Coronavirus response must include bold fiscal policy
By all indications, if unabated, the economic damage Americans experience resulting from the COVID-19 pandemic could be severe, with a far sharper downturn than a typical recession. This is a public health crisis, but it is rapidly becoming an economic one as well. Financial markets are showing extreme distress; early reports of unemployment insurance claims suggest they are spiking in ways consistent with rapidly rising unemployment and job loss. Many sectors are effectively coming to a halt as firms shut down — hopefully, temporarily. Millions of workers are experiencing reduced income whether through hours reductions, furloughs or layoffs, which will in turn put further downward pressure on spending.
Fortunately, Congress has begun to acknowledge the gravity of the looming crisis with the first and second coronavirus-response bills. These rightly focused on addressing the public health crisis and preserving lives in the short-term, providing money for health agencies, testing, state Medicaid funds, the safety net and sick days. Any further policy response will need to begin with policies to stop the health crisis. Additional funding for treatment, temporary hospitals, ventilators and other measures will need to remain a top priority.
Still, steps aimed at preserving health, while necessary, will not be sufficient to address the economic fallout on the horizon. Accordingly, as congressional leaders move forward with plans for the next fiscal package, it is imperative that they focus on providing substantial support to vulnerable households and firms while the economy grinds to a halt in order to reduce the spread of the COVID-19 pandemic. They should provide the stimulus needed to support the economy when the restrictions on activity designed to stall the virus eventually begin to subside.
Despite the potentially grim outlook, a path forward for economic policy exists. A broad 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. I recommend that the next phase of fiscal actions should:
Provide income support to a wide 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.
A sound solution gaining momentum is to send checks to households as fast as possible to help families immediately. Proposals range from $1,000 to $2,000 per person. In response to concerns about the federal government’s capacity to get checks to people fast enough, one option to quickly help the most vulnerable households would be to provide cash to all Supplemental Nutrition Assistance Program (SNAP) households by putting $250 per household member on the electronic benefit transfer cards as non-restricted cash. Congress could allocate more funds to states via emergency Temporary Assistance for Needy Families block grants to enable states to support the most vulnerable in a flexible way. Another way to help individuals is to delay payments they owe, such as taxes or student loans. Taking immediate burdens off people could help them make it through the next few months.
Use the safety net to cushion the crisis. As job losses mount, it will be crucial to make it easier for individuals to access unemployment insurance by waiving search rules, waiting periods and so on. Extending unemployment insurance also will be important. People unemployed before the crisis almost certainly will struggle to find work and may soon run out of benefits; Congress should extend the eligible weeks of unemployment insurance and mandate that states provide 26 weeks to begin with.
To provide additional funds to already struggling households, it would be important to increase the benefits workers currently receive. Federal funding for these proposals will be important to bolster state unemployment insurance funds, as an analysis by Brookings Institution fellow Ryan Nunn details. Additionally, many states allow firms to use work-sharing (reducing hours for many employees rather than firing a subset) and allow those workers to draw on unemployment insurance, as outlined by University of Maryland economics professor Katharine Abraham and W.E. Upjohn Institute for Employment Research senior economist Susan Houseman. This also should be expanded and federally funded.
We can use SNAP, formerly known as the food stamp program, to help the most vulnerable households, as detailed by Brookings Institution fellow Lauren Bauer and Northwestern University’s Diane Schanzenbach. First, it is important to remove any work requirements until the economy has truly healed. Second, increasing the value of SNAP benefits for all participants – and even more so for families with children – is a simple mechanism for targeting cash-like resources to low-income families and is critical to insuring against hunger.
Help small and mid-size firms to survive the pause in the economy and keep people employed. One method is with Small Business Administration loans that could be expanded and disbursed with broad federal guarantees. In addition, the federal government could grant tax relief to firms based on the number of employees working at least 20 hours per week. It could allow payroll tax credits for up to 100 employees working at least half-time, up to a monthly wage of $4,000. The goal would be to provide relief to a small business that is trying to keep workers on the payroll. It may be that this is insufficient and a broader subsidization of employment, especially for small businesses, is needed. But, combined with using the unemployment insurance system for work sharing, these steps could substantially subsidize payroll.
Lastly, provide wider stimulus support to the economy based on economic data over time. Congress should pass policies with automatic triggers that provide more support over time if the economy stays weak, including additional payments to households through direct checks, additional funds made available to states via unemployment insurance funds and Medicaid funding, and additional unemployment insurance extensions. Last June, the Brookings Institution’s Hamilton Project and the Washington Center for Equitable Growth published a book of ideas for automatic stabilizers.
This pandemic is already an economic crisis for many workers and firms, and is moving toward a wider economic downturn. To prevent this crisis from reaching the magnitude of those experienced in previous generations, we must act upon and implement the lessons learned during our nation’s responses to past recessions. A broad, sustained program of bold fiscal policy will be needed to reduce the impact of damaging economic outcomes.
Jay Shambaugh is a senior fellow in economic studies at the Brookings Institution, which focuses on economics and tax policies, urban issues, governance, foreign policy and global economic development. He directs Brookings’ Hamilton Project, which proposes policies to create a growing economy that benefits more Americans. He is a professor of economics and international affairs at George Washington University and served as a member of the White House Council of Economic Advisers.
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