The United States is at war. We face an enemy, COVID-19, that has already killed 45 percent more Americans than the Vietnam, Korean, Iraq and Afghanistan wars combined. This enemy has created countless personal tragedies, divided the nation, and is attacking the engine of our economic growth and prosperity — the private sector and the middle class. So far, by most metrics, we are losing. It is time to reassess our strategy for fighting the economic war.
While the Federal Reserve’s $3 trillion monetary policy response has been broad, there are clear geographic and socioeconomic inequities in who is benefiting from this response. Disturbingly, our analysis suggests that states where politicians are most reluctant to support additional restrictions and additional spending (e.g., Texas, Florida and Georgia) are faring much worse economically – and with lower potential benefits from existing economic policy responses – than states with a more cautious approach (e.g., Pennsylvania, Delaware and Maryland).
Given the inequities and limitations of the existing monetary policy response, we are calling on Congress to respond with a fiscal policy that recognizes two realities. First, we are at war with our most dangerous adversary in more than 70 years. Second, victory is not possible without spending and sacrifice.
To illustrate the limited effect of the existing monetary policy response on households, we constructed an index of the extent to which households can benefit from low interest rates. To construct our index, we used the most recent, post-COVID-19 data on employment, income, homeownership and housing prices. We then ranked states into three groups: high, middle and low performers. As demonstrated in this map, households in the Midwest and the South are faring extremely poorly and are the least likely to benefit from monetary policy because of relatively low median income, (Louisiana and Georgia), high unemployment (Florida and Nevada) and/or low homeownership (Texas).
Inequities in the ability to directly benefit from monetary policy suggest Congress needs to open a second front in our economic war on COVID-19: a meaningful, wartime fiscal policy. The CARES Act and initial stimulus was a good start. But it was temporary and anticipated a quick recovery — one that did not materialize. Congress needs to counterattack on three fronts:
- Create a facility to purchase and backstop consumer loans. When facing Depression-level unemployment, it should be no surprise that there will be a wave of consumer defaults. The tip of the iceberg is apparent: Banks are under sufficient stress that the Fed prohibited dividend payments; more than 100 million consumer loans are already in forbearance; and banks have started preparing for record loan losses not seen since the 2007-2008 Financial Crisis.
Treasury has facilities to backstop loans of non-investment-grade corporate debt, and Fannie and Freddie Mae have a history of purchasing mortgages. Congress should augment these facilities to purchase consumer loans. By sharing risk with government, such a facility would protect banks that are lending money to households and preserve consumers’ access to capital. While purchasing consumer loans may seem risky, the delinquency rate on credit card receivables is historically lower than that of mortgages — suggesting that these loans carry less risk than those the government is already purchasing.
- Direct stimulus. To stimulate the economy, we need to stimulate demand. This means getting money in the hands of people who are going to spend it — the middle class and poor. At the same time, we need to reduce waste and the uncertainty about stimulus. One efficient way to achieve this would be for Congress to provide a pre-paid debit card, and at the end of each month for the next six months, reset the balance on the card to $1,000. This way, if a consumer spends only $300 in a given month, she will see only a $300 increase at the end of the month. If the card is never used, it never increases beyond $1,000. A rough estimate of cost, assuming an unrealistically high 100 percent usage for six months and a median income cutoff, is $1 trillion.
- Subsidize employment. We are facing Depression-level unemployment, concentrated in low-income earners. Those individuals working in jobs that pay less than $40,000 face an unemployment rate of 40 percent. We propose adapting the successful strategy implemented by Denmark, Netherlands and Great Britain to stimulate employment. This strategy seeks to achieve three objectives (1) reverse layoffs, (2) avoid creating dependence on government and (3) avoid the costs associated with re-matching companies and workers when the economy re-opens.
We propose creating a refundable corporate tax credit that provides a 100 percent employee wage subsidy of up to $2,500 per employee per month. A generous wage subsidy would incentivize companies not only to avoid layoffs but also to resume hiring, as hiring would be directly subsidized by the government. The employee can be laid off at any time (in which case the company would lose the tax credit) and employers would still be responsible for providing non-wage benefits such as health insurance. If this program were so successful that it restored the economy to pre-COVID-19 employment levels, the maximum cost of these subsidies would be less than $2 trillion in foregone tax revenue, similar to the CARES Act.
We need a wartime fiscal policy. We paid a steep price to fight wars in Afghanistan, Iraq, Vietnam and Korea — wars in foreign countries with questionable direct benefits to U.S. households. The adverse consequences of spending another $2 trillion to fight the economic war here at home is much less than the risk of a global recession, countless personal tragedies and the accompanying polarization of U.S. politics.
Yadav Gopalan is an assistant professor at the Kelley School of Business at Indiana University. Thomas Lys is a professor emeritus at the Kellogg School of Management at Northwestern University. Daniel Taylor is an associate professor at The Wharton School of the University of Pennsylvania.