowances, and unemployment insurance far more generous and long-lasting than that which exists in the United States. All of these have served to cushion the blow for workers on the Continent, while helping to sustain the broader economy by propping up demand. Nevertheless, even in the European nations with the most comprehensive welfare states, such as Denmark, policy-makers have recognized that massive new appropriations must be made to keep workers afloat in this time of crisis. This week, the Danish government offered to pay 75 percent of the wage bill of any firm impacted by coronavirus for three months, if those companies agree to pay the remaining 25 percent while laying off no one.

Congress should consider emulating the Scandinavian nation’s efforts to limit job losses, while expanding existing social welfare programs and establishing new ones, from paid medical leave to public health insurance to child-care assistance. Ideally, these would be permanent programs (there has never been a good reason why America’s workers should be denied the protections that their peers across the wealthy world enjoy, nor why our economy should not have the backstop of such automatic stabilizers). But if there is only consensus around temporary measures, then so be it; for the moment, imperfect measures implemented rapidly are preferable to more superior policies enacted after extensive protest and debate.

Congress’s struggle to so much as enact paid sick leave for all workers affected by the coronavirus pandemic may make broader actions seem impossible. But the chief Republican complaint about Nancy Pelosi’s initial paid-sick-leave proposal appears to be reasonable and resolvable: House Democrats wanted to establish paid leave as a mandatory benefit that employers must provide their workers, an approach that would increase firms’ expenses just as their cash flow is cratering. Such a policy would conceivably accelerate layoffs by making it even harder for businesses to stay afloat without slashing payroll. As Republican senator Lamar Alexander has argued, the federal government should pick up the full tab on sick leave. Corporate America may be due for a tax hike at some future date. But now isn’t the time to put the squeeze to these businesses. The economy needs demand and Uncle Sam can currently borrow at zero percent interest rates. Congress must not let its superstitious fear of deficits push it into a penny-pinching fiscal policy that proves orders of magnitude more expensive than giant appropriations in the long run (as Congress did in the aftermath of the 2008 crash).

Beyond wage subsidies and social benefits, workers and their dependents need more cash and fewer bills. As Bloomberg’s Joe Weisenthal notes, this crisis does not require stimulus in the conventional sense — which normally describes measures aimed at increasing growth and economic activity. But in a period of social distancing, growth is impossible. The economy is going to remain on pause; the challenge is keeping everyone’s finances afloat until we’re open for business again. That means putting dollars directly into people’s pockets. Current proposals for cutting Americans checks of between $1,000 and $2,000 are a start, but the amount should probably be higher and recurring. Some have reasonably objected to giving such checks to Americans who manifestly don’t need them, rather than concentrating larger sums of money on low-to-middle-income workers. But in this context, speed is more important than precision. If universal money drops are faster to implement in political and administrative terms, then they are the superior policy. We can tax back the wealthy’s share of the handouts once we get to the other side of this.

In the meantime, the government should help workers on both sides of their balance sheets. Tax and mortgage payments, rent, and utility bills should be suspended, if not permanently forgiven.

2) States and cities

State governments are coming down with a wide range of morbid symptoms. Their spending on Medicaid, hospitals, and pandemic response measures is about to climb, while their revenues collapse. And unlike the federal government, states cannot print their own currencies, or borrow money at near-zero interest rates. Many are also constitutionally prohibited from running substantial deficits.

In both economic and epidemiological terms, these conditions are hazardous. Last year, state-level appropriations accounted for more than 40 percent of all U.S. government spending. In times of crisis — when private actors are not sustaining demand or workers’ incomes — governments must step up spending to keep the economy afloat. But due to their financial constraints, state-level spending tends to decline during recessions, as falling tax revenues force governments to lay off public workers or reduce their pay.

Meanwhile, due to the decentralized nature of the American health-care system, states are in many cases best positioned to manage the logistical challenges of allocating limited medical resources and ramping up hospital capacity; or rather, they would be best positioned were it not for their financial constraints.

Fortunately, the Federal Reserve has the power to all but eliminate those constraints right now. As the Berggruen Institute’s Yakov Feygin and Employ America’s Skanda Amarnath explain, under section 14(2)(b) of the Federal Reserve Act, America’s central bank has the authority to start purchasing as many municipal bonds as necessary for keeping state and local governments’ borrowing costs low enough to meet their existing funding needs and address the exigent demands of the present public-health crisis.

In other words: The Fed can and must extend the kind of support it is providing to the U.S. Treasury market to the market for municipal bonds. Notably, the central bank already established a model for such an extension when it propped up the market for short-term, unsecured corporate debt during the global financial crisis. The central bank has the authority and logistical capability to make this happen in short order. It just needs to care as much about sustaining the functions of state governments as it did about sustaining those of corporations back in 2009.

3) Businesses

This is the tricky one. On the one hand, wide swathes of corporate America have been lapping up federal largesse for years (and/or decades) now. And some of the industries that are going to be hardest hit by the coronavirus crisis are agents of social disaster — from the for-profit hospital sector whose rentierism has helped to keep America’s health-care system exceptionally expensive and inhumane, to the fossil-fuel industry whose lobbying has undermined the transition to sustainable energy. Meanwhile, the COVID-19 recession is likely to accelerate the extinction of firms that were already in long-term decline. Even if some of these companies are sympathetic, does it make sense for taxpayers to foot the bill for postponing their inevitable demise?

On the other hand, in contrast to 2008, no U.S. industry is directly responsible for the crisis that is now engulfing it. And the human costs of “creative destruction” are even higher in the context of a global recession and pandemic than they are in normal times.

Cataloguing precisely which industries merit outsize help, and on what terms, would require more time and expertise than I can muster here. But, as The Atlantic’s Derek Thompson and Bloomberg’s Joe Weisenthal have argued, the restaurant industry seems to be an especially worthy candidate for federal help. Beyond the fact that the state has formally ordered restaurants to close their doors in many states, food service has become a pillar of working-class employment in the U.S., supplying more than 10 percent of all jobs in some states. Restaurants are also typically low-margin businesses that can’t afford to overpay management or buy back their own shares or engage in most other forms of corporate self-dealing. And as institutions that increase the appeal of the areas in which they operate, restaurants function as a quasi–public good, offering some marginal benefit even to those who do not frequent them.

As for the more malevolent segments of the corporate sector, The New Republic’s Kate Aronoff has an intriguing proposal for nationalizing the fossil-fuel industry (a proposition that is, for the moment, eminently affordable), while Business Insider’s Henry Blodget has some thoughts on what conditions the government should attach to any bailout of major airlines.

But regardless of how Uncle Sam might wish to customize its approach to especially worthy or problematic sectors, it needs to establish a baseline of support far higher than any currently being contemplated on Capitol Hill. One approach would be to emulate the aforementioned Danish plan of covering 75 percent of any corporation’s wage bill in exchange for a firing freeze. But policy-makers should also consider (a version of) this proposal from the UC Berkeley economists Gabriel Zucman and Emmanuel Saez to have the government operate as “a buyer of last resort”:

In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses. The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual. To see how the notion of a buyer of last resort works, take the case of the airline industry. If demand drops by 80%, the government would compensate this missing demand, in effect buying 80% of plane tickets and maintaining sales constant. This would allow airlines to keep paying their workers and maintain their planes and equipment without risking bankruptcy. 

The reason why such a policy would work in the case of the coronavirus pandemic is twofold. First, it is clear what is driving the shock: a health crisis that has nothing to do with any business’s decision and will be temporary. Second, different industries are affected differently. That’s in contrast to normal recessions, where the drop in demand is widely spread and has no clear timeline. 

How much would such a buyer-of-last report program cost? An economy-wide fall in the demand for goods and services of 40% over 3 months leads to a 10% drop in annual GDP. The government can fully compensate private losses by transferring 10 points of GDP to the private sector, financed via an increase in public debt. The direct output loss from social distancing measures would be put on the government’s tab, i.e., socialized. The distributional consequences of this policy would be controlled by the tax system. Governments can decide later how to adjust taxes to repay the extra debt; with progressive income and wealth taxes, for instance, the cost would be borne by the wealthiest.

As Zucman and Saez note, the forms of assistance currently under discussion in Washington — such as interest-free loans — can help businesses smooth their costs over a longer time horizon, but do nothing to compensate them for their pandemic-induced losses. And only such compensation would ensure that “each business can re-emerge almost intact after the hibernation due to social distancing ends.”

There are plenty of reasonable objections to a policy this sweeping and unconditional (I already articulated a couple above). But Zucman and Saez’s fundamental premise — that our government has the means to socialize the losses that are accruing to firms and workers through no fault of their own, and should do so to avert the wrenching human and economic costs of widespread business failures — is a sound one. All discussions of bailouts should begin from there and then make concessions to political, social, and environmental concerns as needed — as opposed to beginning with the premise that government support for private industry is unnatural or unsavory, and then making concessions to economic reality as needed.

From an economic perspective, coronavirus is a severe but treatable illness. With the right prescriptions, a full and timely recovery is possible; with the fiscal equivalent of leech therapy that is D.C.’s balanced-budget fetishism, it is not.

Who Should Get a Coronavirus Bailout and How?