The pandemic and a 'rainy day fund' for American charity
Should we follow the Swiss in dealing with COVID-19?
Currently 144 countries have confirmed cases of the novel coronavirus. They vary in size, income, culture, and governance. Each offers a real-world laboratory in the quest for the right program to deal with the pandemic.
Of the 144 infected countries, Switzerland consistently ranks number four in the world in economic freedom. It is a multi-ethnic and multi-lingual confederation that reserves most decision-making power to its 26 cantons and to its more than 2,000 communes.
The cantons have their own constitutions and legal systems. The communes engage in local planning, social welfare and schools. Many political issues are resolved by national and local referenda in rare exercises of direct democracy. The central government - the Bund - looks after roads, external relations, and national defense. With a rotating presidency, few even know the name of the current chief executive.
Like its European neighbors, Switzerland has not been spared the coronavirus. As of late March, it had almost 9,000 confirmed cases and some 120 deaths, most located in cantons bordering on the hard-hit Italy.
Like its European neighbors, Switzerland has put in place "social distancing" measures. A nation of trains, it has cut service. Citizens have been urged to shelter in place. Small businesses and restaurants have had to close their doors.
As characterized by Switzerland's flagship newspaper, NZZ (Neue Zuercher Zeitung), the Bund must offset the "massive restrictions" it imposed on the economy with measures that restore "economic health," not just public health.
Unlike the complex rescue packages adopted by the U.S. and Europe, Swiss measures to restore economic health are simple and "cheap."
The two main measures are:
- First, extend unemployment benefits to the 330,000 self-employed. Regular employees receive some 70 percent of their previous gross income, paid from compulsory unemployment insurance funds. In addition, all receive supplements for children. Adding the self-employed will cost 42 billion Swiss francs - about $44.12 U.S. dollars - or some five percent of GDP.
- Second, the Bund will make available "bridging" loans to small and medium businesses designed to prevent a wave of bankruptcies. These loans are backed by Bund money, and they will be administered by the "house banks" of the borrowers. Banks will bear a portion of the risk (15 percent) for larger loans. To qualify for bridge loans, borrowers must demonstrate their business has been harmed by the pandemic. The interest rate will be set a 0.5 percent. The bridging loan program went into effect immediately, on March 25.
The Swiss reject stimulus or bailouts.
Large Swiss companies are expected to maneuver their own way out of the crisis - a reasonable feature given the strength of Swiss pharmaceutical and medical equipment producers.
Various forecasting companies project horrendous growth (-8 to -15 percent) and unemployment figures (8 to 30 percent) for the U.S. economy. In Switzerland, a designated group of experts issues its projections for the Swiss economy every quarter. In their figures issued a few days ago, they project a dip in 2020 growth to -1.5 percent versus their pre-pandemic estimate of 1.3 percent. However, they raise their projection for 2021 from 1.2 to 3.3 percent. Their estimates suggest that the unemployment rate will be scarcely touched by COVID-19.
Swiss economic officials count on the fact that a relatively modest rescue package will limit the 2020 economic damage to the Swiss economy to a rather modest recession to be followed in 2021 by vigorous growth.
Within Europe, the Swiss are caricatured as deliberate, unemotional, and imperturbable. Their reaction to the coronavirus pandemic fits this stereotype. Of course, it helps that the Swiss are better positioned than other countries with a debt to GDP ratio of 40 percent (versus 81 percent for the U.S.) and a fully funded unemployment insurance fund. (In the U.S., in contrast, impending shortfalls at the state level will require huge federal bailouts).
Unlike raucous U.S. politics, the Swiss formed a swift national consensus, and their rescue package is already underway, at an estimated cost of 5 percent of GDP. At this juncture, the U.S. rescue package was approved by the House on Friday - at a cost that will well exceed 10 percent of GDP.
Paul Roderick Gregory is a professor of economics at the University of Houston, Texas, a research fellow at the Hoover Institution at Stanford University and a research fellow at the German Institute for Economic Research. Follow him on Twitter @PaulR_Gregory.