In response to the spread of COVID-19, the economy appears to be in recession. Lawmakers are scrambling to respond to the recession with many ideas floating around about how best to do so. Below, I outline a few responses that I think would be wise.
In a normal recession, the proper goal of a policy response is pretty simple: increase output and employment by directly or indirectly increasing aggregate demand. Many proposed responses to this recession have fallen into this typical model. But, strictly speaking, this model does not really make sense for our current situation.
Insofar as we are attempting to limit the spread of a virus, we should not be trying to increase employment and output. The only work that should be done is work that can be done in isolation or work that is absolutely necessary. All other work and its associated output should cease.
This is an unfortunate feature of the current recession, but it also simplifies the policy debate considerably. Since we are not interested in job creation, we do not need to have the usual disagreements about how best to do that. Since we do not want very many people working, we do not need to debate about whether the low employment level is because employers aren’t hiring or because the unemployed aren’t seeking work.
Instead, the only question we need to answer for individuals is how to keep them financially solvent during the disruption. In a well-constructed society with a good welfare state, the system would already be set up to handle these kinds of disruptions. The shocks people are going to face in the coming months — mainly unemployment and leave for sickness and caregiving — are shocks that already hit people all the time in our society. We should already have good benefits for those shocks. But we don’t. So we’ll have to build them on the fly probably on a temporary basis.
The first thing we should do is expand unemployment benefits. The benefit duration for ordinary unemployment benefits should be increased to one year and the benefit amount should be increased to 100 percent of prior earnings up to $8,333 per month. In addition to the changes to ordinary unemployment benefits, a new basic unemployment benefit should be established that is equal to at least the one-person poverty line, which is $1,063 in the 48 contiguous states. Any unemployed, non-elderly adult who is not eligible for ordinary unemployment benefits would be eligible for the basic unemployment benefit.
The second thing we should do is create a sickness allowance for those who need to take leave from a job because they are inflicted by the virus. The allowance duration would be one month and the benefit amount would be 100 percent of prior earnings up to $8,333 per month. Employers can pay the allowance themselves and be reimbursed by the government. If they do not, then the employee can get the benefit directly from the government.
The third thing we should so is create a family leave benefit for those that need to take leave to care for family members due to various disruptions such as school closures. The benefit duration would be three months long but would otherwise be structured like the sickness allowance.
These benefits would directly address the kinds of disruptions people will face that will cause them to become financially insolvent. Insofar as this may not be enough and people might fall through the cracks in other ways, it would also be wise to send cash out indiscriminately, such as through a $1,000 per month universal cash benefit.
Bailouts for Equity
Many companies will require bailouts to stay afloat due to massive contractions in revenue, e.g. airlines and hotels. These companies should be bailed out with cash from the government but only in exchange for new stock issued by the companies. This is what we did with General Motors. It is what any other investor would require of these companies. Structuring the bailout as cash for equity ensures that, once the recession has passed and the companies bounce back, the public gets the benefit of their investment. It would also establish substantial public ownership that we should hold on to permanently.
Social Wealth Fund for Stocks
The stock market is collapsing as the prices of the shares of all companies are declining dramatically. Investors are selling off their stock at increasingly lower prices and putting their money into cash and treasury bonds. This has driven the interest rates on treasury bonds to their lowest levels ever seen.
The federal government should respond to this situation by selling trillions of dollars of new treasury bonds and then plowing the cash from those sales into stock purchases. Similarly, the federal reserve should expand its balance sheet by creating new money and buying corporate stock with it. The stock purchased through these two mechanisms should then be placed into a social wealth fund. By buying these stocks at rock-bottom prices with money borrowed (or created) at rock-bottom interest rates, the federal government will help stabilize financial markets while also ensuring that the public reaps the windfall when the stock market climbs back up after the recession is over.